This Selected Issues paper and Statistical Appendix analyzes economic developments in Botswana during the 1990s. The paper analyzes the growth process during 1982/83–1996/97 by assessing the contribution of capital, labor, and technological progress, both at the macroeconomic and sectoral levels. The paper examines the diversification initiatives undertaken by Botswana and the extent to which diversification and employment creation have been achieved. It provides the background to the unemployment problem, and summarizes Botswana’s policy initiatives to diversify and create sustainable employment.


This Selected Issues paper and Statistical Appendix analyzes economic developments in Botswana during the 1990s. The paper analyzes the growth process during 1982/83–1996/97 by assessing the contribution of capital, labor, and technological progress, both at the macroeconomic and sectoral levels. The paper examines the diversification initiatives undertaken by Botswana and the extent to which diversification and employment creation have been achieved. It provides the background to the unemployment problem, and summarizes Botswana’s policy initiatives to diversify and create sustainable employment.

I. Recent Economic Developments1

A. Background

1. Since the discovery of diamonds at the end of the 1960s, Botswana’s economy has undergone dramatic changes. The efficient exploitation of mineral resources, coupled with the pursuit of prudent financial policies, has enabled the country to establish an impressive growth record. During the past two decades, real per capita GDP increased by almost 5 percent a year; it reached US$3,419 in 1997/98 (national accounts year basis; July-June; Figure I.1). The authorities have struck a balance in the use of mineral revenues by investing part of them abroad and investing in domestic infrastructure and social services, such as education and health. Spending on education and health increased by 170 percent in real terms between 1980/81 and 1998/99, and Botswana’s social indicators have improved considerably (Table I.1). The under-5-years mortality rate has declined significantly and is now less than a third of the average for sub-Saharan Africa, while the incidence of child malnutrition is less than half of that for the subcontinent. The adult literacy rate is almost 70 percent, nearly all children attend primary school, and school enrolment at the secondary has been expanding rapidly. In addition, the share of the population living below the poverty line fell from 59 percent in 1985 to 47 percent in 1993.

Figure I.1.
Figure I.1.

Botswana: Selected Economic Indicators, 1980-98

Citation: IMF Staff Country Reports 1999, 132; 10.5089/9781451806342.002.A001

Sources: Botswana authorities; and Fund staff estimates.1/ National accounts year beginning July 1.2/ Fiscal year beginning April 1.
Table I.1.

Botswana: Social Indicators, 1971-96

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Sources: UNDP, Botswana Human Development Report 1997; Botswana authorities; and Fund staff estimates.

At 1990 prices, using 1990 exchange rates.

2. The diamond sector continues to be the mainstay of the Botswana economy. It accounts for about one-third of GDP, more than 45 percent of government revenue, and about 75 percent of export earnings. During the 1990s, Botswana’s share of global diamond sales of the Central Selling Organization (CSO) of De Beers ranged between 30 percent and 45 percent (Appendix I).

3. The sharp increase in diamond sales from the mid-1970s onward improved Botswana’s overall fiscal and external positions considerably. Between 1983/84 and 1989/90 (fiscal year basis; April-March), fiscal surpluses averaged more than 13 percent of GDP. In conjunction with the strong budgetary position, the external current account recorded surpluses from 1985 onward, and rising overall balance of payments surpluses resulted in a rapid increase in official reserves, which at end-1998 amounted to US$5.9 billion, equivalent to 29 months of imports of goods and services.

4. Botswana’s trade system can be characterized as moderately open.2 The country maintains close economic and financial links with South Africa. As a member of the Southern African Customs Union (SACU),3 it has duty-free access to the South African market. Botswana is also a member of the Southern African Development Community (SADC),4 which aims, inter alia, at establishing a free trade area over an eight-year period.

B. Growth, Employment, and Inflation

5. After averaging 7½ percent a year in 1995/96-1997/98 (July-June), real GDP growth slowed to an estimated 4 percent in 1998/99 (Table I.2), mainly on account of the decline in diamond output, which shifted toward lower-quality diamonds. The nonmining private sector grew by an estimated 8 percent in 1998/99, reflecting a broad-based expansion in most sectors of the economy.

Table I.2.

Botswana: Sectoral Real GDP Growth, 1995/96-1998/99 1/

(Annual percentage change)

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Sources: Botswana authorities; and Fund staff estimates.

National accounts year beginning July 1.

