Botswana WT/TPR/S/35
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I. THE ECONOMIC AND TRADE ENVIRONMENT
(1) Major Features of the Botswana Economy
1. The Republic of Botswana is a landlocked State in southern Africa, bordered by South Africa
in the south and southeast, Zambia and Zimbabwe in the northeast, and Namibia in the north and
west.  The country covers an area of 582,000 km2, approximately the same size as France.  The
climate is sub-tropical, ranging from continental to semi-arid.  Almost 70% of the country is coveredby desert, with the Kalahari dominating southern a nd western Botswana.  Average rainfall varies from
650 mm in the northeast to less than 250 mm in the southwest, and is highly variable from year to
year.  Hence, agricultural activities, bot h pastoral and arable, are very unstable.
2. According to 1996 official estimates, the country has a population of around 1.5 million
1,  a
large share concentrated in the eastern regions where the major towns are located. Between 1981 and1991, the rate of population growth was 3.5% per annum (a figure more recently revised downward to
2.5%) and population is fastest growing among the poorest families.
2
3. At independence in 1966, Botswana was one of the 20 poorest countries in the world and thedominant economic activity in the country was cattle raising.  Botswana is now counted as a middle
income country, basically because of a mining sector dominated by diamonds, discovered after
independence;  GDP per capita at current prices was estimated at around US$2,700 in fiscal
year 1995/96.  The first diamond mine was opened in 1970, and there are currently three mines
operating in Jwaneng, Orapa and Letlhakane.  The revenues flowing directly to the Government from
diamond mining have increased dramatically, despite occasional recessions in the international
diamond market which necessitated a measure of stockpiling in the period 1982 to 1985 and again in
1992.  Exploitable deposits of gold, uranium, copper, nickel, coal, manganese, asbestos, common salt,
potash, soda ash and sodium phosphate have also been proved, some of which are being mined.
4. The transformation of Botswana has been dramatic.  Substantial improvements in incomes,
infrastructure and employment have been achieved since independence - supported primarily by
income from the mining sector.  Whereas only 4% of the total population lived in urban centres at
independence, by 1991 this had increased to 46%.  The country's infrastructure, which was hardly
developed when Bechuanaland was a British protectorate, has improved significantly, with a roadsystem comprising more than 4,600 km of tarred roads linking main urban centres, and the extension
of dependable water, electricity and telecommunication services to many parts of the country.
Table I.1 describes the main features of the economy.
5. Although customs revenues and other taxes make significant contributions, diamonds have
become the principal source of government revenue through the royalties, taxes and dividendsaccruing from its 50% shareholding in the Debswana Diamond Company.  Since 1982/83 these
revenues have permitted the Government to support strong growth in expenditure on infrastructure,
health, education and other services, while achieving budget surpluses in most years.
                                                     
1EIU (1997a).
2Ministry of Finance and Development Planning (1994), p. 5.WT/TPR/S/35 Trade Policies Review
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Table I.1
Major features of the economy
Area 582,000 km2
Population, 1996 (million) 1.5 million
Urban, 1991 (%) 44.7
Population density, 1991
Population growth rate, 1981-912.3 per km2
3.5% per annum
Life expectancy at birth, 1991 65.3 years
GDP at current prices, 1995/96 (US$m.) 4,015
GDP per capita at current prices, 1995/96 (US$) 2,691.30
Average annual inflation rate, 1996 (%) 10.1
Exchange rate, 1996 3.64 pula/US$1
Share in GDP at current prices, 1995/96 (%)
Agriculture 3.8
Mining 33.2
Manufacturing 4.7
Construction 5.9
Trade 17.0
Government 17.4
Other 18
Share in formal sector employment, 1995/96 (%)
Agriculture 1.9
Mining 3.5
Manufacturing 10.1
Construction 9.6
Trade 19.5
Government 37.1
Other 18.3
Merchandise exports (f.o.b.), 1995 US$2,135.3 million
Merchandise imports (f.o.b.), 1995 US$1,913.8 million
Source:  Central Statistics Office;  Bank of Botswana;  and Ministry of Finance and Development Planning.
6. Botswana's significant achievements of economic development have to a large extent resulted
from sound and effective management by the Government, which has pursued a policy of financial
prudence.  Diamond exports have ensured a healthy balance of payments, with a strong foreign
exchange reserve position and low levels of foreign borrowing.  Botswana's debt servicing burden is
relatively small and the economy is in a strong position to continue to finance its future developmentrequirements.
