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Standard Bank - Botswana’s 2006 budget

Africa market briefing

Jan Duvenage

Standard Bank Group Economics

10 February 2006

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The Minister of Finance and Development Planning, Baledzi Gaolathe, delivered the 2006 budget to the Botswana National Assembly on 6 February. The theme of the budget was “Building an Innovative Economy for the 21st Century“.

Recent macroeconomic developments

The minister reviewed Botswana’s economic performance over the 2004/05 fiscal year (which runs from April to March) in regional and international contexts. A central focus of the speech was the ninth National Development Plan or HDP 9, which runs from 2003/04 to 2008/09. The budget proposals are based on the Mid-Term Review of the NDP 9 of December 2005.

Botswana’s macroeconomic indicators reflected several positive developments. The economy grew by 8.3%, significantly above the 3.4% achieved in the previous year, which is largely due to the strong performance of the diamond mining sector. Output in this sector grew by 18.2% in 2004/05 compared to 0.2% in the previous year. The non-mining sector grew by a more sluggish 1.9% in 2004/05, and below the rate of 5.6% achieved in the previous period. Most industries in non-mining sectors grew by less than 3%, but the transport sector (5.6% growth), finance and business sectors (4.1%), general government (3.6%) and water and electricity (3.3%) were above this trend. A real GDP growth rate of more than 6% is envisaged in NDP 9.

Inflation was higher at an average of 8.6% in 2005 against 7% in 2004. The minister blamed the transitory effects of the new crawling band exchange rate mechanism (introduced in May 2005) and high administered price increases, mainly fuel and telecommunications. Price pressures emanating from the high international crude oil price can be expected to be more permanent than the once-off impact of the new exchange rate mechanism.

Employment growth of 2.8% was below expectations as well as the previous rate of 3.1%, but above the population growth rate of 2.4%. Employment growth was recorded largely in the informal sector.

The external sector was affected by volatile exchange rates. The government is particularly concerned about the negative impact on Botswana’s international competitiveness caused by an overvalued real exchange rate, which has emerged since 2000. To combat this, the new crawling band system was introduced in May 2005 to reverse the pula’s real appreciation. This is based on the view, stated in the minister’s concluding remarks that “No nation has prospered with an overvalued currency”.

The balance of payments is expected to show a record surplus of P6.5 billion in 2005 as exports (up 31%) rose more than imports (up 17%). Exports were buoyed by higher volumes for diamonds, copper/nickel, soda ash, beef and textiles, as well as strong commodity prices (diamond prices rose by 19% in US dollar terms) and favourable exchange rate movements.

Botswana’s international sovereign credit ratings by Standard and Poors’ and Moody’s are investment grade with a stable outlook and are still the highest in Africa.

Foreign exchange reserves were up by almost 9% y/y in US dollar terms to US$6.2 billion at year end, equivalent to about 27 months of imports of goods and services.

The minister also reviewed the financial affairs of the government’s 12 public enterprises and concluded that their performances were satisfactory. Sectoral developments and policy issues were also reviewed.

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