BOTSWANA COUNTRY STRATEGY PAPER

Transcription

1 AFRICAN DEVELOPMENT BANK BOTSWANA COUNTRY STRATEGY PAPER COUNTRY DEPARTMENT SOUTH REGION OCTOBER 2000 SCCD : N.G.

2 TABLE OF CONTENTS Page LIST OF ABBREVIATIONS, EXECUTIVE SUMMARY... i-vi I. INTRODUCTION 1 II. RECENT DEVELOPMENTS Overview Macroeconomic Context Private Sector and Business Climate Cross-Cutting Themes Major Constraints to Development...15 III. THE GOVERNMENT'S DEVELOPMENT AGENDA Key elements of the Government's Agenda Assessment of the Government's Agenda Challenges and Risks Strategic Partnership...27 IV. BANK GROUP STRATEGY Assessment of Previous Strategy Bank Group Portfolio The Medium-Term Bank Group s Strategy The Lending Programme Creditworthiness and Bank Group Exposure Issues Requiring Dialogue...32 V. CONCLUSION AND RECOMMENDATION Conclusion Recommendation...33 ANNEXES I. CSP Strategy Matrix II. Botswana: Basic Data Sheet: Comparative Socio-economic Indicators III. Botswana: Summary of Bank Group Operations IV. Botswana: Selected Economic and Financial Indicators V. GDP by type of Economic Activity Constant Prices (1985/86 prices) VI. GDP by type of Expenditure (1985/86 prices). VII. Public Finance VIII. Balance of Payments

3 i L I S T O F A B B R E V I A T I O N S AAC : Anglo American Corporation BCCIM : Botswana Confederation of Commerce Industry and manpower BCL : Bamangwato Concessions Limited BDC : Botswana Development Corporation BDF : Botswana National Defence Force BEDIA : Botswana Export Development and Investment Authority BMC : Botswana Meat Commission BOCODOL : Botswana College of Distance and open Learning BOTASH : Botswana Ash (Pty) Limited BPC : Botswana Power corporation BR : Botswana Railways BSE : Botswana Stock Exchange BTC : Botswana Telecommunication Corporation BTDP : Botswana Tourism Development Programme CBI : Cross Border Initiative CBO : Community - Based Organisation CSO : Central Selling Organisation COMESA : Common Market for Eastern and Southern Africa DOD : Disbursed and Outstanding Debt EIA : Environmental Impact Assessment EIF : European Investment Fund EU : European Union EMP : Environmental Management Plan FAP : Financial Assistance Policy GDP : Gross Domestic Product GNP : Gross National Product HATAB : Hotel and Tourism Association of Botswana HIV/AIDS : Human Immune-deficiency Virus IEC : Information, Education and Communication IFSC : International Financial Services Centre IHS : Institutes of Health Sciences ILO : International Labour Organisation IMF : International Monetary Fund MCB : Motor Company of Botswana MOE : Ministry of Education MMRWA : Ministry of Mineral resources and Water Affairs MWTC : Ministry of Works, Transport and Communications NACA : National Aids Co-ordinating Agency NCS : National Conservation Strategy NDP : National Development Plan NGO : Non Governmental Organisations NHP : National Health care NWMP : National Water Master Plan OPSD : Private Sector Department PCR : Project Completion Report PEEPA : Public Enterprises Evaluation Agency PHC : Primary Health Care PPAR : Project Performance Audit Report PPGD : Public and Publicly Guaranteed Debt RNPE : Revised National Policy on Education

4 ii L I S T O F A B B R E V I A T I O N S (cont d) SACU : Southern African Customs Union SAP : Structural Adjustment Programme SADC : Southern African Development Community SDR : Special Drawing Rights SEISA : Study of Economic Integration in Southern Africa SMMEs : Small, Medium, Micro Enterprises STD : Sexually Transmitted Diseases UNDP : United Nations Development Programme WUC : Water Utilities Corporation F I S C A L Y E A R April 1 - March 31 CURRENCY EQUIVALENTS (30 August 2000) 1 Pula = 100 Thebe 1 Pula = UA