7. Compared to other sub-Saharan African countries, Botswana has demonstrated strong
economic growth and social development (Table I.2).  GNP per capita in Botswana is over five times
above the average for sub-Saharan Africa.  There are also major differences in Botswana's social
indicators relative to other countries in the region;  crude death and infant mortality rates are lowerand life expectancy is higher than the averages for sub-Saharan Africa.Botswana WT/TPR/S/35
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Table I.2
Comparative economic and social indicators, 1993
Averages for
Botswana Sub-Saharan Africa High income economies
Economic Indicators
GNP per capita (US$) 2,790 520 23,090
Economic structure (% share of GDP)
Agriculture 4 20 4
Industry (including manufacturing) 46 33 41
Manufacturing 6 16 30
Services 50 47 55
Avg. annual growth rate of exports of goods, 1980-90 (%) 8.0 2.5 5.1
Avg. annual growth rate of imports of goods, 1980-90 (%) 3.9 -2.2 5.8
Avg. annual rate of inflation, 1980-93 (%) 12.3 16.1 4.3
Social Indicators
Avg. annual population growth rate, 1980-93 (%) 3.5 2.9 0.6
Avg. annual labour force growth, 1980-93 (%) 3.3 2.5 0.7
Crude birth rate per 1,000 population 39.3 44 13
Crude death rate per 1,000 population 11.5 15 9
Infant mortality per 1,000 live births 42 93 7
Life expectancy at birth 65.2 52 77
Urban population as a percentage of total 45.7 30 78
Source:  Ministry of Finance and Development Planning (1996b), "Macroeconomic Outline for  National Development Plan 8", p. 6.
8. Economic development in Botswana has not been constrained by shortage of finance, for
more than 20 years.  Revenue accruing in foreign exchange from diamond exports has created large
budget surpluses:  government balances with the banks that currently exceed annual recurrent and
development expenditure;  and large and growing fo reign exchange reserves, amounting to 33 months
of imports at the end of 1996.  Interest earned on these reserves represented 25% of governmentrevenue in 1996/97, considerably exceeding Botswana's income from the SACU revenue pool.  As
noted, however, income from the diamond sector represents 48% of total government revenue.
9. Non-financial constraints on economic growth ha ve also been relatively weak.  For roughly
25 years, from independence in 1966 to the beginning of the recession in 1991, Botswana had the
fastest rate of growth of GDP, and of per capita income, of all World Bank member countries with
populations above one million.
3  As discussed above, there was a sharp slow-down in growth
after 1991, for a combination of reasons, including the abrupt ending of a property boom, depressed
demand internationally for diamonds, and a very large depreciation of the Zimbabwe dollar which
drastically reduced non-traditional exports.  The recession appeared to be over by 1995/96, when real
GDP growth was estimated at 7% per annum, and furt her growth at this level seemed likely because
of some large development projects and a recovery in the construction sector.  This rate of growth
would be lower than was enjoyed previously, but should nevertheless be high enough to reduce the
worryingly high level of unemployment.
                                                     
3World Bank, World Development Report, statistical tables, various issues.WT/TPR/S/35 Trade Policies Review
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10. The most significant constraint on economic growth, throughout the period since
independence, has been the shortage of skilled labour.  The Government has spent extensively on
education, but the extraordinarily rapid economic growth has meant that shortages of skilled labour
remain.  The proportion of expatriates in the employed labour force has fallen from about 12% to
about 4%;  however, the absolute number of expatriates employed has risen, because of the enormous
increase in formal sector employment.  The planning of government expenditure takes account ofskilled labour shortages;  every project that is put forward has to identify the skilled labour that it will
require.  Other constraints have been the almost complete lack of physical infrastructure at
independence
4, and in particular scarcities of serviced land for residential, commercial and industrial
use.  Again, the Government has spent heavily on relieving these constraints, but inability to keep
pace with demand has meant that they have set lim its to the rate of economic growth from time to
time.
(2) Economic Performance
11. Botswana's economy has experienced continuous strong growth since independence.  Real
GDP increased on average by 9.3 % annually between 1975/76 and 1994/95, while real GDP per
capita increased by almost 6.0 % per year on average.  Much of this growth can be attributed to thegrowth in the mining sector, which grew at an average annual rate of over 13%.  Despite slower
growth in recent years (2.3% per year on averag e over the planned period of NDP 7), the mining
sector still accounted for 33% of GDP in 1996.  Ot her sectors, like government and trade, are
increasing their share of economic activity
5;  on the other hand, the share of agriculture in GDP
continues to decline (Chart I.1).