6. Following rapid growth during the 1970s and 1980s,5 diamond production averaged about 16 million carats during 1990-94 and increased to 17½ million carats during 1995-96. The strong demand for diamonds in the mid-1990s prompted the start in October 1996 of the Orapa 2000 project, which is expected to increase mining output to about 26½ million carats by the year 2000.6 Production capacity has been further boosted by the introduction of continuous operations at the Orapa and the Letlhakane mines, which involved extending operations from five to seven days a week.

7. The nonmining private sector continued to perform well across all sectors except agriculture, which has suffered from adverse climatic conditions, ongoing urbanization, and, more recently, cattle lung disease.7 The finance, transport, and construction sectors are estimated to have recorded double-digit growth rates in 1998/99. The expansion of the government sector moderated somewhat, following a period of strong growth during 1996/97-1997/98.

8. Real domestic demand grew by 15½ percent in 1997/98, notably reflecting a strong increase in private consumption, which was stimulated by sizable wage increases in the public sector (Table I.3). Public investment also rose substantially, reflecting the accelerated implementation of development projects under the Eighth National Development Plan (NDP8).8 In 1998/99, real domestic demand also rose sharply, on account of both strong consumption and investment demand.

Table I.3.

Botswana: Real Domestic Demand, 1995/96-1998/99 1/

(Annual percentage change)

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Sources: Botswana authorities; and Fund staff estimates.

National accounts year beginning July 1.

9. Botswana lacks time series data on unemployment. Unemployment data are available for 1984/85 and 1995/96 from labor force surveys, as well as for 1981 and 1991 from population censuses. The unemployment rate, which stood at 10 percent of the total labor force in 1981, increased to 17 percent in 1984, reflecting sluggish economic growth in the first half of the 1980s. Unemployment subsequently declined to 14 percent in 1991, as the economic boom in the late 1980s created many jobs; during 1988-91, formal sector employment increased by 11½ percent a year (Table I.4). Since 1992, however, employment growth has not kept pace with the growing labor force. During 1992-98, formal sector employment increased by only 1 percent a year, mainly reflecting the expansion of government employment, which more than offset the decline in private sector employment. According to the latest 1995/96 Labor Force Survey, published in March 1998, unemployment was 21½ percent in 1995/96. The accelerated migration into urban areas has exacerbated the unemployment problem in recent years, which is concentrated among the youth, particularly in the age group of 15-24 years.9

Table I.4.

Botswana: Formal Sector Employment, 1982-98 1/

(In thousands)

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Source: Botswana authorities.

Data for 1982 were for August, for 1985 for September, and from 1988 onward for March.

10. Wage increases in the public and private sectors remained generally in line with consumer price inflation in the 1990s. They stayed well below labor productivity gains, as reflected in the decline in the labor income share during 1991/92-1996/97 (July–June); this share fell by about 7 percentage points to 28 percent in 1996/97 for the overall economy, and about 14 percentage points to 42 percent in 1996/97 for the nonmining private sector (Figure I.2). During 1990-97, unit labor costs of the nonagricultural sector in Botswana rose by 8.8 percent a year, compared with 10.3 percent in South Africa. In the manufacturing sector, however, they increased by 11.8 percent a year, considerably more than in South Africa (8.4 percent). In 1997/98, compensation in the public and private sectors rose by 29.1 percent and 22.5 percent, respectively. In July 1998, a further 25 percent wage increase was awarded to civil servants, with most parastatals following suit.

Figure I.2.
Figure I.2.

Botswana: Growth, Employment, and Inflation, 1990-99

Citation: IMF Staff Country Reports 1999, 132; 10.5089/9781451806342.002.A001

Sources: Botswana authorities; and Fund staff estimates.1/ National accounts year beginning July 1.

11. Consumer price inflation has decelerated steadily since 1993, closely following price developments in South Africa. It reached a 13-year low of 5.9 percent in July 1998, mainly because the slowing of tradable prices more than offset the acceleration of nontradable prices that began in early 1998. As inflation in South Africa edged up to about 9 percent during the second half of 1998, tradable prices in Botswana picked up toward late 1998, and overall inflation amounted to 7 percent in August 1999.

C. Public Finances


12. The importance of the diamond sector for the Botswana economy is also reflected in the fiscal accounts. Fiscal revenue from the mining sector grew significantly over the years to a high of more than 31 percent of GDP in 1986/87 (April-March), constituting 55 percent of government revenue in that year (Figure I.3).10 The sharp increase in mineral revenue led to a substantial improvement in Botswana’s overall fiscal position, and sizable fiscal surpluses were recorded from 1983/84 onward. These surpluses allowed the government to accumulate large balances with the Bank of Botswana. Another important and growing source of fiscal revenue has been the profit transfers from the central bank, which averaged almost 5 percent of GDP during the 1980s, and has risen to an average of almost 8 percent of GDP during the 1990s.