5 iii EXECUTIVE SUMMARY I. Introduction 1. This Country Strategy Paper (CSP) Botswana covering the period presents an analysis of Botswana s recent economic and social developments and the Government s medium-term development agenda. It also discusses the major development challenges facing the country in the implementation of this agenda and assesses the past performance of the Bank Group Portfolio. Based on these analyses and consultations with the Government and the civil society, the CSP proposes an appropriate Bank Group lending strategy for Botswana. II. Recent Developments 2. While Botswana has gained a reputation for its remarkable economic growth and prudent macroeconomic management, the country is still riddled with a high level of poverty and unemployment. Over 47 percent of the population live below the poverty line. Geographically, poverty is highest in rural areas, with 55% of the rural population living below the poverty line compared with 46% in urban villages and 29% in urban areas. On the positive side, the relatively high economic growth in Botswana has been translated into significant achievements in the social sectors including a system of free health care and universal primary education. Spending on health and education increased by 170% in real terms between 1980/81 and 1998/99. These achievements are, however, threatened by the AIDS epidemic, which poses a great risk for government s efforts to promote economic development and eliminate poverty. 3. GDP growth has averaged 7.3% per annum over a twenty-five year period ( ), based on diamond production. GDP growth in 1998/99 slowed down to 4.2 % from a growth rate of 8.0% in 1997/98. This lower growth performance was largely due to a downturn in the rate of growth of the mining sector resulting from weak international demand for diamonds in the wake of the 1997 Asian crisis. GDP estimates for 1999/2000 indicate that the weaknesses observed in 1998/99 have largely been reversed. For 1999/2000, the mining sector is expected to grow by 15 percent while GDP growth is estimated at 10 percent. Despite significant formal sector employment growth in recent years, the overall rate of unemployment remains high. The rate of unemployment increased from 10% in 1980 to 22% in 1994 declining to 19.6% in 1999 resulting from rapid employment growth in construction and manufacturing. 4. The average rate of inflation in 1999 rose to 7.2%, slightly higher than the 6.5% rate recorded in Increased inflation was largely attributable to the imported tradable component. The inflationary pattern observed in 1999 had reversed a downward trend in inflation initiated in 1992 when the rate of inflation stood at 16.5 percent. As a result of decline in mineral revenues, total revenue and grants as a percentage of GDP fell from 44.3 percent in 1996/97 to 37.3 percent in 1998/99. On the other hand, total expenditure and lending as a percentage of GDP rose from 36.5 percent to 44.5 percent during the same period. Consequently, there was deterioration in the overall fiscal balance position as a percentage of GDP from a surplus of 7.8 percent in 1996/97 to a deficit of 7.3 percent in 1998/ On the external front, current account surpluses as well as financial inflows have enabled the country to build up substantial foreign exchange reserves, which, in December 1999, stood at Pula

6 iv 28.9 billion (US$ 6.1 billion) representing 28 months cover of imports of goods and services. The overall balance of payments improved significantly following substantial increases in diamond exports. In 1999, Botswana had an overall balance of payments surplus of P billion representing 7 percent of GDP. The real exchange rate of the Pula remained stable with little change against the US dollar and the South African Rand. Botswana s total debt stock outstanding at the end of 1995 amounted to US$ 633 million. This declined to US$483 million in 1998, representing 10% of GDP (1998) and a debt service ratio of 3.0%. 6. Sectorally, the mining sector continues to dominate in contributing to growth, standing at 30.8 percent in 1998/99. Trade, hotels and restaurants (18.4 percent), general government (16.2 percent), followed this. In spite of the sustained soundness of macroeconomic management, insufficient progress was achieved in overcoming the challenge of over-dependence on the mining sector, in particular, diamonds. Diversification is inhibited by the smallness of the domestic market and the difficulties of competing in regional markets against South Africa. The Government is actively searching for industrial niches where it can successfully develop comparative production advantages and tourism development. III. Government Development Agenda 7. The surpluses generated from the diamond sector have been used by Government to invest in a sound infrastructural base in roads, telecommunications, and electricity distribution, and simultaneously to develop the labour force's skills through public expenditures on health and education. The Government's Agenda is outlined in two major policy documents: 1) Vision 2016, Towards Prosperity for All is a multi-dimensional statement of policy encompassing economic, social, political, cultural and spiritual objectives. Vision 2016 also sets development targets to be achieved in 2016 marking the 50th anniversary of the country's Independence. 2) The 8 th National Development Plan (NDP 8) (1997/ /03). The NDP-8 centers on the theme of Sustainable Economic Diversification to be achieved through accelerated growth of the non-mining sectors, especially manufacturing, tourism and financial services. 8. While the recorded indicators of real GDP growth and per capita income growth suggest that Botswana is progressing in its long-term economic and social development, the underlying levels of poverty remain sizeable with 47 percent of the population below the poverty line according to government of Botswana sources. Moreover, the country has extremely high levels of unemployment. In this context, the government s growth oriented policy has not resulted in a concurrent decline in levels of poverty and unemployment. In fact, in the course of the 1990s the level of unemployment have increased substantially from the levels recorded in the 1980s. Relying largely on the impetus of economic growth, the government has not formulated adequate policies geared towards alleviating the plight of poverty and unemployment. In fact, what has occurred in the 1990s is a pattern of jobless growth.