12. Botswana's economic growth faltered in 1988/89 and the early 1990s, with a fall in output
in 1992.  The slow-down can be attributed to bo th international and domestic factors.  On the
international side, the world recession in the early 1990s adversely affected the demand for diamonds;
value-added in mining fell by nearly 5% in 1992/93.  Domestically, drought and the contraction of the
construction industry in 1992 had a negative impact on GDP growth.  The economy has since
recovered, recording growth of 4.1%, 3.1% and 7% in 1993/ 94, 1994/95 and 1995/96 respectively.6
The moderate growth in 1993/94 was attributed to the slow recovery in the world economy and the
improvement in commodity prices during that period;  increased international demand for diamonds
led to an improvement in the performance of the mi ning sector, while following improvements in the
international prices of metals in 1993/94, production of copper and nickel increased significantly
contributing to a growth rate of 5% in the mining sector (Chart I.2).
13. The main contributory factor behind the impressive improvement in economic activity in
1995/96 was the continued high performance of the two major sectors:  mining and general
government.  These two sectors grew by 9.9% and 6.8% in real terms respectively during the year,
compared to -1.5% and 6.1% in 1994/95 (Table I.3).  The increase in government spending was
largely on infrastructure development.
                                                     
4Just a few kilometres of tarred road, for example.
5The significance of Government's role in the economy of Botswana is manifested by the fact that the
Government sector accounts for 37.1% of formal employ ment.   See Table I.1 and the discussion of recent
economic development in the next section.
6Ministry of Finance and Development Planning (1996a), p. 5.Botswana WT/TPR/S/35
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Chart I.1
GDP by economic activity, 1991 and 1996
Source :  Central Statistics Office, Botswana.Construction
7.0Government
15.0Mining
40.0
Trade
14.0 Agriculture
5.0Other
14.0
Agriculture
4.0Other
18.01991 1996(Per cent)
Trade
17.0
Construction
6.0 Manufacturing
5.0Manufacturing
5.0Mining
33.0
Government
17.0
Chart I.2
Real growth rates for total GDP and selected sectors, 1989/90-95/96
(Per cent)
1989/90 90/91 91/92 92/93 93/94 94/95 1995/96-10-5051015
Source :  Ministry of Finance and Development Planning (1996), Annual Economic Report.Total GDP
Non-miningMiningWT/TPR/S/35 Trade Policies Review
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Table I.3
Annual growth rates by sector, 1991-1996
Economic activity 1991/92 1992/93 1993/94 1994/95 1995/96
Agriculture 2.0 -1.0 -1.1 -4.6 -0.4
Mining 1.9 -4.6 5.0 -1.5 9.9
Manufacturing 6.4 -1.0 -1.3 4.3 6.5
Water & electricity 5.7 16.1 9.0 6.2 -0.9
Construction 4.6 -15.0 1.0 1.6 2.7
Trade 15.1 0.0 5.0 7.8 7.3
Transport 10.1 9.0 -1.5 6.7 6.1
Finance 3.9 16.2 9.5 7.6 5.5
Services 5.4 3.5 3.5 4.3 4.5
Government 11.0 3.5 4.6 6.1 6.8
Total 6.3 -0.1 4.1 3.1 7.0
Source:  Central Statistics Office, Botswana.
14. Economic recovery is likely to be further strengthened by the recent reform measures aimed
at resuscitating the economy and providing a firm basis for economic diversification.  These measures
include the Orapa diamond mine expansion, the North-South pipeline, the liberalization of exchangecontrols, the reduction of corporate tax rates, wage restraint, and the restructuring of parastatals.
15. Notable growth was also recorded in manufacturing, which grew by 6.5% in 1995/96
compared to 4.3% in 1994/95, mostly due to rapidly rising exports of non-traditional commodities
(principally  soda ash, textiles, motor vehicles, and foodstuffs) to South Africa (Table I.3).
