1. Recovery from the Crisis and Looking to the Future: Economic Performance and Prospects Keith Jefferis 29 June 2011

2. The Botswana economy is … Highly dependent on mining for … Highly dependent on mining for … GDP (40%) GDP (40%) Government revenues (40-50%) Government revenues (40-50%) Exports (85%) Exports (85%) Highly dependent on government (which is dependent on mining) for Highly dependent on government (which is dependent on mining) for Employment Employment Investment Investment Spending Spending Very open to international trade (exports + imports > 80% of GDP) Very open to international trade (exports + imports > 80% of GDP) Hence highly geared to international economic developments, especially in mining – both boom and crisis Hence highly geared to international economic developments, especially in mining – both boom and crisis

3. Economic Growth

4. 2010 – recovery from recession 2010 – recovery from recession Annual growth in 2009 was minus 5% Severe recession – first since data series started in 1975 Recovery to 7% growth in 2010, driven by diamonds

5. Annual sectoral growth Reasonably broad-based recovery in 2010 Strong growth in export sectors badly hit during the recession (manufacturing, mining, tourism) Slower growth in government – cutting back after expansion during recession

6. Growth forecasts - recovery projected to continue Growth forecasts - recovery projected to continue IMF forecasting growth of 6%- 7% for 2011 & 2012 Government forecasts around 7% growth Driven by continued mining sector recovery, power sector investments

7. Trade & Exchange Rates

8. DTC Diamond Sales Continued recovery in DTC diamond sales, with improved prices and volumes Almost back to pre- crisis levels in value terms Driven by retail market recovery and re- stocking of inventory Supply restrictions also suporting prices

9. Exports & imports.. both growing Exports fell dramatically during the crisis.. but now recovering Almost back to pre-crisis levels But imports have continued to grow rapidly Rising oil & food prices Diamond imports Capital goods imports for mining & power projects Imports still exceeding exports

10. Trade balance.. big deficits Trade surplus was generally strongly positive pre-recession Collapse of diamond exports led to unprecedented deficits from 2008Q4 Large deficits still persisting even with export recovery, due to higher imports

11. Exchange rates – BWP vs ZAR, USD Bilateral rates quite volatile More volatile against USD than ZAR Short-term movements against USD and ZAR tend to be in opposite directions BWP-ZAR approaching parity, but not a policy objective

12. Nominal Effective XR (Pula basket) Exchange rate policy governed by pula basket composition and rate of crawl Both not disclosed Basket is broadly trade weighted Crawl gradually downward – approx 2.5% at present – to maintain competitiveness No change as a result of global crisis

13. FX Reserves FX reserves peaked in 2008 – have since been depleted by BoP deficits resulting from global crisis Supplemented by external borrowing (AfDB & World Bank) in 2009

14. Import cover FX reserves well below their peak but still respectable in terms of months of import cover

15. Inflation and Interest rates

16. Inflation … a nagging problem Inflation has stubbornly above upper end of BoB’s 3%-6% target range Inflation to 8.3% in May Underlying inflation remains low Upside risk from international oil prices Inflation forecast to fall to 6% by mid-2012

17. Monetary policy – easing with large cuts in interest rates Interest rates sharply lower in response to declining inflation Bank rate cut by 6% since Nov 2008 Last cut by 0.5% in Dec 2010 Interest rates now at 20 year low BoB likley to pause and watch inflation developments Lower interest rates helped to cushion impact of recession

18. Government Budget

19. Fiscal policy – stimulus helped the economy, but at the cost of large deficits Govt spending rose sharply in 2009 – helped to maintain non- mining economy Turnaround from fiscal surplus to substantial deficit, driven by both increased spending and falling revenues Recent deficits estimated at 10% of GDP - unsustainable Revenues recovering slowly – but further fiscal adjustment needed to restore budget balance

20. Impact of deficits on Govt finances Net financial position – govt. deposits & reserves at BoB less public debt (foreign & domestic) Peaked at P41bn in 2008 Cumulative deficits in 3 yrs 2008-2011 = P25bn Continuation of deficits will lead govt to become net debtor

21. Summary and Outlook

22. Summary Headline GDP growth hit hard by recession – but concentrated on mining/exports Headline GDP growth hit hard by recession – but concentrated on mining/exports Non-mining growth held steady – hence limited impact on employment Non-mining growth held steady – hence limited impact on employment Fiscal stimulus helped – but deficit/debt problems resulted – with the crisis compounding adverse longer-term trends Fiscal stimulus helped – but deficit/debt problems resulted – with the crisis compounding adverse longer-term trends Growth recovered strongly in 2010 Growth recovered strongly in 2010 External sector: exchange rate steady, BoP deficit, but FX reserves helped to stabilise, with modest drawdown External sector: exchange rate steady, BoP deficit, but FX reserves helped to stabilise, with modest drawdown Inflation – substantial decline, monetary easing helped to cushion impact of crisis, but still a nagging problem Inflation – substantial decline, monetary easing helped to cushion impact of crisis, but still a nagging problem

23. Prospects International Improving global growth prospects – but still volatile Shifting of global economic balance to emerging markets Commodity markets strong – good for mining Uncertainties remaining over govt debt, withdrawl of fiscal stimulus, de-leveraging, euro- zone stability Domestic Growth rotation in place : 2009 – mining/exports weak, non-mining/domestic demand strong 2010 – opposite Weakness in household consumption and fiscal spending as export markets recover Trade, balance of payments should continue to improve – but not back to normal Fiscal sustainability the overriding issue

24. Thank You Keith@econsult.co.bw 3900575