7 v IV. Assessment of the Government's Agenda 9. Unemployment and Poverty Reduction: With 47% of the population of Botswana living beneath the poverty line (1994/95 estimate), poverty reduction is and must be a priority concern. Despite efforts to address this issue, concrete results have been limited. Economic growth coupled with diversification was viewed as the main instrument for eradicating poverty. No concrete targeted poverty alleviation measures have been implemented. In this regard, it was anticipated that with the high levels of GDP growth, the unemployment rate would go down to 12% in the course of NDP 8. In order to achieve the Government's stated objective of halving poverty by 2008 and totally eradicating poverty by 2016, important weaknesses at both the policy and implementation levels need to be addressed. The latter include: strengthening the pro-poor focus of existing Sectoral policies in the areas of education, health and citizens economic empowerment); defining a National Poverty Reduction Strategy (with inputs from poor people); translating strategies into clearly defined operational programmes; investing in implementation capacities, especially at the local level. V. Bank Group Operations 10. The performance on the implementation of the 28 projects that have been financed by the Bank Group in Botswana has been satisfactory. Nineteen of these projects have been completed; two others have been substantially completed, except for a few on-going activities being financed with loan savings. There had also 5 Technical Assistance Grants to Botswana. This gives a total of 33 operations in the country to date. Overall project implementation has been satisfactory, with the level of attainment of project goals, objectives and outputs of many of the completed projects falling in the top echelon of per cent. 11. The Bank Group's strategy to Botswana had been focusing on human resources development and infrastructure. There is, for the foreseeable future, no significant financial risk in lending to Botswana. Due to its sound balance of payments position, Botswana has not contracted any new debt from commercial creditors since External debt service amounts to only 3 per cent of exports of goods and services. The country has maintained a good loan repayment record and has never had to undergo any debt restructuring. VI. Recommended Bank Group Strategy 12. The Bank Group operations strategy for will focus on poverty reduction, capacity and institutional building, targeting agriculture, infrastructure, and the fight against the HIV/AIDS pandemic. In addition, the financing of private sector operations offers possibilities for diversification. In agriculture the intervention will focus on food security and livestock management improvements. In the infrastructure and public utilities sector, the emphasis of ADB operations will be on provision of water supplies in both rural and urban areas, and the rehabilitation of existing district roads.

8 vi 13. The Bank Group will support of GOB's effort to diversify the economy away from dependency on the mining sector through private sector investment. The targeted areas for diversification/private investment are manufacturing, tourism, and financial services. In the manufacturing sector, the areas of natural comparative advantage are the downstream processing of locally available raw materials. Leather goods production and diamond cutting and jewellery are natural niches to develop. The tourism sector sits at the centre of a nexus of service-based industries, which should be developed at the regional level. Similarly, for financial services, a range of activities can be promoted, including investment banking. 14. The Board is invited to endorse the strategy presented in this paper.

9 I. INTRODUCTION 1.1 This Country Strategy Paper (CSP) for Botswana covering the period assesses the recent socio-economic developments, examines the potentials for sustainable economic growth in the medium-term and analyses the performance of the Bank Group Portfolio. Following this analysis, the CSP proposes an appropriate Bank Group lending strategy for Botswana. The report is largely based on data obtained from official Government sources by a Bank Group CSP preparation mission that visited Botswana from 15 to 30 April In an effort to work in a participatory manner, the mission consulted a wide range of stakeholders including senior government officials, technical staff in line ministries, officials of parastatal organizations and representatives from the private sector, civil society organizations and developments partners. BOX 1 BOTSWANA Country Snapshot After 80 years as a British protectorate, Bechuanaland attained self-government in 1965 and became the independent Republic of Botswana in Botswana is located in the centre of the Southern African plateau. The country is landlocked sharing border with the Republic of South Africa, Namibia, Zambia and Zimbabwe with a total land area of 582, 000 sq. km. The mean altitude above sea level is approximately 1000 metres. The country is largely arid or semi-arid. The majority of Botswana s population is concentrated in the eastern region, which straddles the North -South railway line. This region has a less harsh climate and more fertile soils. The rest of the country accounts for two-thirds of the land area, and is covered with thick sand layers of the Kalahari Desert. The population of Botswana is 1.6 million (1998), with a density of 2.7 per sq. km (1998) and an urbanisation rate of 49.2%. Most Botswana citizens are members of the Setswana-speaking ethnic group. The official languages are Setswana and English. Botswana has one of the fastest growing economies in the developing countries. With a per capita income of $3070 (1998), Botswana is classified as a middle income country. The main economic activities are mining, manufacturing, tourism and livestock. Despite strong growth led by the mining sector, unemployment remains relatively high estimated at 19.6% of the labour force (1999). Botswana has established a system of universal primary education and health care. The Gross Enrolment Ratio at the Primary School level is The Adult Illiteracy Rate is 25.7 % (1998). However, life expectancy at birth is low at 44.3 years largely as a result of high rate of HIV/AIDs prevalence. The latter is estimated to be of the order of 25% (1998). According to Government sources, 47% of the population live below the poverty line (1997). 1.2 Since 1992, there has been no new ADB lending to Botswana. The country has also no borrowing from the World Bank. This is due mainly to the comfortable external reserve position of Botswana. In the circumstances, the Government is reluctant to borrow non-concessionary funds for projects that it can finance either from partly concessionary loans or from its own external reserves. In 1997, the Government started implementation of the eighth National Development Plan (NDP 8) covering the period 1997/ /03. Implementing the poverty reduction measures and development programmes stipulated in the Plan requires technical assistance as well as considerable financial resources. In view of this, the Bank Group has intetnsified its dialogue with the Government with the objective of exploring various possibilities for supporting its efforts to address the soci-economic challenges the country faces. These possibilities are explored in this paper. II. RECENT DEVELOPMENTS 2.1 Overview