16. Other sectors recording growth in 1995/96 included construction, trade, hotels and
restaurants, transport, banks, insurance and business services and social and personal services.  Output
of water and electricity, which increased by 9% in 1993/94, fell by 0.9% due to the closure of the
Selebi-Phikwe power station in favour of cheap er import sources and the closure of BOTASH, a
major customer for water, for part of the year.  Output from agriculture also suffered a decline of
4.6% in 1994/95 as a result of drought.  The authorities fear that the small contribution of agricultureto GDP may fall further if the preferences that Botswana's beef exports enjoy under the Lomé
Convention are reduced as a result of developments in the WTO Agreements and in EU agricultural
policies;  however, as noted in Chapter IV, Botswana does not currently fill its Lomé beef quota.
Employment
17. Growth in Botswana's economy has not be en matched by expansion of employment
opportunities. For the period 1991-96, the average annual growth rate of formal sector employmentwas 1.1%, considerably lower than growth of GDP.  Although this trend partly reflects increased
labour productivity in some sectors, there was also slow growth, or decline, in some major areas,
including slow growth in construction and manuf acturing.  Employment in the manufacturing sector
recovered in 1994/95, when it increased by 7.8 %, after three consecutive years of decline;  butemployment in construction fell again significantly by 15.4% during 1994/95, continuing the trend of
decline that began in 1992.  A recent drive to restructure public enterprises has also contributed to
slowing down the rate of employment growth.
18. The government sector continues to be responsible for most of the growth in formal
employment. During 1995, government employment rose by 4.1% from 82,900 to 86,300, slightly
increasing its share of total formal sector employment to 37%.  Employment in the private sectorBotswana WT/TPR/S/35
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declined by 0.6% while employment in parastatals rose by 2.3% during the same period.
Consequently, the private sector share in total employment dropped from 58.5% to 57.4%, perhaps as
a result of restructuring in an attempt to contain costs and improve productivity.  On the other hand,
employment in the informal sector rose by 24% to reach 129,104 as reported in the Household,
Income and Expenditure Survey (HIES).  Most of this increase came from self-employment, which
increased by 62%, and unpaid family work, which almost doubled in 1994.
19. Unemployment in Botswana, therefore, remains high, estimated at 21%, according to latest
available data from the 1993 Literacy Survey and the 1994 HIES.  Females, the uneducated, and the
young continue to be most vulnerable;  young people between the ages of 15 and 29 years (53% of the
labour force in 1994) constituted 80% of total unemployment that year.
Inflation20. The annualized monthly rate of inflation in Botswana as measured by the consumer price
index fell from 10.5% in January to 9.6% in December 1996 (Chart I.3).
Chart I.3
Annual inflation rates in Botswana and South Africa, 1990-96
(Per cent)
J M SJ M SJ M SJ M SJ M SJ M SJ M S468101214161820
Source :  Ministry of Finance and Development Planning (1996), Annual Economic Report.Botswana
South Africa
1990          |        1991         |        1992         |        1993         |        1994         |        1995         |       1996WT/TPR/S/35 Trade Policies Review
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Fiscal and monetary policies
21. The Botswana Government has had large budget surpluses for many years (Table I.4),
principally because of the rapid growth of government revenue from diamond exports (Table I.5).
In 1980, roughly a third of government revenue came from Botswana’s share of Southern African
Customs Union (SACU) revenue, a third from minera l revenues, and a third from other sources.  (See
Chapter II for a description of the SACU.)  By 1995, these had changed to only 15% from customsrevenue, but almost half from mineral revenues.  Thus, Botswana's strong fiscal position and revenue
from other sources have greatly reduced its vulnerability to changes in customs revenue.
22. The Government has no domestic debt, and has accumulated large balances at the Bank of
Botswana (Table I.4), standing at P 7.5 billion in  November 1996, just over twice the previous year's
recurrent government spending, and 1.4 times the previous year's total government spending.Although the Ministry of Finance and Development Planning has been predicting for several years
that the budget would move into deficit, annual surpluses have continued, through a combination of
good fortune, currency depreciation against the US dollar, and constrained government spending
(Table I.5).
Table I.4
Government financial surplus, 1992-96
(P million)
Budget year Budget surplus Government balances at the
Bank of Botswana
1992 700 5,083
1993 881 5,907
1994 879 6,752
1995 197 7,095
1996 270 7,557
Source:  Botswana Financial Statistics, February 1997.
23. This comfortable situation continued through the budget year ending in March 1997, with a
surplus for 1996/97 of P 442 million estimated in the Budget Speech.  The surplus in the 1997/98
budget was projected to be even higher, at P 763 m illion:  considerably higher than the surplus of
P 27 million forecast in the macroeconomic outline for the next Plan.