Figure I.3.
Figure I.3.

Botswana: Selected Fiscal Indicators, 1980/81-1998/99

Citation: IMF Staff Country Reports 1999, 132; 10.5089/9781451806342.002.A001

Sources: Botswana authorities; and Fund staff estimates.1/ Fiscal year beginning April 1.2/ Actual spending, except for 1998/99, which is based on the revised 1998/99 budget.

13. Revenue has increased from 42 percent of GDP in the 1980s to 44½ percent in the 1990s, which is more than double the average for sub-Saharan Africa. Government spending also has expanded substantially, from 36 percent of GDP in the 1980s to almost 40 percent in the 1990s. The overall fiscal surplus has averaged 5 percent of GDP in the 1990s, compared with an overall deficit of about 6!4 percent of GDP for sub-Saharan Africa in the same period (Table I.5).

Table I.5.

Botswana: Selected Fiscal Indicators in Sub-Saharan Africa, 1980-98

(In percent of GDP)

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Source: Fund staff estimates.

Excluding grants.

14. Public investment has been maintained at high levels at around 12 percent of GDP in the second half of the 1990s to build and improve infrastructure. In 1997/98, a quarter of total expenditure was allocated to education, followed by housing and urban and regional development (10 percent), electricity and water (8 percent), and transportation and communications (7 percent).


Functional Classification of Expenditure, 1997/98 1/

(In percent of total expenditure)

Citation: IMF Staff Country Reports 1999, 132; 10.5089/9781451806342.002.A001

Source: Ministry of Finance and Development Planning.1/ Fiscal year beginning April 1.

The 1998/99 budget outcome

15. The fiscal position in 1998/99 (April-March) deteriorated sharply and deviated markedly from the original budget. While the original budget for 1998/99 projected a fiscal surplus equivalent to 1 percent of GDP (Table I.6), three supplementary budgets approved by parliament allowed for additional spending of P 1 billion, equivalent to 4.6 percent of GDP,11 and revenue projections were revised downward by almost P 800 million. Thus, the projected fiscal balance moved from a surplus of 1 percent of GDP to a deficit of 7¼ percent. The preliminary fiscal outturn of a deficit of 5¼ percent of GDP was somewhat better than envisaged in the revised budget, as some of the planned capital outlays were not executed owing to bottlenecks in project implementation. The deterioration in the fiscal position in 1998/99 reflected the steep decline in revenue and grants, which fell by 7½ percentage points of GDP from the 1997/98 fiscal outturn on account of lower mineral revenue. The sales tax and the nonmineral income tax held up well, buoyed by the strong growth of domestic demand and economic activity in the nonmining private sector. Income tax collection was also favorably affected by the tax amnesty, which expired on March 31, 1999.

Table I.6.

Botswana: Revenue and Expenditures, 1995/96-1999/2000 1/

(In percent of GDP)

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Sources: Botswana authorities; and Fund staff estimates.

Fiscal year beginning April 1.

Receipts from Southern African Customs Union.

Transfers from Bank of Botswana.

16. Notwithstanding the substantial additional spending authorizations, total expenditure was broadly in line with original budget limits, as higher current outlays were offset by lower capital expenditure. The fiscal deficit of P 1.2 billion was financed domestically by drawing down the government’s cash deposits with the Bank of Botswana.

The budget for 1999/2000

17. The government budget for 1999/2000, which was presented to parliament on February 8, 1999, aims at reducing the overall budget deficit (including grants) to 1½ percent of GDP. Total revenue and grants are projected to increase by 37 percent, mainly on account of higher mineral revenues and transfers from the SACU. As the transfer from the SACU revenue pool is calculated on import and excise data from two fiscal years earlier, owing to the time lag in data availability, the increase in SACU receipts of 2 percentage points of GDP in 1999/2000 reflects imports and consumption of excisable goods in Botswana in 1997, which increased by 31 percent in U.S. dollar terms. While the larger transfer from SACU is certain to materialize, the budgeted 52 percent increase in mineral revenue hinges on a strong recovery of the global diamond market. Total expenditure and net lending are budgeted to grow by 23 percent, consisting of a 30 percent increase in development expenditure and a 17 percent increase in recurrent expenditure. The budget does not envisage civil service salary increases in 1999/2000. To achieve the planned increase in development expenditure, the authorities will need to improve the implementation capacity, as the construction sector is currently operating at full capacity and one-fourth of the development budget is allocated for the construction of primary schools and village infrastructure. Another one-fifth of the development budget is allocated for building roads and improving rural access to telecommunications.