10 Botswana is well-known for its remarkable growth record and prudent macroeconomic management. Based on its per capita income and social indicators, Botswana ranks favourably compared to other African countries. (see Annex II). The country has achieved a significant rate of real GDP growth, and has built comfortable foreign exchange reserves. Nevertheless, the challenges facing the country are immense. Botswana is considered to have been less successful in addressing income poverty than in reducing capability poverty. About 47% of the population and 38% of households live below the poverty line. At the same time, Botswana ranks fourth in Africa and 45 th among 101 developing countries in terms of the capability poverty measure. This is mainly due to the fact that Botswana has successfully increased the provision of such social services as schooling, health facilities and clean water while job creation has been limited The UNDP Human Development Report for Botswana suggests that income distribution in Botswana is highly skewed with a Gini coefficient of 0.54 in 1994, implying that the benefits of growth are not equitably shared. Inequitable gender relations, resulting in inequitable access and opportunities for women, also contribute to poverty. Related to the incidence of poverty, are the country s narrow economic base, unsuitable climate and soil for arable agriculture, and poorly developed human capital. Furthermore, in view of the HIV/AIDS epidemic, it is projected that life expectancy will fall below 40 years by This is anticipated to result in a reduction in productivity per capita, an increase in public expenditure on health care, replacement training, and a reduction in national investment, mainly due to reduced domestic savings. 2.2 Macroeconomic Context Growth: The average annual rate of real growth of Gross Domestic Product (GDP) over the five-year period 1994/ /99 was of the order of 5.7 percent, exhibiting a somewhat irregular pattern. From a 2.5 percent growth of GDP recorded in 1994/95, the economy grew respectively by 6.6 and 7.1 percent in 1995/96 and 1996/97. GDP growth in 1998/99 slowed down to 4.2 % from a growth rate of 8.0% in 1997/98. This lower growth performance was largely due to a downturn in the rate of growth of the mining sector resulting from weak international demand for diamonds in the wake of the 1997 Asian crisis. Significant diamond sales during marked by a substantial rise in diamond exports-- contributed to reversing the setbacks observed in 1998/99. GDP estimates for 1999/2000 indicate that the weaknesses observed in 1998/99 have largely been reversed. For 1999/2000, the mining sector is expected to grow by 15 percent. Overall GDP growth for 1999/2000 is estimated to be of the order of 10% Employment: Despite significant formal sector employment growth in recent years, the overall rate of unemployment remains high. The rate of unemployment increased from 10% in 1980 to 22% in 1994 declining to 19.6% in 1999 resulting from rapid employment growth in construction and manufacturing. In the early 1990s, government sector and parastatal employment grew faster than that of the private sector. Since 1998, however, this pattern has been reversed. The tendency is towards expanded employment growth in the private sector Inflation: The average rate of inflation in 1999 rose to 7.2%, slightly higher than the 6.5% rate recorded in Increased inflation was largely attributable to the imported tradable component. The inflationary pattern observed in 1999 had reversed a downward trend in inflation initiated in 1992 when the rate of inflation stood at 16.5 percent. The success of bringing down inflation has been largely a result of sound fiscal and monetary policy. It has also been due to the slow down of inflation in South Africa as Botswana is significantly dependent on imports from South Africa.

11 Public Finance: Due to mineral related taxes and the expansion of the mining sector, the government was able to run budget surpluses respectively of the order of 2.0 and 7.8 percent of GDP in the 1995/96 and 1996/97 fiscal years. A comfortable budget surplus was also recorded in 1997/98. However, the overall budgetary position deteriorated in 1998/99 with a decline in the revenues from mining. The earlier changes in company taxes implemented in 1995/96 had in this regard increased the government s vulnerability to short term changes in the mining sector. Total revenues and grants in 1998/99 experienced a decline of 7 percent largely on account of the decline in mineral revenues. Combined with increases in civil service salaries, the revenue shortfall contributed to a budget deficit in 98/99 for the first time in 16 years. For 1999/2000, total revenues and grants recovered, increased by 13.8 percent resulting from significantly higher mineral revenues. Combined with selective cuts in expenditure, a modest budget surplus of P510 million for 1999/2000 was recorded. The budget proposal for 2000/2001 is based on the achievement of a small budget surplus or balanced budget. On the expenditure side, domestic increased steadily over the 1994/ /99 period, while its share as a percentage of GDP dropped markedly in relation to the pattern observed in the 1980s and early 1990s. In 1997/98, the share of domestic consumption in GDP was of the order of 31.4 percent Savings and Investment: Gross national savings as a percentage of GDP which was 34.4 percent in 1995 fell slightly to 33.0 percent in Out of this, the private sector share was 18.2 percent in 1995 and 21.4 percent in Gross investment as a percentage of GDP rose from 25.7 percent in 1995 to 29.3 percent in The private sector s share was 12.8 percent in 1995 but in 1999 it was 18.6 percent. However, given that the savings rates had always exceeded the investment rates, there had been no need to source for external finance for investment purposes for all these periods. The forecasts for the next few years indicate that there would be no change in these trends. The savings rates are projected to be about 36.1 percent by 2002 while the investment rates are estimated to be about 28.0 percent Monetary Developments: Following a period of credit expansion in 1998, some tightening of monetary policy was implemented in 1999 with a view to dampening inflationary pressures. Monetary policy in 1999 attempted to "maintain a careful balance between meeting the objectives of lower inflation while avoiding the potential negative impact of high interest rates on private sector investment". Significant increases in diamond sales in the last quarter of 1999 resulted in a 10 percent increase in the country's foreign exchange reserves. The latter were in December 1999 of the order of Pula 28.9 billion (US$ 6.1 billion) representing 28 months cover of imports of goods and services. The Bank Rate in early 2000 was raised to 13.25%. Real interest rates remain high with a prime interest rate of the order of 15.25% compared to an inflation rate of 7.0%. Botswana has no internal debt Exchange Rate and Balance of Payments: Botswana has been able to develop a strong external position over the last twenty years. Current account surpluses as well as financial inflows have enabled the country to build up substantial foreign exchange reserves. The overall balance of payments improved significantly following substantial increases in recorded diamond exports. In 1999, Botswana had an overall balance of payments surplus of P billion representing 7 percent of GDP. The real exchange rate of the Pula remained stable with little change against the US dollar and the South African Rand External Debt: Botswana continues to avoid contracting any new debt from commercial creditors. The total debt stock outstanding amounted in end-1995 to US$ 633 million and declined to US$483 million in 1998, representing 10% of GDP (1998) and a debt service ratio of 3.0%. Almost the totality of the external debt is composed of bilateral and multilateral loans. Resulting from its low