24. Current fiscal policy is to continue to manage government spending within the limits imposed
by absorptive capacity and the Government's ability to finance recurrent spending requirements,
generated by the development programme, from future recurrent revenues.  Government development
spending fell by 12% in 1994/95, but grew by 21% in the following year (roughly twice the rate of
consumer price inflation), and by an estimated 39% in the budget year ended March 1997.  The
estimates for 1997/98 show government development spending already 15% higher than theprojections published a year earlier, so  that it will have to be sharply constrained over the following
five years to bring it into line with the Plan.
25. The recurrent budget first moved out of deficit in 1973, and overall budget surpluses began in
1984.  However, there remain important structural limits on government spending, most importantly
the scarcity of skilled labour, which constrained the growth of output.  The fundamental objectives ofBotswana's expenditure policy have been to spend only where spending was productive, and for
projects whose recurrent costs could be sustained indefinitely in the future.  This spending policy has
contributed to the building up of financial surpluses.Botswana WT/TPR/S/35
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Table I.5
Central Government budget, selected years
(P million, at current prices)
1980/81 1985/86 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96
Total revenue & grants 306.6 1,133.4 3,740.7 4,069.4 4,652.3 5,359.5 4,472.5 5,464.4
Mineral revenue 101.1 581.2 2,005.4 1,888.0 1,866.1 2,278.7 2,349.4 2,591.4
Customs and excise 102.0 149.2 478.2 761.6 998.4 822.3 711.8 829.4
Non-mineral income tax 38.5 93.6 289.9 357.3 369.9 420.5 386.9 356.9
Revenue from Bank of Botswana 0.0 35.0 566.8 761.9 832.1 1,106.8 451.4 1,050.5
Other revenue 27.3 274.4 400.4 300.6 585.8 731.1 573.0 636.1
Grants 37.8 41.1 117.8 69.8 100.1 186.6 75.7 37.1
Total expenditure & net lending 308.4 719.2 2,942.7 3,372.2 3,771.0 4,481.2 4,276.8 5,194.5
Recurrent expenditure 166.8 427.0 1,416.6 1,789.8 2,187.0 2,702.4 2,975.1 3,437.6
Development expenditure 121.4 247.5 1,090.1 1,098.0 1,207.0 1,558.3 1,377.8 1,672.0
Net lending 20.1 44.6 436.0 484.5 377.0 220.5 -76.0 84.9
Budget surplus
Overall budget balance -1.7 414.2 798.0 697.2 881.3 878.3 195.7 269.9
Recurrent budget balance -12.0 330.6 195.2 858.0 190.6 1,272.4 -433.3 257.1
Per cent distributions
Total revenue & grants 100 100 100 100 100 100 100 100
Mineral revenue 33.0 51.3 53.6 46.4 40.1 42.5 52.5 47.4
Customs and excise 33.3 13.2 12.8 18.7 21.5 15.3 15.9 15.2
Non-mineral income tax 12.5 8.3 7.8 8.8 8.0 7.8 8.7 6.5
Revenue from Bank of Botswana 0.0 3.1 15.2 18.7 17.9 20.7 10.1 19.2
Other revenue 8.9 24.2 10.7 7.4 12.6 13.6 12.8 11.6
Grants 12.3 3.6 3.1 1.7 2.2 3.5 1.7 0.7
Total expenditure & net lending 100 100 100 100 100 100 100 100
Recurrent expenditures 54.1 59.4 48.1 53.1 58.0 60.3 69.6 66.2
Development expenditures 39.4 34.4 37.0 32.6 32.0 34.8 32.2 32.2
Net lending 6.5 6.2 14.8 14.4 10.0 4.9 -1.8 1.6
Note: Table shows consolidated operations of various budget funds, netting out inter-fund transfers.
Source: Ministry of Finance and Development Planning.
26. The combination of government surpluses with financial surpluses in the private sector has
led to excess liquidity in the commercial banks.  As a consequence, the commercial banks have from
time to time refused to accept additional large deposits;  the central bank, beginning in 1977, had
therefore to act as a deposit taker of last resort, in order to enable businesses and individuals to make
normal use of the banking system.  By far the largest source of financial surpluses in the banking
system was the diamond mining company, Debswana, for which the Bank of Botswana initiallyopened a call account.  Later, other institutions were also allowed to hold deposits in the form of call
accounts at the central bank.
