Maestro Gaolathe's good fortune budget: Botswana's canny finance minister, Baledzi Gaolathe, has presented a 'people friendly' budget for 2006/07, cutting taxes and raising public sector wages on the strength of a healthy surplus. Barry Baxter reports.

Presenting the 2006/07 budget, Botswana's finance minister Baledzi Gaolathe called upon Batswana to use what he was giving them to build an innovative and more productive economy. The budget, which found favour with the public, reduces personal taxes, increases development spending, raises public service wages, and commits to $7bn worth of growth-accelerating projects.

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"The private sector needs to strengthen its ability to be innovative in order to compete in world markets. There have been concerns about our workers' unsatisfactory attitude towards their jobs and inadequate focus on the customer. They have to strive for improved productivity to enhance Botswana's competitiveness," he told the National Assembly in February while presenting a budget in surplus by $171.7m.

Gaolathe also said that 2004-05, expected to show a P1.43bn deficit, would outturn at P574m surplus; and a budgeted P112m surplus for 2005-06 would be improved to P1.58bn (the current pula/dollar exchange rate is approximately P18.5/$1).

Although the unassuming finance minister would be embarrassed to be credited with bringing about this good fortune, it is his prudent but often criticised tough fiscal policies of the past two years that have found the resources to regenerate an economy that, while fundamentally sound, is suffering short-term malaise.

Most of the resources for his new policies have come from his innovative forex manipulation of the dollar earnings from diamond production.

In volume (carat weight) it has--and will in the future--change only slightly. Botswana is the world's largest producer by value of diamonds and produced 31.9m carats in 2005 and 31.1m in 2004--but production has reached a plateau.

Over 2004, Botswana's export of diamonds totalled $2.8bn; in 2005, they were an estimated $2.6bn--but in May last year, Gaolathe devalued the pula by 12% and instituted a 'crawling band' exchange regime.

"It has been done," said Gaolathe, "to help Botswana's new export industries whose market is South Africa." The pula had been appreciating against the dollar and the rand--it now began to track the heavily dollar-influenced South African rand month by month.

The exporters did benefit, but pula diamond revenues more so. "Mineral revenues over 2005-06 increased by $174.9m primarily because of diamond revenue increases," Gaolathe said. "A record surplus in the current account of $1.2bn is forecast for 2005, driven by a balance of substantial increase in exports as compared to the smaller increase in imports. Exports of goods in 2005 are $4.2bn which represents a 31% increase on 2004, mainly reflecting increased exports of diamonds."

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The net result is an estimated surplus in the overall balance of payments of $944m compared to a deficit of $42m in 2004.

A full 12 months of the new exchange regime should see a significantly higher increase. Since the devaluation, the pula has appreciated against the euro by 3.6%, the British pound by 4.4%, but depreciated against the dollar by 0.7% and 5.5% against the rand.

Growth aim is 6% to 2010

Gaolathe's tighter economic control over 2004 and 2005 was aimed at cutting government spending and bringing inflation and household credit into line with Central Bank targets. Annual growth in development spending became negative over the second half of 2004 and remained so over the first half of 2005.

In 2006-07 development spending will be $1.06bn, up by 32% over 2005-06 and 50% over 2004-05. Longer term, the National Development Plan will see a continued aggregate increase in development spending by 30% to 2009-10. The $7bn budget for special projects will also run to 2010. "The expected outlook for the economy to 2010 is a growth rate of more than 6% a year," Gaolathe said. To achieve it would be a challenge to Botswana's implementation capacity.

Botswana remains a diamond economy and short term this will sustain revenues, but long-term development depends, as Gaolathe said in his speech, on an innovative and productive economy.

A danger to growth remains Botswana's poor record of implementation, already blamed for failure to diversify the economy away from reliance on diamonds, promote industry and create jobs.

Gaolathe told the National Assembly that growth in formal sector employment between March 2004 and March 2005 was down to 2.8% against 3.1% for the previous 12 months.

He acknowledged that while international ratings agencies Standard and Poor's and Moody's continued to show confidence in Botswana by maintaining its investment grade 'A' ratings, they had warned there was insufficient diversification of the economy.

While over 2004-05, real growth in Botswana was 8.3% compared to 3.4% in 2003-04, non-mining gross domestic product declined to 1.9% from 5.6%.

"The significant growth was due to the mining sector, which recorded a very high rate of 18.2%, compared to 0.2% in 2003-04. Increased diamond revenues and production in the second half of 2004-05 made up for lower production in the first half of the year," Gaolathe said.

Continuing confidence in Botswana was also shown by the African Development Bank (AfDB) and the European Investment Bank (EIB). "Their first-ever issues of pula-denominated bonds demonstrated confidence in our economy and our currency," Gaolathe said.