12 4 levels of external debt (combined with sizeable foreign exchange reserves), Botswana is among few developing countries that have not implemented a Structural Adjustment Programme (SAP) under the stewardship of the International Monetary Fund (IMF) and the World Bank. Sectoral Developments Mining: Botswana is the World's largest gem diamond producer. Total production is of the order of 26 million karats representing approximately 40 percent of total World production. The share of mining in GDP is about one third. Largely driven by diamonds, the mining economy registered substantially increased sales in 1999 resulting from exceptional demand for diamond jewelry. The Completion of the Orapa expansion project (Orapa II) has contributed to strengthening Botswana's position as the World's leading producer of gem diamonds. The Orapa complex, considered to be the World's largest diamond mine with an annual output of 12 million carats, was officially inaugurated in May Other mineral products include copper and nickel, soda ash and salt. A newly formed jointventure company Botswana Ash (Pty) Ltd. (BOTASH) was formed in BOTASH is owned by the Government (50 percent) and by the Anglo-American Corporation (AAC) of South Africa and several South African commercial banks. The copper/nickel mining industry fared better in 1999 due to a recovery of nickel prices. While soda ash production reached levels of 25,000 tons a month in 1999 compared with 16,900 tons in 1998, the revenues of BOTASH have been eroded by competition Agriculture: Since 1992/93, the agricultural sector has experienced a pattern of negative growth. In 1998/99, the rate of growth of agriculture was -3.1%. The share of agriculture in GDP has gradually declined from 4.7 percent in 1990/91 to 2.9 percent in 1998/99. This situation is all the more serious in view of the fact that agriculture constitutes an important source of income and employment for about a quarter of the labour force. A number of staple crops including sorghum and maize are grown in Botswana. Crop cultivation is essentially based on rain fed farming with very small areas of the country under irrigation. The underlying climatic conditions marked by recurrent droughts have not favoured the growth of cereal production. Neglect of farming and relative low

13 5 levels of investment in irrigation, agricultural infrastructure and marketing have been contributing factors in the decline of the agricultural sector. In 1998/99, total cereal production from traditional and commercial agriculture was of the order of 68,525 tons representing 21 percent of Botswana's consumption needs While in some areas cultivated lands have increased, crop yields have remained low in most parts of the country. Government s policy for the arable sub-sector is to introduce drought tolerant and early maturing varieties of crops and intensifying the use of integrated pest management In the Pandamentanga area of Northeastern Botswana where the total area under cultivation has increased significantly in recent years, commercial farmers have shifted from traditional cereal into high value cash crops Livestock farming: in Botswana remains largely undeveloped and characterised by extensive livestock systems in the communal areas. The large-scale commercial farms comprise 8 per cent of the total land area and specialize in cattle production. Two thirds of traditional farmers practice mixed farming with individual arable holdings and communal grazing of livestock. In the communal areas livestock off-take is low, about 8%, compared to 14% in the commercial areas. Also there are high mortality rates, 12% in the communal areas and 5% in the commercial sector. Recurrent drought, poor nutrition, low calving rates and incidence of disease outbreaks all contribute to the low productivity of the livestock sub-sector Beef production is a major foreign exchange earner for Botswana after diamonds. 80% of cattle and 95% of small stock are owned and managed under the traditional production systems. The Botswana Meat Commission (BMC) exports more than 90% of its beef to EU, Norway, Reunion and the Republic of South Africa. It has achieved an excellent reputation for quality and standards. However, Poor animal husbandry practices, high mortality rates, weak extension and technical support, lack of marketing facilities, depressed producer prices are major constraints in this area of livestock production. These constraints have to be addressed in order to improve the output of the beef industry and increase the amount of export of beef, the demand for which is still high in the world markets Major diseases of economic importance such as Foot and Mouth Disease are under control. The National Veterinary Laboratory (NVL) in Sebele financed with ADF resources and completed in 1996 is well equipped for diagnosis, disease surveillance, hormones and residue testing. The laboratory still suffers from the loss of qualified staff to the private sector in search of higher pay. Training of staff to build up capacity and replace resigning staff is slow. There is capacity constraint in terms of extension staff, veterinary personnel and equipment in the public sector. The private sector in this area is poorly developed. The dairy sector is poorly developed. Poor genetic potentials of the existing national herd, traditional management systems and lack of feed greatly hamper the development of this sector of livestock production. This area was addressed in the recent National Master Plan for Agricultural Development (NAMPAD)-a study currently being finalised The climate of Botswana is predominantly semi-arid to arid. It suffers from frequent droughts and has very few other water sources. The major source of fodder is from the marginal land and crop residue after harvest. This is neither sufficient nor of high enough quality to carry the national herd through the extended period of the dry months. Botswana is endowed with abundant land and wildlife resources. The wildlife resource is now a major foreign exchange earner for the country in terms of tourism. There is an upsurge of interest in wildlife and ranching in the country. This is a very good