27. Despite these attempts to absorb excess liquidity in both the private and public sectors, there
was a tendency for most interest rates to be negative in real terms.  In 1991, the Bank of BotswanaWT/TPR/S/35 Trade Policies Review
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began to issue Bank of Botswana Certificates (BOBCs) and at the same time to phase out deposits
from the private sector, including the parastatal sector and Debswana (Table I.6).  Persistent attempts
were also made to achieve positive real rates of interest in line with those in international financial
markets.
Table I.6
The shift to Bank of Botswana Certificates (BOBCs)
(P million)
End-yearNon-government balances at
Bank of BotswanaBank of Botswana Certificates
issued
1990 362 n.a.
1991 59 772
1992 33 987
1993 36 1,203
1994 46 1,451
1995 48 1,964
1996 53 2,687
n.a. Not applicable.
Source: Botswana Financial Statistics, various issues.
28. The intention was to develop a money market in short-term paper, and to shift towards the
market determination of interest rates.  This has been partially successful.  Although the supply of
Bank of Botswana Certificates is controlled by the authorities, demand comes from the market.  Thishas resulted in more flexible interest rates than pr eviously.  In addition, some real interest rates did
become positive, including commercial bank prime lending rates, and the return on Bank of Botswana
Certificates (ignoring the impact of tax on interest received, and interest paid on borrowing being tax
deductible).
29. However, the authorities' aim of sterilizing excess liquidity was only partially achieved.  The
commercial banks continued to hold assets greatly in excess of requirements under banking
regulation.  For example, at the end of 1996, liquid assets held by the commercial banks (at
P 1.5 billion) were about five times the official requirement of P 0.3 billion.
30. Commercial bank lending increased by 77% between 1991 and 1994 in nominal terms (23%
in real terms at 1996 prices) declining in 1995 and growing again slightly in nominal terms in 1996
(in real terms falling to below its 1991 level).
Table I.7
Slow-down in commercial bank lending, 1991-96
(P million)
End-year Lending (current prices) Lending (1996 prices)
1991 1,041 1,810
1992 1,399 2,088
1993 1,563 2,070
1994 1,847 2,228
1995 1,779 1,938
1996 1,799 1,799
Note: Nominal lending deflated by Consumer Price Index.
Source: Botswana Financial Statistics, various issues.Botswana WT/TPR/S/35
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31. Although Botswana is not a member of th e Common Monetary Area, grouping the other
SACU members, monetary policy is clearly constrained by the importance of South Africa as a
trading partner.  In 1976, the imposition of exchange controls on transactions with South Africa made
it possible for the first time for Botswana interest rates to be different from those of South Africa.  In
particular, residents of Botswana were no longer allowed to maintain bank accounts in South Africa
or to invest there.  Although, as in other countries, it was probably possible to evade these rules overtime, the largest balances were held by commercial banks and mining companies, which were highly
conspicuous and wanted to be seen to obey the laws;  thus capital account exchange controls were
probably effective over a large proportion of potential capital outflows.  Later, Botswana's foreign
exchange reserves grew to levels greatly in excess of anything that might be required to cope with
fluctuations in the balance of payments.  Since the domestic equivalent of reserves was, and is, to a
large extent government balances with the banking system, Botswana developed a position where it
could have interest rates different from those of South Africa, regardless of whether capital account
exchange controls were effective.  By the mid-1990s, nearly 90% of the reserves were matched by
government balances within Botswana, so that whatever interest rates were in Botswana compared
with those abroad, the maximum possible capital outflow was small in relation to total reserves.  Inpractice, the current policy is to have real interest rates roughly equivalent to those in major
international money markets, and generally below South African rates.  The authorities see this as no
cause for immediate concern;  they believe that th e differential can, if so desired, be maintained for
the foreseeable future.
32. The Government's intention is to maintain m onetary policy without significant changes.  The
Government intends to continue to liberalize exchange controls thus reinforcing this policy.
(3) Composition and Direction of Trade and Foreign Investment
33. Although its structure has changed over the years, the economy of Botswana remains open;
although their shares have fallen, merchandise exports and imports still represented 51.2% and 31.2%
of GDP, respectively, in 1995/96.  Botswana's trade relationships are highly concentrated, with
respect to both exports and imports, on a limited number of countries and, with respect to exports, in a
limited number of commodities.  While there have been some notable changes in the level of exportsand imports, Botswana's trade patterns have been fairly stable, apart from a shift of manufactured
exports from Zimbabwe to South Africa.
