by Dr. KR Jefferis - University of Botswana

IN common with many other countries, the past year has been one of disappointingly slow economic growth in Botswana. Recent estimates are that the economy grew by approximately 2 percent in 1992/93 and 1993/94, which is not particularly poor by current world standards but significantly below the 10 percent a year average growth rates experienced in Botswana during the 1980s.

Numerous factors lie behind this slowdown - perhaps most important have been the weak demand conditions in international diamond markets, leading to the imposition of sales quotas by De Beers' Central Selling Organization (CSO) and a significant reduction in Botswana's diamond exports. As diamonds account for some 80 percent of exports and nearly half of government revenues, this has a major economic impact. Earnings from other major mineral exports - copper-nickel and soda ash - have also been hard hit by recession in international and regional markets. Another contributory factor has been the reduction in rate of growth of government spending, in keeping with slower growth of revenues.

The government plays a major role in the economy - particularly as an employer and as the source of many major construction projects - and any change in spending patterns has knock-on effects on many other sectors of the economy. The construction sector has also been hard hit by intense competition from South African firms which, in the face of severe recession in their home country, have been cutting prices to the bone in order to secure jobs in Botswana. There has also been strong competition from Chinese construction companies established in Botswana - these seemingly achieve levels of efficiency (in terms of cost and the time taken to complete projects) which local companies cannot match. Finally, manufacturing firms have also been squeezed hard, with slow growth in the domestic market and major problems in selling to Zimbabwe following devaluation's of the Zimbabwe dollar in 1992 and 1993. Employment, too, has taken a knock during the recession; in contrast to steady increases in the number of formal sector jobs during the 1980s, employment has been falling since its peak in 1991, and it is likely that unemployment has risen from the 14 percent recorded at the time of the 1991 census to perhaps 20 percent by 1994.

Despite this somewhat gloomy backdrop, however, the general opinion is that the trough of the recession has been passed and that a recovery is in place, albeit a slow one. In recent months the diamond market has strengthened; total CSO diamond sales in 1993 were 28 percent higher than ion the previous year, and a small (1,5 percent) increase in average prices was sustained. Although quotas remain in place, there must be a good chance of some easing before the end of 1994.

Furthermore, a major expansion of Botswana's largest diamond mine, Jwaneng, will be on stream in mid-1994 and this will boost diamond exports even if quotas remain. Copper and nickel prices have shown more recovery since the beginning of the year, and the demand for soda ash has improved, although prices remain depressed. Agriculture is recovering from the droughts of 1992 and 1993, and there are signs of a small improvement in the manufacturing sector. The Ministry of Finance is currently projecting that economic growth will recover to over 8 percent in 1994/1995; whist this is probably overoptimistic, growth of 5 percent or more this year should be achievable.

Several macro economic indicators have also taken a turn for the better. Inflation has fallen sharply from its peak of 17.7 percent in June 1992 to only 10,5 percent in April 1994 - it is hoped that single-digit inflation will be achieved by the end of the year. Following the fall in inflation, the central bank has reduced interest rates thus easing the pressure on the many borrowers caught between rising interest rates and recession in 1992/93. The government budget also remains healthy; a projected deficit of over P500 million in the 1993/4 financial year now looks like being a surplus of the same amount, despite slower growth of revenues, and for 1994/5 a balanced budget is predicted. Thus the long-awaited move from budget surplus into deficit is yet to occur, although revenue and expenditure projections still point in this direction.

The government also took the opportunity in the 1994 budget to reduce company and personal income tax, so that at 35 percent ( or 30 percent for publicly quoted companies), Botswana's company tax is now below equivalent rates in South Africa, Zimbabwe, Namibia, Swaziland and Zambia. sustained government budget surpluses have also been a factor behind the continued rise in Botswana's foreign exchange reserves which, at the end of 1993, totalled over P10 million (US$4 billion). At the same time Botswana's foreign debt was only around $400 million, with debt service only 4 percent of exports, indicating the very healthy state of Botswana's external finances.

This year's tax reductions are clearly aimed at boosting the attractiveness of Botswana to foreign investors. This is particularly important given the essential role to be played by foreign investment in contributing to the diversification of the economy away from dependence upon mineral exports. In the past Botswana has benefited from very large inflows of foreign investment, mostly into mining ventures, but recent years the value of foreign direct investment has declined. Nevertheless, 1993 and 1994 have seen the establishment of some important new ventures involving foreign investors. A Hong Kong company has established a factory in Selebi-Phikwe (under the auspices of the Selebi- Phikwe Regional Development Project), producing clothing for export to the USA and currently employing 1000 workers. Similarly, a factory is under construction in Gaborone to house a US/Hong Kong joint venture operation to export jeans to the USA, made from locally woven denim cloth; this will also employ nearly 1000 workers at full capacity. Both of these operations are important successes in Botswana's attempts to establish itself as an attractive location for international textile and clothing companies, and they mark a welcome change from the problems experienced by some of the older clothing manufacturers in exporting to Zimbabwe in recent years. A number of other significant inward investments have been established over the past twelve months; the Lazare Kaplan diamond cutting factory in Molepolole (projected to employ 500), a plastic pipe manufacturing plant set up by Owens Corning, and a small vehicle assembly operation established by Hyundai. Although Hyundai has faced import duty problems in bringing its kits into the Southern African Customs Union and the highly protected South African vehicle market is likely to prove very difficult to penetrate, this Korean firm has grown rapidly in recent years and has been the only successful new mass vehicle producer on the world market in the past 20 years; it has done well in other parts of Africa, and its determination to succeed should not be underestimated.