D. Monetary Developments

18. Monetary developments and policies in Botswana during the 1990s have been driven by the authorities’ twin objectives of achieving positive real interest rates and controlling excess liquidity12 within the banking system. The problem of excess liquidity originated in the 1980s when increasing inflows of mineral revenues and the resultant large current account surpluses led to an excessive growth in the money supply against the backdrop of exchange controls and a pegged exchange rate.

19. To reduce excess liquidity in the banking system, the Bank of Botswana (BoB) assumed the role of deposit-taker of last resort when it introduced a call deposit facility for commercial banks in 1976. However, this instrument failed, mainly because the real call rate was negative. Consequently, banks opted to intermediate the excess funds by lending at slightly better—but still negative—real prime rates, which, coupled with a considerable flow of government lending to the parastatals, led to a surge in credit.13 In order to reign in credit expansion and reduce excess liquidity, the BoB introduced its own paper, the Bank of Botswana Certificates (BoBCs) in May 1991 and allowed the market to determine the level of interest rates, thereby making it an attractive investment opportunity for overliquid banks.14 The BoBCs are short-term discount instruments, ranging from three months to nine months in maturity, and are sold at periodic auctions.15 They are highly liquid and can be rediscounted at any time at the BoB. The auctioning of BoBCs became the main instrument of monetary policy,16 as well as the primary tool for mopping up excess liquidity, while the BoB adopted the maintenance of positive real interest rates as an intermediate target of monetary policy. Since 1991, the issues of BoBCs have increased significantly, reflecting the rise in excess liquidity (Table I.7).

Table I.7.

Botswana: Selected Financial Ratios and Aggregates of Commercial Banks, 1995-99

(End of period; in millions of pula, unless otherwise indicated)

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Source: Bank of Botswana (BoB).

Required liquid assets are 10 percent of commercial banks’ daily average deposit balances. Eligible liquid assets include cash, current account balance with the BoB in excess of the primary required reserve, balances due from domestic banks, foreign notes and coins, BoBCs, and private sector bills eligible for discount at the BoB.

Primary required reserves, consisting of current account balances with the BoB, are 3.25 percent of average daily deposit balances.

Credit developments in 1998

20. Monetary developments in 1998 were characterized by a strong expansion of bank credit to the private sector, which rose by 46 percent in 1998, compared with 6 percent in 1997 (Figure I.4). Aided by the substantial salary increases in the civil service and parastatals,17 credit to households grew by 46 percent. Credit to the parastatals more than tripled, as the government encouraged public enterprises to borrow from the banking system on commercial terms rather than from the Public Debt Service Fund (PDSF).18 Private sector credit from nonbank financial institutions19 rose more moderately in 1998, increasing by 14 percent, compared with 27 percent in 1997.

Figure I.4.
Figure I.4.

Botswana: Selected Monetary Indicators, 1993-99

Citation: IMF Staff Country Reports 1999, 132; 10.5089/9781451806342.002.A001

Source: Bank of Botswana.1/ Excess liquid assets defined as actual liquid assets minus required liquid assets.2/ Required liquid assets are 10 percent of commercial banks’ daily average deposit balances.

Distribution of Commercial Bank Credit, March 1999

Citation: IMF Staff Country Reports 1999, 132; 10.5089/9781451806342.002.A001

Source: Bank of Botswana

21. The deceleration of inflation in late 1997 and early 1998 prompted the central bank to lower the central bank rate by 50 basis points in January 1998 and by 25 basis points in March 1998 to 11¾ percent. However, as inflationary pressures began to emerge from the sizable depreciation of the South African rand vis-à-vis major foreign currencies, the BoB raised the central bank rate in September 1998 by 75 basis points to 12½ percent, and by 25 basis points and 50 basis points in January and March 1999, respectively. Commercial bank prime lending rates, which follow closely movements in the central bank rate, were lowered marginally to 13¼ percent in April 1998 and subsequently raised to 14¾ percent in April 1999.

22. As a result of the rapid expansion of loans, the ratio of actual to required liquid assets fell from 5.9 at end-1997 to 4.3 at end-1998, and further to 4.1 in March 1999. Also, credit in percent of deposit liabilities, which had declined steadily during the past few years, rose in the second half of 1998 and reached 58 percent at end-March 1999, from 49 percent at end-1997.