After the introduction of the new exchange rate regime, the AfDB launched a P300m ($55m) bond with a maturity of one year and the EIB a P500m ($90m) bond with a maturity of five years.

Longer term projects

The special longer term growth projects that Botswana will undertake over the next five years are: to increase the capacity of Morupule Power Station at an estimated cost of $600m; construct Mmamabula export power station if feasibility is confirmed (which essentially hangs on an agreement with South Africa that it will buy the power), costing $5bn; an investment of about $1.2bn by De Beers and Debswana on facilities for the Diamond Trading Company (Botswana) which will start to directly market Botswana's diamonds and expansions at Orapa diamond mine.

In spite of inflation having increased year on year, civil servants have been denied any increases since April 2004. "The cost of living has increased since by 15.6%. The National Employment, Manpower and Incomes Council in January recommend a 10% adjustment, which is 2% higher than half of the inflation for the period. After taking into account affordability and risks associated with revenue forecasts, government has decided to award a public salaries increase of 8% across the board, which is estimated to cost $104.5m dollars," Gaolathe said.

Personal tax breaks in the budget will mean the income tax threshold rising to $4,540 with the upper threshold at which the maximum tax rate is levelled up at $21,790. This will cost the fiscus $18,160 a year.

Other figures from the Botswana 2006-07 budget:

*Total revenues and grants are forecast to rise by 4.38%. Of this, mineral revenues (90% diamond) will account for 47% of the rise.

*The other major sources of revenue are: customs and excise 22%, non-mineral income taxes 12% with value added tax amounting to 9%.

*Recurrent expenditure is $3.06m, almost the same as the 2005-06 budget. "That the recurrent budget is almost unchanged demonstrates government's decision to contain costs," Gaolathe said.

*The development budget is $1.05bn, 32% up on 2005-06 with major spending plans on countering HIV/Aids ($118m); the Botswana Defence Force ($56m); police ($32m); education and tertiary education ($171m); health ($112m)--some of which will be spent on care for HIV/Aids patients); roads, bridges and airports improvements ($116m); minerals, energy and water resources ($113m), which includes $18m for the development of renewable energy resources.

As at November 2005, foreign exchange reserves were $6.3bn, equivalent to 27 months of import cover.

In 2004, the Southern African Development Community (SADC) region achieved a growth rate of 4.2% compared to an expected rate of 4.7% in 2005. The SADC region registered inflation rates of 10.3% in 2005 and 10.4% in 2004. In sub-Saharan Africa, growth over 2005 is expected to have declined to 4.6% from the 5.3% in 2004 with inflation rising to 9.9% from 9.3%.

*Spiralling oil prices are helping further fuel the already booming diamond jewellery market in the Persian Gulf. The marketing director for the Gulf for De Beers' Diamond Trading Company, Jonathan Chippindale, has predicted 2006 will see a 12% to 14% rise over the $1.9bn sales in 2005. Chippindale expects the rise to be closer to 20% for Dubai as Saudi Arabians, Russians and others pour in to shop at duty free outlets there.

RELATED ARTICLE: MEDIA

Diamond industry to combat negative publicity from new film

The World Diamond Council has called for more mass awareness of the Kimberley Process ahead of the release of a major Hollywood movie The Blood Diamond, starring Leonardo DiCaprio, which is expected to be released soon.

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Council president Eli Izhakoff emphasised the importance of informing the public about the industry's efforts to counter 'a distorted image' of the industry.

"We will soon be challenged by fallout from the movie. Instead of running for cover, I suggest we take a positive, proactive approach," he said. "Our actions over the past several years demonstrate clearly that we have nothing to be ashamed about. We clearly are not part of the problem, but rather we are part of the solution." The Kimberley Process certifies that the production of diamonds by its members is clean and cannot be classified as 'conflict' or 'blood' production.

The chairman of the Process and deputy permanent secretary of Botswana's Ministry of Minerals, Energy and Water Resources, Kago Moshashane, said the joint efforts of government, civil society and the diamond and jewellery industries in tackling the issue had helped bring about a reduction in the incidence of civil war in the areas where conflict had been fuelled by illicit diamond sales.

President of the World Federation of Diamond Bourses, Shmuel Schnitzer, reaffirmed the commitment of the bourses to uphold the Kimberley Process. "Our commitment derives primarily from our full recognition that the diamond industry, which is so proud of the purity of our product, must not and can not be involved in any shape or form with violence or the financing, even indirect, of conflicts that distort and contradict the untainted nature of the diamond," he said.

The president of the International Diamond Manufacturers Association, Jeffrey Fischer, stressed the efficiency of the Kimberley Process Certification Scheme. Liberia and Cote D'Ivoire had been barred from exporting rough diamonds, as they had been determined to be non-compliant to the scheme. The importance of compliance and the penalties of noncompliance were becoming clear to all producers, he said.