14 6 development since it involves the majority of the rural dwellers and encourages community participation and environmental conservation The livestock sub-sector is characterised by inefficient production systems, which is in part attributable to the degradation of cattle ranges and the lack of maintenance of boreholes. In order to improve livestock management practices, Government has encouraged individuals and groups to fence in the communal areas. The outbreak of Cattle Lung Disease in 1996 reduced the size of the herds by 12%. The Cattle population, however, has increased markedly in the last three years. There are an estimated 2.5 million cattle, 2.8 million goats and 373,000 sheep. Some 80% of the cattle and 95% of the small stock are in the traditional communal livestock areas. The livestock sub-sector is a big enterprise in the country. With 80% of the rural population and about 46% of the national population involved in livestock, the importance of developing and providing manpower in the sub-sector need not be over-emphasized. There is a capacity constraint in terms of trained personnel and extension workers to deliver livestock services to the majority of the rural livestock producers Manufacturing: The share of manufacturing in Gross Domestic Product has declined from 6.4% in 1990/91 to 5.9% in 1998/99. The sector consists of agro-industry (largely concentrated in meat processing), building materials, chemical and rubber products, the assembly of motor vehicles, and textiles and clothing. The overall performance of the manufacturing sector has vastly improved since 1993/94. The average annual rate of growth over the 1994/ /99 period was of the order of 5.2%. The manufacturing sector suffered a major setback in 1999 with the closure of the country's main automobile assembly plant following the provisional liquidation of the Motor Company of Botswana (MCB) Hyundai assembly plant). This decision was implemented in the wake of the liquidation of the Wheels of Africa Group of South Africa of which MCB was a member. The government has opened discussions with several automobile groups with a view reestablishing production at the motor assembly plant Tourism: Hinging upon Botswana's extensive wildlife resources, Tourism is considered as one of the potential engines of economic growth. According to estimates of the Hotel and Tourism Association of Botswana (HATAB) and the Botswana Confederation of Commerce Industry and Manpower (BCCIM), the contribution of the Tourist sector to GDP is estimated to be of the order of 3% (slightly higher than that of Agriculture). The number of people employed in the tourist industry is estimated at 27, Water and Energy: Affected by recurrent droughts, the management of water resources is central to Botswana's economic and social development. The country's water resources consist of a system of water bore-holes used for cultivation and livestock as well as three major river basins shared with neighbouring countries: the Zambezi, the Limpopo and the Okavango. Consolidated water demand for Botswana (2000) is estimated to be of the order of million cubic meters per annum. Of total water demand, 24% goes to urban centers, 23% for livestock, 18% for mining and energy, 15% for irrigation and forestry, 11% for major villages and 4% for wildlife and other settlements. Difficulties pertaining to the supply of potable water still prevail. The Water Utilities Corporation (WUC) is responsible for the sale and distribution of potable water in designated areas With regard to electric power, approximately 40% of Botswana's power supply requirements are imported (through connections to the South African and Zambian grid lines) under the authority of the Botswana Power Corporation (BPC). Domestic power supply is generated from coal and petroleum. Despite the availability of electricity, consumption is limited to the upper income groups.