23. As commercial banks expanded their lending operations in 1998, they reduced their holdings of BoBCs (Table I.8). The total outstanding market value of BoBCs declined by 4 percent to P 3.3 billion at end-1998. In 1999, the BoB introduced repurchase agreements (repos) and the secured lending facility (SLF) as additional tools for short-term liquidity management. Repo transactions will enable banks to sell their holdings of BoBCs, or other eligible securities, to the BoB to obtain overnight or longer-term liquidity, while the SLF will enable banks to borrow from the BoB to meet unanticipated daily clearing imbalances.

Table I.8.

Botswana: Value of Outstanding Bank of Botswana Certificates (BoBCs), 1994-98

(End of period; in millions of pula)

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Source: Bank of Botswana.

Financial sector

24. Botswana’s five commercial banks, which are all foreign owned, are well capitalized, and only 1 percent of the aggregate loan portfolio is nonperforming. The BoB conducts regular off-site and on-site inspections.20 The statutory minimum capital adequacy ratio is 8 percent, but in 1998 the BoB directed commercial banks to raise capital levels to 15 percent of risk-weighted assets as a precautionary measure against risks associated with the full liberalization of exchange controls, as well as possible Year 2000 computer problems. The recent full liberalization of exchange controls prompted the BoB to issue new guidelines on foreign currency exposure of banks in February 1999, which stipulated that (i) the maximum net foreign currency exposure for a bank must not, at any time, exceed 30 percent of the bank’s unimpaired capital; and (ii) within this overall limit, the maximum net foreign currency exposure is 15 percent for any of the four major currencies (the U.S. dollar, the South African rand, the British pound sterling, and the euro) and 5 percent for all other currencies.

25. The Botswana Stock Exchange continued to perform well in 1998. Market capitalization amounted to P 3.2 billion during the year, a 38 percent increase from the previous year. Two companies were listed during 1998 to bring the total number of listed domestic companies to 14. In addition, one company was added to the list of dual-listed stocks,21 bringing the total number of foreign companies to 9. The domestic companies index increased by 34 percent, while the foreign companies index fell by 15 percent due to a decline in De Beers’ share prices related to the sluggishness of the global diamond market.

E. External Sector Developments

26. Botswana’s external position has improved steadily over the past two decades. Since 1982, a combination of rapid export growth, prudent fiscal management, and earnings from the sustained accumulation of financial resources has allowed the country to continue running current account surpluses. These increasing surpluses, together with the significant inflows in the financial account, have led to a rapid buildup in international reserves (Figure I.5). Botswana’s international reserves rose from a modest US$293 million in 1982 (4½ months of imports) to US$3.3 billion (20 months of imports) in 1990. At the end of 1998, foreign exchange reserves stood at US$5.9 billion. The rapid growth in exports was fueled by the strong increase in the production of diamonds, which accounted for more than 75 percent of exports during the 1980s.

Figure I.5.
Figure I.5.

Botswana: Selected External Indicators, 1990-99

Citation: IMF Staff Country Reports 1999, 132; 10.5089/9781451806342.002.A001

Sources: Bank of Botswana and Fund staff estimates.1/ Using multilateral weights (1990-95 average) with percentage shares assigned to countries as follows: South Africa (47 percent), United States (39 percent), United Kingdom (9 percent), and Zimbabwe (5 percent).2/ Based on relative consumer prices.

27. Botswana exports diamonds in rough form through the Central Selling Organization (CSO), the marketing arm of De Beers. Sales of diamonds by Botswana have been subject to a sales quota established by the CSO to deal with weak demand for diamonds and increased competition from suppliers outside the cartel. The CSO initially reduced its purchases from its contracted suppliers, including Botswana, to 75 percent of production in September 1992. Following an improvement in market conditions, this quota was gradually raised to 85 percent in 1993, and remained in effect through 1994-95. Conditions in the diamond market deteriorated rapidly in 1998, leading the CSO to reintroduce a sales quotas—initially at 80 percent in February 1998 and subsequently lowered to 75 percent in October 1998. As a result, diamond exports fell sharply, by almost 30 percent in 1998 in U.S. dollar terms.

28. The weakening of the diamond market in 1998 had a pronounced effect on the balance of payments. The external current account surplus was reduced from 14 percent of GDP in 1997 to 1 percent in 1998, with the surplus in the trade account falling from 17 percent to 3 percent of GDP (Table I.9). The acceleration of construction activity following the implementation of some large development projects22 also put pressure on the current account, leading to a steep increase in imports in 1997. Reflecting ongoing work on these projects, imports increased by a further 3 percent in 1998.23 The terms of trade (in U.S. dollar terms) in 1998 are estimated to have improved by 13 percent, as the import price index declined significantly, owing to the substantial depreciation of the South African rand vis-à-vis the U.S. dollar.

