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Growth concerns in Africa’s star economy

: Thursday, August 19 - 2004 @ 13:57

The impact of rand strength on South Africa’s economy has been well flagged. But Botswana’s pula, pegged to a basket of currencies dominated by the rand, has strengthened in line with the ZAR. Even the 7.5% surprise devaluation, announced earlier this year, has had little impact on competitiveness, as the rand has strengthened further since then. In Botswana – where diamond mining provides around 70% of the country’s exports, constitutes one-third of the economy, and contributes over 40% of fiscal receipts – pula strength, especially vs. the USD, has been hurting.

Recent currency strength has also coincided with a decline in receipts from other key sources of revenue. As Southern African trade with the rest of the world is liberalised, receipts from the Southern African Customs Union – of which Botswana is a member – have fallen. Returns on the Bank of Botswana’s reserves, also a significant source of past revenue, have declined. As a result, there is more dependence on mining than would usually be the case. But fiscal concerns are growing. Botswana has a favourable credit rating, in part due to its record of almost consistent budget surpluses. More recently, Botswana has announced small deficits. This fiscal year, which is also an election year, an attempt will be made to restore a balanced budget. Although spending is projected to increase, the hope is that revenue will grow sufficiently to allow budget balance. This is why currency strength may be problematic.

Available statistics for diamond production from Jan-April 2004 suggest a lower ‘run rate’ than one would expect given 2003’s full year production of over 30 million carats. Worse still, the mining sector is threatened by pay-related strikes. Although a closure of Botswana’s diamond mines from strike-related action seems unlikely, it is a risk to fiscal revenue. Against this background, negotiations between the government and De Beers, over the licence to operate the Jwaneng diamond mine, continue. The original licence expired at end-July. A temporary licence was granted, allowing De Beers to continue operations until year-end. Faced with declining sources of fiscal revenue, the government may attempt to secure greater concessions from mining companies active in the country. But even this may not happen soon enough to safeguard near term growth.

Government spending as a percentage of GDP has been high in Botswana, recently averaging over 40%, amongst the highest in the region. There is little doubt that Botswana’s impressive growth record was related to this spending. Now, although no data is available, anecdotal evidence suggests a slowdown in spending. The construction industry, usually reliant on government contracts in an election year, is feeling a slowdown. This is likely to be a lead indicator for the rest of the economy – it is only a matter of time before consumption follows. At this point in the fiscal year, it is unlikely that spending will accelerate. The dampening effect of BWP strength on the economy will be difficult to avoid.

Nonetheless, another BWP devaluation is unlikely. With inflation already near the top end of its preferred 4-7% range and international oil prices still a source of concern, the government is unlikely to opt for a dramatic one-off weakening. If the ZAR should fail to correct however, then a gradual move down in the BWP/ZAR rate – controlled by the authorities – appears probable.

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Thursday, August 19- 2004 @ 13:57 UAE local time (GMT+4) Replication or redistribution in whole or in part is expressly prohibited without the prior written consent of Mediaquest FZ LLC.

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