VZCZCXRO4380
RR RUEHDU RUEHJO RUEHMR
DE RUEHOR #0431/01 0871419
ZNR UUUUU ZZH
R 281419Z MAR 06
FM AMEMBASSY GABORONE
TO RUEHC/SECSTATE WASHDC 3068
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RHMFIUU/HQ USEUCOM VAIHINGEN GE
RHEHNSC/WHITE HOUSE NSC WASHINGTON DC

UNCLAS SECTION 01 OF 03 GABORONE 000431 
 
SIPDIS 
 
SIPDIS 
 
AF/S FOR MUNCY 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD ELAB BC
 
SUBJECT: BOTSWANA BALANCES BUDGET ON HIGHER DIAMOND EXPORTS 
 
REFERENCE: 05 GABORONE 264 
 
¶1.  SUMMARY:  The Government of Botswana expects to balance 
its budget in 2006, thanks to growth in revenues from the 
mining sector and a one-off payment from the old Southern 
African Customs Union agreement.  Although Minister of 
Finance Gaolathe predicted 6 percent growth for the next two 
to three years and easing inflation, the private sector and 
politicians are not so confident.  The large allocations to 
education and social services demonstrate that Botswana 
continues to have its fiscal priorities right even as it 
struggles to avoid budget deficits.  END SUMMARY 
 
GOVERNMENT FORECASTS SLIGHTLY SLOWER GROWTH 
 
¶2.  Botswana's economy grew at 8.3 percent in real terms 
during 2004/05, up from 3.4 percent in 2003/04.  The 
increase derived primarily from the mining sector, which 
grew at 18.2 percent, versus only 0.2 percent the previous 
year.  This change reflects the fluctuating nature of 
revenue flows from mining rather than significant additional 
revenue from a new mining operation coming on stream.  The 
exchange rate adjustment also increased the Pula value of 
Botswana's mineral exports.  The non-mining sectors turned 
in a less impressive performance, with growth slowing to 1.9 
percent from 5.6 percent in 2003/04. Lisenda Lisenda, of the 
Botswana Institute of Development Policy Analysis, 
attributed this to a decline in manufacturing exports and a 
dip in tourism resulting from the prior appreciation of the 
pula. 
 
¶3.  Minister of Finance and Development Planning Baledzi 
Gaolathe forecast growth of 6 percent over the next two to 
three years.  In order to reach that target, he said, the 
GOB must further eliminate barriers to investment, increase 
productivity and maintain a competitive exchange rate.  With 
the latter challenge presumably met through the institution 
of a crawling band mechanism, government efforts will focus 
on attracting investment and increasing productivity.  In an 
effort to chart a path toward economic diversification, the 
President appointed an Economic Advisory Council that should 
make recommendations by September. 
 
¶4.  According to Wayne Osterberg, CEO of Stockbrokers 
Botswana Ltd., however, 6 percent might be optimistic.  In a 
March 23 conversation, Osterberg told Emboff that he was 
surprised by Gaolathe's estimate given the "gloomy" 
atmosphere in the private sector.  This was consistent with 
the Botswana Confederation of Commerce, Industry and 
Manpower's (BOCCIM) description of the economy as "waning". 
High interest rates (businesses borrow at 17 percent) and 
rising prices are cutting into the historically large 
margins that lack of competition has afforded Botswana 
companies. 
 
RECORD BALANCE OF PAYMENTS SURPLUS EXPECTED 
 
¶5.  Minister Gaolathe forecast a record surplus of P6.5 
billion ($1.2 billion) in the current account for 2006, 
driven by substantial export growth. The preliminary 
estimates for the balance of payments show a surplus in 2005 
of P5.2 billion ($0.95 billion), compared to a deficit of 
P232 million ($42.2 million) in 2004.  Exports of goods are 
estimated at P22.7 billion ($4.12 billion) in 2005, a 31 
percent increase from P17.3 billion ($3.15 billion) in 2004. 
This 31 percent gain primarily reflects increased exports of 
diamonds, copper/nickel, soda, ash and beef coupled with 
increased world market prices and favorable exchange rate 
movement.  Imports increased 17 percent from P13.4 billion 
($2.44 billion) in 2004 to P15.7 billion ($2.85 billion) in 
¶2005.  Net outflows in the financial account were P880 
million ($160 million), associated primarily with pension 
fund portfolio diversification.  As of November 2005, 
Botswana's foreign exchange reserves held at P34.7 billion 
($6.2 billion), representing an increase over 2004 of $500 
million.  These reserves were estimated to represent 27 
months of import cover, an increase from 22 months in 2004. 
 
INFLATION UP, DESPITE PREDICTIONS 
 
¶6.  Botswana's inflation rate averaged 8.5 percent in 2005, 
up from 7 percent in 2004.  Gaolathe attributed this to 
depreciation of the pula and rising prices in the energy and 
telecommunications sectors.  He expected inflation to slow 
in 2006.  (The Bank of Botswana's target range for inflation 
is 4 - 7 percent.)  The Government's Central Statistics 
Office, however, reported that year-on-year inflation had 
reached 16.6 percent in January and edged up to 17 percent 
 
GABORONE 00000431  002.4 OF 003 
 
 
in February.  The institution of school fees in January 
contributed significantly to this change -- education costs 
increased 140 percent.  Rate hikes by Botswana 
Telecommunications Corporation of up to 100 percent for off 
peak, domestic calls and 50 percent for peak-hour domestic 
calls helped drive up transport and communication prices by 
20 percent.  Other areas of high inflation included energy 
(26 percent), alcohol and tobacco (17 percent) and food (12 
percent).  To offset inflation, the budget proposed an 8 
percent across-the-board raise for all public employees. 
 