Table I.9.

Botswana: Selected External Indicators, 1980-98

(In millions of U.S. dollars, unless otherwise indicated)

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Sources: Botswana authorities; and Fund staff estimates.

29. The financial account balance fell from a surplus of US$6 mi1lion in 1997 to a deficit of US$54 million in 1998 as the increase in direct investment inflows was more than offset by an increase in other investment outflows, notably repayments on government long-term borrowing. International reserves rose by US$266 million during 1998 to US$5.9 billion at year’s end, equivalent to 29 months of imports.

30. The Botswana government has continued the process of liberalizing exchange controls (Box I.1). Reflecting the strong track record of prudent financial policy implementation, the successive liberalization of exchange controls did not have a significant negative impact on capital outflows during 1998. In February 1999, all the remaining exchange controls were eliminated, which resulted in the full convertibility of the currency for both current and capital account transactions.

Exchange System Liberalization

Botswana embarked on a major exchange control liberalization in January 1995: all restrictions on current account transactions were eliminated, and the country accepted the obligations of Article VIII of the Fund’s Articles of Agreement. In addition, permanent residents were allowed to make offshore capital investments; pension funds and related institutions were allowed to invest up to 70 percent (up from 50 percent) of their assets offshore; foreign stocks were allowed to be dually listed on the Botswana Stock Exchange; and Botswana banks were permitted to open Foreign Currency Accounts (FCAs) for both residents and nonresidents. Effective February 1997, nonbank financial institutions were permitted to conduct foreign exchange transactions. As of February 1999, all the remaining regulations on capital account transactions were abolished, including the requirement of Bank of Botswana’s approval for residents to take up pensions from abroad, and the surrender requirement for foreign exchange received in payment for exports of goods and services.

31. The exchange rate of the pula, which is determined on the basis of a basket in which the South African rand has a significant weight, depreciated in nominal and real effective terms by some 3 percent and 2 percent, respectively, in 1998. The sharp depreciation of the South African rand in 1998 also caused the pula to depreciate significantly vis-à-vis the U.S. dollar, by 14½ percent. The depreciation of the pula against the Japanese yen and the ECU was even higher, at 25 percent and 19 percent, respectively.

32. Botswana’s membership in the SACU gives its exports duty-free access to the South African market at the cost of the loss of discretion over its external trade regime.24 A trade agreement has been concluded between the European Union (EU) and South Africa: EU tariffs will be abolished over ten years, with the main reductions coming in years three to six, while South African tariffs will be phased out over twelve years.25 26 Negotiations on a new SACU agreement are still ongoing, notably with respect to the following outstanding issues: (i) the revision of the revenue-sharing formula; (ii) the establishment of a SACU administrative secretariat; and (iii) the implementation of sectoral tariff policies affecting individual countries. Botswana’s dependence on revenue from the SACU pool is relatively low: customs and excise duties now contribute only 15 percent of government revenue, compared with one-third in 1980.

F. Public Enterprise Performance and Privatization

33. The main nonfinancial parastatals comprise the Botswana Agricultural Marketing Board, the Botswana Livestock Development Corporation, the Botswana Housing Corporation, the Botswana Meat Commission, the Botswana Power Corporation, the Botswana Telecommunications Corporation, and the Botswana Water Utilities Corporation. As most of the nonfinancial parastatals have been profitable, and pay taxes and dividends to the government (Table I.10), they have not been a burden on the budget. However, considering that privatization could increase the efficiency of operations and relieve the government’s administrative and management burden, the authorities have recently initiated a program of privatization for parastatals.

Table I.10.

Botswana: Consolidated Income Statement of Nonfinancial Public Enterprises, 1994/95-1997/98 1/

(In millions of pula, unless otherwise indicated)

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Source: Bank of Botswana.

Data cover fiscal year April-March, except for the Botswana Livestock Corporation (January-December) and Botswana Meat Commission (October-September).

34. A task force including private and public sector representatives submitted a white paper on privatization to the government in July 1998, in which the various modalities of privatization were reviewed, including the financing, legal, and regulatory changes needed. The white paper also laid out a timetable and possible candidates for privatization.27 It also recommended the establishment of the Public Enterprise Monitoring and Privatization Agency (PEMPA), an autonomous public agency, to oversee the privatization process.