34. Botswana has also generally enjoyed a secure balance-of-payments position since 1976, with
the current account in surplus every year since 1982.  The strong performance during the second half
of the 1980s was almost entirely the result of rising diamond earnings.  Not surprisingly, therefore,adverse conditions in the diamond market in the early 1990s resulted in a decline in total export
earnings from P 3.7 billion in 1989 to P 3.3 billion in 1990.  This meant that the trade balance moved
into deficit in 1990-92;  a surplus was, however, re -established in 1993 as export earnings recovered
momentum and imports of goods and services declined.
35. Table I.8 presents a summary of the balance of payments over the period 1991-96, with an
expanded presentation in Table AI.7.  For the three years preceding 1994, the overall balance of
payments recorded increasing surpluses.  The fall in the surplus in 1994 to less than half the level
recorded in the previous year despite a 119%  increase in trade surplus from 1993 to 1994, was mainly
due to  a significant decline in interest income received from abroad during that period.WT/TPR/S/35 Trade Policies Review
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Table I.8
Balance-of-payments summary, 1991-96
(P million)
Year 1991 1992 1993 1994 1995 1996
Balance on goods and services 256 53 321 1,112 910 1,479
Balance on current account 740 529 1,196 559 744 898
Balance on capital account 266 613 -19 80 -32 3,540
Errors and omissions -242 -281 -196 -249 -121 -3,590
Overall Balance 764 861 981 390 591 848
Source:  Government of Botswana.
(i) Trade in goods
36. While always in substantial surplus, the visible trade balance exhibited sizeable fluctuations
over the period 1991-95 (Table I.8).  Diamonds, copper-nickel and beef accounted for 88.5% of
Botswana's exports on average between 1985 and 1 995;  however, from 1995, motor vehicles - a new
export in 1993 - were the second largest item (Table I.9).  As a result, although the value of exports of
meat and copper-nickel have been maintained, their shares have declined dramatically.
Table I.9
Shares of export products, 1980-96(Per cent)
YearMeat &
productsLive
animalsHides &
skins DiamondsCopper-
nickel Textiles Soda AshVehicles &
partsOther
goods Total exports
1980 7.21 0.03 0.78 60.38 20.69 4.01 .. .. 6.54 100
1985 7.05 0.02 0.84 75.72 8.66 2.09 .. .. 5.62 100
1990 3.18 0.01 0.60 78.74 8.17 3.37 .. .. 5.93 100
1991 3.30 0.02 0.48 78.69 7.93 3.29 0.59 .. 5.71 100
1992 3.53 0.03 0.54 78.88 7.23 2.08 1.18 .. 6.52 100
1993 3.72 0.02 0.47 77.46 5.10 2.20 1.17 2.11 7.75 100
1994 3.66 0.05 0.57 74.88 5.21 3.57 0.74 6.06 5.26 100
 1995 3.03 0.04 0.62 67.31 5.28 2.47 0.43 16.00 4.84 100
1996a 2.26 0.02 0.34 68.61 4.62 2.33 0.79 16.82 4.21 100
.. Not available.
a 1996 figures are for the first six months only.
Source: Central Statistical Office, Botswana.
37. The export sector continued to perform well in 1996, with exports’ share of GDP 36% higher
than in 1995.  Contributing to the remarkable e xport performance was the continued strong growth in
exports of vehicles, which grew by 62% during the first half of 1996 compared to the first half
of 1995, increasing their share in total exports from 13.4% to 17%.  Diamonds remained the leading
export commodity, at 69% of total exports during the first half of 1996 compared to 71% during the
same period in 1995.
38. Imports grew at an annual rate of 16.5% between 1980 and 1995, but by only 2.4% from
P 2,478 million during the first half of 1995 to P 2,537 million in the first half of 1996.  Imports of
food, beverages and tobacco, and machinery and electr ical equipment retained their relative positions
in total imports, with 17.3% and 15.8% respectively, while vehicle imports were 12.6% during theBotswana WT/TPR/S/35
Page 13
same period (Table I.10).  Import values in these categories recorded some decline compared to the
same period in 1995 probably due to factors such as the depreciation of the pula, good rain during the
year raising domestic production of food, and developments in the motor vehicle industry.  All other
imports, except for metals and metal products, increased in 1996 compared to the corresponding
period in 1995.