15 7 According to Government sources, it is estimated that 18% of the population had access to electricity in A 1993/94 Survey conducted in the context of the study on Poverty and Poverty Alleviation in Botswana (under the auspices of the Ministry of Finance and Development Planning) suggests that only 20% of "non-poor" households used electricity for lighting. The percentage of poor and very poor households using electricity was of the order of 2% and 0% respectively Transport and Communications: Botswana's transport network is characterised by a railway line and an extensive system of trunk roads linking main towns. Because the country is landlocked, the Government has invested heavily in developing international road and rail routes to South Africa, Namibia and Zimbabwe. The railway line located in the most populated eastern part of the country consists of 642 km of track. Botswana's railway line operated by Botswana Railways links up with the rail network of neigbouring countries including South Africa and Zimbabwe. The road network consists of some 20,000 kilometers of publicly maintained roads and tracks. This network is split into 8400 km of national roads maintained by the Government's Roads Department and 7,600 km of district and urban roads maintained by local authorities. Following the completion of the Trans-Kgalagadi Road linking Gabarone to the port of Walvis Bay in Namibia, the only link that remains to complete the national ring-road network is the Gantsi-Sihithwa road scheduled for completion in March The transport sector accounts for about 5.5% of GDP Financial Services: The notable features of the Botswana s financial sector are that its institutions are efficient, and the infrastructure is of high standard with good telecommunications facilities and institutional support mechanisms. Sound banking practices combined with sizeable Central Bank foreign exchange reserves favour the development of the sector in the context of the Government s economic diversification programme. In line with the Government s decision to eliminate exchange controls (February 1999), the Financial Services industry has been earmarked as a new engine of sectoral growth. In 1998/99, Banking Insurance and Business Services constituted 10.6% of GDP. The sectoral rate of growth of Banking, Insurance and Business Services was of the order of 10.5% During the past decade, the government has liberalised licensing requirements for banks and developed local capital and money markets in order to establish a more efficiently operating financial services sector. The government has revised the role of the Public Debt Service Fund by encouraging public sector organisations and agencies to source funds from the private credit market, rather than relying entirely on government support. This development has been positive for the local banks over the last few years, with lending opportunities for banks having increased as a consequence. The period has been a generally successful one, in terms of bank profitability, with return on average assets for banks ranging from 1.7% to 3.3%. Interest income from normal lending activity, together with investment income from Bank of Botswana Certificates have been important sources of earnings.

16 The government has shown its commitment to attracting foreign investment and liberalising the financial services sector further by introducing an International Financial Services Centre. The centre provides the following incentives for international financial services companies to invest in Botswana: a lower than normal corporate tax rate of 15%, until 2020; exemption from witholding taxes in Botswana; credits for witholding taxes levied in other jurisdictions. All the major banks are subsidiaries of international banking groups and the latter would most likely come to the former s aid in terms of further capital injection, if the need for it were to ever arise. Private sector credit has been playing, alongside public expenditure, an increasing role in the economic expansion Botswana has a well-developed telecommunications network in urban areas including a system of mobile phones, which extends to large areas of the country. Extension of telephone services into rural areas is progressing slowly. Botswana is connected to the Internet. The Botswana Telecommunications Corporation (BTC) is responsible for maintaining and modernising the telecommunications network Education: The educational system in Botswana is considered to be among the best in Africa. It is characterised by 7 years of primary school, 3 years of junior secondary and 2 years of senior secondary. Non-formal education, apart from the National Literacy Programme, takes the form of extension services; and specialist training offered by various public and private organisations such as the Roads Training Centre, the Police College, the Defence College, Botswana Telecommunications Corporation Training Centre, Debswana Training Centre, and the commercial banks' training schools. In recent years, industrial and vocational training centres have been set up, jointly funded by Government and private businesses, to train employees while they are on the job. The Ministry of Education bears responsibility for providing and supervising education and safeguarding standards and certification. There are also a significant number of private primary and secondary schools Following the implementation of the Revised National Policy on Education in 1992, considerable efforts were made to enhance access and improve the quality of primary, secondary and tertiary education in Botswana. The gross primary school enrolment ratio is (1996) compared to the African average of The gross secondary school enrolment ratio is 64.6 (1996) compared to the African average of Close to 75 % of adult Batswana are literate compared to the African average of 43.5%. The 1997 Botswana National Literacy Survey shows a national literacy rate of 69.9 percent; 66.9 % for males, and 70.3 % for women. Although, this rate is among the highest in sub- Saharan Africa, the level of education may not empower people to access jobs in a highly competitive labour market. The available data show that in recent years unemployment is concentrated among the secondary school leaves. The current level of unemployment is likely to intensify the poverty profile in Botswana Health: The health system in Botswana provides free or near free primary health care for all. By the early 1990s, virtually all Batswana had access to a health facility within a distance of 15 km. The public health system in Botswana is characterised by two national hospitals located respectively in Gaborone and Francistown, six Government district hospitals serving urban villages and towns and 13 primary hospitals providing maternity and general in-patient care, lab tests and surgery. Beneath the hospitals are 170 health clinics and 308 health posts The district level clinics are under the jurisdiction of the Ministry of Local Government; the hospitals are under that of the Ministry of Health. While procurement problems have developed in