APPENDIX I The Structure of the World Diamond Market

35. De Beers, a diamond conglomerate founded in 1888, consists of De Beers Consolidated Mines Limited (DBCML), based in South Africa, and De Beers Centenary AG (DBCAG), based in Switzerland. The DBCML manages the South African interest of the group, while the DBCAG manages the group’s interests outside South Africa, including the 50 percent participation in Debswana in Botswana and Namdeb in Namibia (the remainders of the shares are held by the respective governments).28

36. By value, Botswana is the largest producer of diamonds, followed by Russia, South Africa, Angola, Namibia, and Australia. The De Beers group—with 20 mining operations in Botswana, South Africa, Namibia, and Tanzania—accounts for more than 50 percent of world production. By volume, Botswana is the second-largest producer after Australia, followed by Russia (estimated at 25 percent of world production), South Africa, the Democratic Republic of the Congo, and Namibia. In 1998, the De Beers group produced 31 million carats of diamonds, with Botswana alone accounting for 20 million carats. Botswana produces mainly gem diamonds for jewelry. Smaller producers include Canada, Chile, China, Ghana, Lesotho, and Sierra Leone.

37. The producers of the De Beers group voluntarily subscribe to exclusive sales through the Central Selling Organization (CSO). In addition, De Beers has trade arrangements with producers outside the group, including Almazy Rossi-Sakha (ARS), the main Russian producer, and Broken Hill Proprietary Company Limited (BHP) group—Australia’s largest industrial and natural resources company—for its mining operations in northwest Canada. The agreement between the CSO and each producer is on a pro rata basis, whereby the CSO allocates a certain percentage of its worldwide purchases to the group’s producers, as well as to other producers. In 1996, the CSO processed 72 percent of global diamond output by carat and 73 percent by value, down from 85 percent in 1990. The CSO purchases rough diamonds from producers at 90 percent of the standard selling prices (SSV). The diamonds are sort into different categories according to size, shape, quality, and color.

38. Although the CSO has held a strong grip on the market, leakage of sales outside the CSO, mainly from Russia and Angola has—at times—been a destabilizing factor. In the early 1990s, De Beers reached a trade agreement with the ARS, which had been flooding the market by selling its large stockpile accumulated during the former Soviet Union era. A new 13-month agreement came into effect in December 1997, which was extended in December 1998 to end-2001, stipulating that ARS would sell a minimum of US$550 million through the CSO of its planned production of US$1.5 billion. An upper limit has been set at 26 percent of CSO global sales, or US$1 billion. As a result, up to two-thirds of Russia’s production will be sold through the CSO. Also, in March 1998, De Beers signed a three-year agreement with the BHP to purchase 35 percent of its diamond production from northwest Canada.

39. At various times, the CSO has imposed quotas on its purchases from the mining companies. In September 1992, when world demand was sluggish and supply abundant, owing to increased sales by Russia and Angola, the CSO imposed a quota of 75 percent of production; the level was raised to 80 percent in May 1993 and to 85 percent in July 1993, where it stayed until 1995. Most recently, a quota of 80 percent was introduced in February 1998, which was subsequently lowered to 75 percent in October 1998.

40. The largest consumer of gem diamonds is the United States. Its imports of gem diamonds increased by more than 10 percent a year during 1993-98, generating 46 percent of world demand in 1998. Japan is the second-largest consumer, although its imports fell precipitously during 1995-98 owing to its prolonged recession. The Asian crisis in mid-1997 exacerbated the already weakened global diamond market. As a result, diamond sales of the CSO declined by 4 percent in 1997. In 1998, diamond sales by the CSO fell by 28 percent to US$3.3 billion, the worst since 1992. However, sales in the first half of 1999 increased by 44 percent over the first half of 1997, reflecting the recovery of the Asian economies.

Diamond Production and Sales, 1991-98

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Sources: Bank of Botswana, Annual Report 1998; and De Beers, 1998 Annual Report.

Including sales of diamonds purchased from outside the De Beers group.


Prepared by Mr. Almekinders, Ms. Kawakami, and Mr. Yuguda.


On the Fund’s 10-point scale of trade restrictiveness, Botswana ranks 6. Countries with a rank of 1 have the most liberalized trade systems.


The other members are Lesotho, Namibia, South Africa, and Swaziland.


All SACU members are members of SADC. Non-SACU SADC members are Angola, the Democratic Republic of the Congo, Malawi, Mauritius, Mozambique, Seychelles, Tanzania, Zambia, and Zimbabwe.


Diamond production in Botswana started in 1971 at the Orapa mine, and annual output averaged 2½ million carats in the early 1970s. With the opening of the Letlhakane mine in 1977, the expansion of the Orapa mine in 1978, and the commencement of production at the Jwaneng mine in 1982, output increased to 11 million carats in 1983 and to 15 million carats by the late 1980s. The expansion of the Jwaneng mine in 1995 added another 1 million carats to output.