Foreign investors of a different kind have also shown a great deal of interest in the Botswana Share Market (BSM) over the past year. Although domestic demand for shares has been flat, reflecting slow income growth and the attractive interest rates offered by the banks, overseas portfolio investors have been buying whatever Botswana shares they can lay their hands on. Much of this interest has been a spin-off from more general interest in investment in the stock markets of South Africa and Zimbabwe, but this inflow of funds helped to sustain the BSM through what was otherwise a quiet year. There were, however, two major take-overs on the BSM. Botswana Insurance Holdings took over IGI Botswana, following the collapse of the latter's South African parent company; whilst this was good for Botswana Insurance, giving it the strength to become a medium-sized player in the region, there has been widespread concern that it would abuse its near-monopolistic position in the domestic market. The take-over also has the unfortunate effect of reducing by one the number of listed companies on the BSM. More recently, the locally-owned Financial Services Company (FSC) was effectively taken over by the Botswana subsidiary of South Africa's first National Bank. Although this marks the loss of a locally-owned financial institution, in business terms the take-over made sense as the two companies had complementary structures (FNB in commercial banking and FSC in leasing, and so on) and the combined operation is now much better placed to challenge the dominant position of Botswana's two largest banks, Barclays and Standard Chartered.

It is now widely acknowledged that the economy is at a turning point, that the period of mineral-led growth (especially that of diamonds) is at an end and that new sources of growth are required. Export-oriented manufacturing, particularly textiles and clothing is still seen as the main hope for the future, but the poor performance of the manufacturing sector over the past two or three years indicates that it would be unwise to rely wholly on this sector for exports, employment and growth. One of the particular areas of concern is that too many manufacturing firms are heavily dependent upon subsidies and incentives paid out under the Financial Assistance Policy (FAP, one of the main planks of the government's job creation policy), and that they may not be able to survive when these incentives terminate after five years. This is still an open question, and the FAP is currently undergoing a major review which could lead to some changes in the operation of the scheme, with some kind of investment incentives no doubt remaining. The government's room for manoeuvre in this area, however, is limited; Botswana has recently joined the GATT, which prohibits incentives taking the form of subsidies to exports, and great care has to be taken to ensure that investment incentives do not invite the imposition of countervailing duties by trading partners under the GATT rules.

Recent policy discussions have taken a broader view on where Botswana's future 'engines of growth' may lie. One of these is tourism, currently heavily concentrated in the Okavango and Chobe areas in north-west Botswana, and the current policy is aimed at spreading tourism more widely throughout the country and on improving infrastructure in main tourist areas. It is also hoped to market the country as part of regional tourism packages, and to this extent Botswana should benefit from the anticipated increase in tourism to South Africa.

Expansion into services more generally may provide a promising source of economic growth for Botswana in the future. Some of the problems facing the export manufacturing sector - such as high utilities costs and the distance from seaports - are less of a problem with services. International trade in services is also growing relatively fast (compared, for example, with trade in primary commodities), indicating that this should be an area with substantial potential for future growth. This trend is also overcoming a traditional argument against services - that they were not internationally tradeable and thus not suitable as a source of export earnings. Botswana could perhaps develop as a regional headquarters for international companies operating in southern Africa.

Another recent proposal has been to develop Botswana as a regional (or even international) centre for financial services. Some of Botswana's main strengths in comparison with other countries in the region are the size of its international reserves and the stability of the currency, as well as the relatively liberal and open nature of the economy. It has been argued that this provides the basis for an expansion of the financial sector into a range of international financial services, such as insurance and leasing, as well as offshore activities such as the raising of foreign currency denominated loans on international markets for regional or other borrowers. The financial centre idea is a controversial one, and some have argued that Botswana's existing financial system does not have the range of institutions and experience necessary to build such a centre, certainly when compared to the much larger and more sophisticated financial sectors in Zimbabwe and South Africa. it is also clear that, if Botswana is to explore this option, action is needed quickly to study costs, benefits and constraints of such as a strategy, and to implement necessary reforms and skills upgrading programmes. One such reform is the removal of foreign exchange controls. Whilst existing exchange controls on trade are relatively liberal - indeed, the recent budget announced that Botswana would shortly move to IMF Article 8 status, entailing the removal of all current account controls - restrictions on capital account transactions remain quite strict and pose limitations on cross-border capital flows. They also prohibit activities such as the maintenance of foreign currency accounts by Botswana's commercial banks - a good example of where Botswana is now falling behind other countries in the region, in contrast to its more normal experience of being ahead. The removal of such restrictions is a prerequisite for Botswana to emerge as a regional centre for financial or other service activities, and for its financial system to become more sophisticated in its handling of international financial transactions.

The wider regional context is, of course, dominated by the process of political change in South Africa and that country's successful transition to majority rule. The prospect of peace and stability in the region, after years of apartheid destabilisation, is very welcome to Botswana and other SADC countries. Although there should be scope for savings throughout the region from reduced military spending, some concern has been raised that the smaller countries may nevertheless suffer economically - the worry is that a resurgent South Africa will dominate the region and that foreign investment, in particular, will tend to flow to the centre rather than be spread around the region. This is obviously a concern, and countries which have benefited from sanctions-avoiding investments from international firms requiring a presence in the region may experience a reduction in inward investment. This has never been particularly important in Botswana, however, and the impact should therefore be limited.

Much more important is the beneficial impact that a process of rapid and sustained economic growth in South Africa will have on the region. if Botswana wishes to promote exports of manufactured goods, it must look first towards the South African market, to which it has free access under the Southern African Customs Union agreement. Penetrating this market will be much easier if it is growing. It is also likely that South African firms will pay less attention to Botswana if their home market is buoyant, and this should relieve some of the intense competitive pressure faced by Botswana firms - especially those in the construction sector - in the domestic market. A prosperous and growing South Africa is also more likely to be a peaceful one, and this, too, will assist in attracting international investment into all countries of the region.

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