17 9 remote areas, essential drugs are distributed for a nominal fee through the district health clinics. Botswana has adopted an expanded programme of immunisation that has achieved 90 per cent immunisation against DPT, polio, tuberculosis, and measles. The Government has set up a Food and Nutrition Programme and a Drought Relief Programme to prevent severe malnutrition in times of natural disasters Resulting from the improvements in public health and maternal-child health, the infant mortality rate has declined from 71% in 1981 to 58.6% in Despite significant progress in preventive and curative health care, the core disease pattern in Botswana is functionally related to levels of poverty in the country. Patterns of morbidity are characterised by a high incidence of respiratory diseases (including tuberculosis) and gastro-intestinal infections. In recent years, the incidence of HIV/VAIDS has increased dramatically. 2.3 Private Sector and Business Climate The private sector is concentrated in mining, manufacturing, trade, banking, insurance, financial services, construction and agriculture. The Government supports the development of the private sector through the Financial Assistance Programme (FAP). Credit schemes have been implemented through the National Development Bank (NDB) in support of small and medium sized enterprises. Foreign capital as well as foreign enterprises registered in Botswana tend to play a dominant role in the development of the private sector. In 1997 the Government appointed a Task Force on Privatisation and initiated a process of privatisation through the Botswana Development Corporation (BDC). In April 2000, the Government's draft privatisation programme (resulting from the recommendations of the Task Force) was approved by Parliament setting the agenda for the divestiture and privatisation of a number of parastal enterprises Government continues to play an important role in key sectors of the national economy as well as in the management of public utilities including water, electricity and telecommunications. In mining, the Government collaborates with the private sector. The national diamond company Debswana is a joint venture between the Government (50%) and De Beers (50%). The Government also plays a key role in the meat processing industry through the Botswana Meat Commission (BMC) which has a statutory monopoly on all meat exports. The Government through its parastatals and public enterprises also has sizeable investments in financial institutions, agricultural marketing, construction services, and publishing and estates management Privatisation: The privatisation strategy for Botswana contained in the Draft White Paper on Privatisation Policy was approved in February The impetus for privatisation in Botswana has come from a desire to improve efficiency in the delivery of services and from the need to create further opportunities for the growth of the private sector. Privatisation has not been adopted as a solution to an immediate financial, economic or political crisis; broadly, the driving force for privatisation is the desire to achieve economic efficiency and improve productivity in both private and public sectors. The objectives of privatisation include the following: promoting competition, improving efficiency and increasing the productivity of enterprises; increasing popular participation in the ownership of national assets; reducing the size of the public sector in the economy; contributing to the development of the stock market; and contributing to the development of citizen businesses. Enterprises earmarked for privatisation include many of the most important state enterprises, such as Botswana Development Corporation (BDC), National Development Bank (NDB), Botswana Power Corporation (BPC), Water

18 10 Utilities Corporation (WUC), Botswana Telecommunications Corporation (BTC), Air Botswana (AB), Botswana Meat Commission (BMC) As discussed in section 2.1, Botswana s economy has been characterised by high growth and the main sources of growth are the mining sector and the general government sector. Botswana offers a package of investment incentives, which are among the most attractive in the world. They include, among others, a refund by the Government of 80% of the wage bill of shop-floor workers in the manufacturing during the first two years, 60% in year three, 40 per cent in year four and 20% in year five, 50% of training costs is refunded by the Government. The corporate tax is only 15% for manufacturing enterprises; and profits and dividends can be readily repatriated. There is no foreign exchange control Botswana also has a well-developed banking sector composed of a number of commercial banks with international operations. The banks advance both short and medium term loans as well as working capital. The prime rate at present is 15.25%. The banking system is highly liquid. The Botswana Development Corporation also plays a major role in the industrialisation process of the country through equity participation, provision of loans and construction of factory shells. The National Development Bank is another financial institution, which provides long term financing to private enterprise. Concerning financial management, the Central Bank is regarded as a strict and efficient regulator, given its high capital adequacy stipulations and the increasing role played by the bank with regards to on-site bank supervision. The minimum risk asset ratio for banks in Botswana is 15% of risk weighted assets, which is considerably higher than the Basle Committee s 8% stipulation. As a consequence of the Bank of Botswana s strict capital requirements, banks in Botswana tend to have high capital to risk asset ratios, in order to ensure that their capital adequacy ratios do not stray from the high capital requirements Stock Exchange: Botswana has an active stock exchange, which started operations in There are thirteen (13) domestic and nine (9) dual listed companies on the Botswana Stock Exchange (BSE). Market capitalisation stood at P3,225 million at the end of December 1998, up from P2,336 million in December There are two broking firms licensed to operate in Botswana, namely Stockbrokers Botswana Limited (SBB), and Investec Securities (Botswana) (PTY) Limited (ISB). Bank stocks are generally the most highly rated on the BSE, given their ability to achieve higher earnings growth rates than stocks in other sectors, due to sustained demand for credit and increasing transaction volumes, for fee income earning transactions Investment Promotion and Export Development: An Act of Parliament which came into effect on 1 April 1998, transformed the Trade and Investment Promotion Agency (TIPA) into an autonomous parastatal, Botswana Export Development and Investment Authority (BEDIA) It is responsible for export development and investment promotion, especially foreign direct investment (FDI). Besides, BEDIA is a One-Stop-Service Centre for investors, which includes prompt provision of services relating to acquisition of land, factory shells, work and residence permits, travel visas, grants, and any other regulatory authorisations Investment Opportunities: Botswana s development strategy puts accent on the diversification of the economy as a means of addressing the problem of unemployment and poverty. Within this context, Botswana s industrial strategy is geared mainly towards export oriented manufacture. Regarding investment opportunities, emphasis is placed on the diversification of the industrial base of the country away from the mineral sector. While the introduction of new production