The Orapa 2000 project, which aims at doubling annual production of the Orapa mine to about 12 million carats, is the largest diamond project ever undertaken by the De Beers group.


In 1996, all cattle (about 320,000) in the Ngamiland area were destroyed in an effort to prevent the cattle lung disease from spreading to other regions.


The NDP8 envisaged development expenditure to the tune of 12½ percent of GDP in 1997/98 and a gradual tapering off to about 5 percent of GDP in 2001/02-2002/03.


More than half the population lives in the greater Gaborone area.


The mineral revenue accruing to the government consists of a royalty (10 percent of gross sales), company income tax (25 percent of profits), and dividends.


The first supplementary budget, which was submitted to parliament in July 1998, included the costs of food supplies (P 67 million) and labor-intensive public works (food-for-work programs to the tune of P 88 million) that were initiated in response to the drought, as well as increased cost estimates for development projects following the completion of the 1998 project review exercise. The second supplementary budget (November 1998) was mainly to take account of the wage increase that had become effective in July 1998, whereas the third supplement (February 1999) covered miscellaneous increases in current expenditure.


This refers to the holding of liquid assets by banks in excess of statutory or prudential requirements.


Annual rates of credit expansion between 1988 and 1992 exceeded 30 percent (including a 55 percent growth rate in 1990).


The call deposit facility was abolished in August 1991.


Nonresidents are not permitted to buy BoBCs. Among residents, BoBCs are held by banks either as own investments or on behalf of their customers, as well as by nonbank financial institutions and private sector entities. Auctions are held irregularly throughout the year. In 1998, 12 auctions were held.


Policy signals are transmitted to the financial sector through the stop-out price—the price below which no bid for BoBCs will be entertained by the BoB—applied at BoBC auctions.


These wage increases eased the access of many workers to consumer loans.


The PDSF was created initially for the purpose of servicing the government’s debt, but later it became the main source of loan capital for the country’s state enterprises. Each year, parastatals were invited to submit a list of projects for funding. Successful proposals have until recently been funded on better-than-commercial terms.


The nonbank financial intermediaries include the Botswana Development Corporation (BDC), the National Development Bank (NDB), the Botswana Building Society (BBS), the Botswana Savings Bank (BSB), Tswelelo Limited, and ULC Limited. Tswelelo Limited is wholly owned by the BDC and provides venture capital financing to small and medium-sized enterprises, while ULC Limited is privately owned and specializes in hire-purchase and lease financing.


The BoB’s prudential supervision of the financial sector is presently limited to banks, while the nonbank financial institutions are supervised by other agencies. The government’s financial parastatals—the National Development Bank, the Botswana Savings Bank, and the Botswana Building Society—are supervised by the Ministry of Finance and Development Planning, which is also responsible for the oversight of the activities of insurance and related businesses, mutual funds, stockbrokers, the stock exchange, and pension funds. Credit unions are supervised by the Ministry of Agriculture.


Since March 1997, the Botswana Stock Exchange has allowed the dual listing of companies.


Including the expansion of the Orapa mine (Orapa 2000 project), the construction of the North South Carrier Water Project, and the establishment of a vehicle assembly plant.


The five largest imported commodities—vehicle and transport equipment, machinery and electrical equipment, food, metal and metal products, and chemical and rubber products—constituted 70 percent of total imports.


Botswana cannot unilaterally reduce its tariffs applicable to trade with non-SACU countries.


The bilateral trade agreement between the EU and South Africa will cover about 95 percent of South African exports and about 86 percent of EU exports.


Botswana’s exports have preferential access to the EU under the Lomé Convention.


The list includes all the parastatals under the supervision of the Ministry of Works, Transport, and Communications (Botswana Railways, Botswana Telecommunications Corporation, Botswana Postal Services, and Air Botswana), as well as that ministry’s Roads Department and Central Transport Organization. All financial parastatals except the BoB are among the candidates for privatization including the Botswana Development Corporation, the National Development Bank, the Botswana Building Society, and the Botswana Savings Bank. Agricultural parastatals, such as the Botswana Meat Commission and the Botswana Agricultural Marketing Board, are also listed.


Debswana came under the control of an equal partnership between De Beers and the Botswana government in 1975 when the government’s shareholding in the company was raised from the initial 15 percent to 50 percent.

Botswana: Selected Issues and Statistical Appendix
Author: International Monetary Fund