GOVERNMENT ANTICIPATES BALANCED BUDGET 
 
¶7.  Minister Gaolathe presented before Botswana's National 
Assembly a total proposed budget of P23.22 billion ($4.2 
billion), which would result in a budget surplus of P922.5 
million ($168 million).  Mineral revenues constitute P11.39 
billion ($2.07 billion) or 47 percent of projected total 
revenues of P24.14 billion ($4.38 billion).  Customs and 
excise receipts are expected to increase by 55 percent from 
the previous year to P5.30 billion ($0.97 billion) due to a 
one-off payment from the Southern Africa Customs Union 
Revenue Pool.  The Minister described this as "the major 
source of revenue increase."  Without this boost in customs 
revenues, the budget would be P968 million ($176 million) in 
the red. 
 
¶8.  After decades of balanced budgets, the mounting costs of 
HIV/AIDS are testing the government's finances.  Last year, 
the Government expected to run its fourth consecutive 
deficit budget but ended up with a surplus of P574 million 
($104 million) (reftel).  This resulted primarily from the 
adjustment to the exchange rate mechanism and favorable 
shifts in world prices for Botswana's mineral exports.  The 
struggle to balance the budget is likely to persist as the 
number of Batswana enrolled in treatment programs rises. 
 
¶9.  In the proposed budget for 2006/07, Botswana continued 
to allocate a preponderance of funds for social development. 
The two ministries with the largest allocations were 
Education, which accounted for 27 percent of the recurrent 
budget, and Local Government, which includes various social 
welfare programs, at 14 percent. 
 
JOB GROWTH WEAK 
 
¶10.  Despite the strong growth numbers for 2004/05, Members 
of Parliament have recently expressed concern about the 
direction of the economy.  During the previous session of 
parliament in November-December 2005, several ruling party 
members opined that the economy was in trouble and pleaded 
with the President to devote more resources to that problem. 
That apparent incongruity results from the fact that 
Botswana's growth is driven by the capital-intensive mining 
sector.  The non-mining sectors, which are more able to 
create jobs, slowed significantly.  Accordingly, formal 
sector job growth slowed from 3.1 percent last year to 2.8 
percent this year, just ahead of the population growth rate 
of 2.4 percent. 
 
¶11.  Minister Gaolathe also announced his intention to 
present for discussion before the National Assembly a draft 
National Policy on Incomes, Employment, Prices and Profits. 
The draft would provide for minimum wages for domestic and 
agricultural workers and would formalize the objective of 
linking wage growth to productivity.  Elaborating on the 
latter point, Gaolathe emphasized "concerns about our 
workers' unsatisfactory attitude toward work" and poor 
customer service as barriers to investment. 
 
WANTED: INVESTMENT 
 
¶12.  Minister Gaolathe underscored the importance of 
attracting investment, including foreign direct investment, 
to accelerate economic growth.  He listed delays in land 
acquisition, the shortage of serviced land and the high cost 
of servicing unimproved plots as barriers to investment. 
Botswana's International Financial Services Center provided 
no encouragement for hopes that it had gained momentum in 
attracting investors.  During 2005, the IFSC had to de-list 
seven companies for failure to start or continue operations 
and approved only five new applications. 
 
LOCALIZATION OF TOURISM SMES 
 
¶13.  In an apparent attempt to address the perception that 
foreign firms dominate the tourism sector to the detriment 
of Batswana, the government announced its intention to 
 
GABORONE 00000431  003 OF 003 
 
 
reserve several types of small and medium tourist operations 
exclusively for citizens.  During the ensuing debate, 
Minister of Environment, Wildlife and Tourism Kitso Mokaila 
accused tourism companies of mistreating their workers and 
importing young and inexperienced managers, overlooking 
better qualified Batswana.  Mission will address this issue 
and its possible ramifications for the important tourism 
sector septel. 
 
PRIVATE SECTOR RESPONDS POSITIVELY TO BUDGET 
 
¶14.  The Bostwana Confederation of Commerce, Industry and 
Manpower issued a press release praising the proposed 
budget.  After a "turbulent" 2005, BOCCIM hoped the 
increased government spending would "kick start [Botswana's] 
waning business prospects."  It welcomed the government's 
decision to keep VAT at 10 percent and exempt some 
additional basic food stuffs but decried the lack of a 
timeline for the implementation of the privatization master 
plan.  Although Transparency International again ranked 
Botswana Africa's least corrupt country in 2005, BOCCIM 
asserted that corruption is on the increase and demanded 
greater transparency in government procurement. 
 
COMMENT 
 
¶15.  Despite the regressive introduction of school fees in 
January of this year, the 2006/07 proposed budget 
demonstrates the kind of fiscal responsibility that helped 
Botswana become a middle-income country.  While the 
continued investment in education and social services should 
pay-off in higher productivity in the long term, low 
productivity, high interest rates, and rising prices pose 
significant obstacles to growth and diversification in the 
short term. 
AROIAN