The economic challenge

Botswana remains a prosperous and well-managed economy but if growth rates are to be maintained successful diversification is needed. The country must reduce its dependence on mining and branch out into the service, tourism and financial sectors where the country still has a comparative advantage. This presents great opportunities to potential investors.

Since independence in 1966 Botswana has been a bastion of growth in a region of political and economic turmoil. In a region where its neighbours were engrossed in political and economic problems it has enjoyed political stability, a working democracy and no wars, or ethnic problems.

The discovery and successful exploitation of diamonds since 1971 gave it a rate of growth of over 9% for three decades from independence in 1966. The World Bank ranked it as the fastest growing country in the world over that period.

But in recent years that rate of growth has been slowing. Botswana is still increasing its diamond production but its sales have been affected by the reintroduction of export quotas and a downturn in demand in face of world recession. Beef exports have been constrained by drought and disease. Tourism has expanded fast but no other sector has been unable to take up the slack in mining.

Botswana's workforce has been sadly afflicted by the spread of AIDS. The HIV infection rate is widespread even among skilled and well-educated workers. Botswana now has the highest HIV infection rate in the whole of Africa. The government is now tackling the problem with total commitment but this is costly and health spending is rising fast from its current 7.5% level. The Botswana Institute for Development Policy comments: "While spending on health has been growing in recent years in view of the AIDS scourge, this is perhaps not enough. It would seem that AIDS is more of a threat to Botswana's survival than any military dangers the nation faces".

Other government spending is also set to rise fast. The budget for 2002/3 forecasts a 27% rise in development spending compared with the previous year. Local costs are always high because Botswana is a landlocked economy where transport and transhipment costs are much higher than neighbours, like South Africa, which has a larger market and a more advanced industrial base.

Botswana's excellent economic performance, trade surpluses, high foreign exchange reserves and financial discipline have also meant that the pula has been much stronger than the rand. Since the end of 1999 the pula has appreciated by over 20% against the rand. This has certain advantages by making imports cheaper but it makes the competitive position of domestic producers worse, making exports relatively more expensive and adding to the woes of the manufacturing sector.

All this means that Botswana's growth rate is slowing fast, with a real growth rate of only 4.5% forecast for 2002 and slightly over 5% in 2003. Increased spending to tackle AIDS and other priority sectors means that for the first time in two decades Botswana is budgeting for deficits rather than the surpluses that it has hitherto enjoyed. These deficits are small and insignificant in the light of Botswana's huge financial reserves but they do indicate a change of trend.

A new national broadcasting centre is well underway and the construction of a headquarters for an international financial centre will follow. But much other development spending is running into difficulties. In recent years government departments have been unable to spend the full budgets allocated to them. For example in 2000/1 actual development expenditures were about 14% lower than revised estimates. There are increasing problems with project implementation and with inefficient state owned industries. There is also a large backlog of uncompleted government projects despite full budgetary provision for them. Plan implementation has been slow.

This situation has made the government more determined than ever to diversify the economy away from the dependence on the diamond sector to almost any other form of sustainable, productive enterprise. This is good news for potential investors and partners who are looking at the Botswana market.

The record of the manufacturing sector in Botswana is not good. The local market is too small and it is generally too costly to compete effectively in the regional market. The closure of the Hyundai vehicle assembly plant in 2000 was a serious blow for the manufacturing sector and for non-mining exports. Before Hyundai withdrew from the country, vehicle exports accounted for $144m of export earnings and nearly 50% of total exports by the manufacturing sector. The partially state owned sector has proved inflexible and inefficient. The government has declared its desire to privatise, but plans are running way behind schedule.

Botswana needs new investment, but new investors will have to choose their projects with great care and careful planning. The Botswana Export Development Authority (BEDIA) recommends certain sectors where investment is needed (see Investment Opportunities in the Doing Business in Botswana section) in such things as textiles, clothing, jewellery, printing and engineering products. But perhaps it is not in the conventional manufacturing sector that the best future opportunities lie.

Concentration on sectors where Botswana already has advantage and expertise may be the best way to go. The diamond industry presents opportunities to diamond cutters and polishers and to jewellers. The tourism industry still has room for expansion and needs servicing with supplies, and more efficient transport by road and air.

If Botswana's manufacturing costs are high, then investors should concentrate on services where costs are easier to control and added value is often greater. The government wants to capitalise on its well educated workforce by creating a "knowledge economy" working electronically on financial services and such skills as data storage and processing.

The new International Financial Services Centre (IFSC) presents a great new opportunity, where new enterprise can rely on Botswana's good international telecommunications in cyberspace, rather than the relative expense of physical production and transport. The government is providing a low tax regime and added incentives to financial companies wanting to set up in the country. Accountants, financial advisers, stockbrokers and unit trust operators are encouraged to set up in this secure and stable financial environment.

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