Table I.10
Relative shares of import products, 1980-96
(Per cent)
YearFood, bev.
& tobacco FuelsChemic. &
rubber
prod.Wood
& paper
prod.Textiles
& footwearMetals
& metal
prod.Machin
& electric
equip.Vehicles &
transp.
equip. Other goodsTotal
imports
1980 15.72 13.05 7.77 3.19 8.41 10.97 16.40 11.81 12.68 100
1985 17.51 11.52 8.10 3.21 8.07 9.14 17.00 13.74 11.71 100
1990 11.66 5.14 8.14 5.25 8.10 14.30 20.09 14.53 12.78 100
1991 13.59 6.30 8.92 5.28 8.05 11.09 17.01 15.96 13.81 100
1992 18.66 5.50 9.42 5.70 7.03 10.77 18.84 9.96 14.11 100
1993 17.83 6.37 9.21 5.45 7.21 10.14 17.34 13.26 12.82 100
1994 17.58 5.96 9.66 5.81 8.87 9.34 17.56 11.99 13.23 100
1995 15.91 5.10 9.25 7.57 7.54 8.69 15.68 18.64 11.63 100
1996a 17.29 5.99 10.65 7.66 7.58 8.48 15.83 12.59 13.94 100
a 1996 figures are for the first six months only.
Source: Central Statistical Office, Botswana.
39. The direction of  Botswana's exports is currently dominated by the United Kingdom, followed
by the rest of Europe including Switzerland.7  The SACU accounted for 21.7% of total exports in
1995, largely because of the increase in Botswana’s exports of vehicles.  The remaining exports weredestined to Zimbabwe (2.8%) and the rest of the world (1.9%).  All of Botswana's diamonds exports
have in the past gone to Switzerland in the first in stance, but ultimately most were sold to the Central
Selling Organization (CSO) in London.  From 1992, there was a shift in the destination of Botswana's
diamonds, with an increasing share exported to the UK, which is also the largest market for
Botswana's beef exports.  Table I.11 shows the percentage share of Botswana's exports by destinationbetween 1980 and 1996.  Zimbabwe is a major market for textile products and for the refining of
copper-nickel.
Table I.11
Percentage share of exports by destination, 1980-1996
YearCommon Customs
Area ZimbabweOther
AfricaUnited
Kingdom SwitzerlandOther
EuropeUnited
StatesAll
otherTotal
exports
1980 6.63 3.09 5.35 2.11 60.54 0.80 20.95 0.52 100
1985 5.61 2.96 0.99 3.84 72.89 8.02 5.29 0.41 100
1990 4.74 6.81 1.60 1.23 80.12 5.21 0.13 0.16 100
1991 4.99 6.84 1.50 1.44 80.84 4.07 0.27 0.05 100
1992  6.95 4.53 1.50 1.56 77.62 7.52 0.25 0.08 100
1993 8.80 3.14 1.33 14.83 66.16 5.33 0.33 0.08 100
1994 13.93 2.70 0.97 25.09 49.33 7.09 0.70 0.19 100
1995 21.66 2.80 0.83 37.78 31.04 4.81 0.89 0.19 100
1996a 18.94 2.44 0.53 41.18 30.65 5.21 0.81 0.24 100
a 1996 figures are for the first six months only.
Source: Central Statistical Office, Botswana.
                                                     
7Botswana has preferential access to the European Union (EU) under the Lomé Convention.  Two
additional major export markets are non-EU countries, Switzerland (diamonds) and Norway (copper-nickelmatte).WT/TPR/S/35 Trade Policies Review
Page 14
40. The SACU accounted for 78.2% of total imports and remained the leading source of
Botswana's imports during the first half of 1996, followed by Zimbabwe (6.4%).  Imports are
overwhelmingly sourced via or purchased from S outh Africa.  Not all goods imported from South
Africa are of South African origin;  some goods are re-exports of goods imported through South
Africa, while others have undergone final processi ng within the country.  Under the present SACU
procedures, details on the actual country of origin on commodities imported from member countriesare not available.  Since the establishment of the Hyundai vehicle assembly plant in Botswana, the
Republic of Korea has become an important trading partner as a source of imports of vehicle parts.
Table I.12 shows the percentage share of Botswana's imports by source between 1980 and 1996.
Table I.12
Percentage share of imports by source, 1980-96
YearCommon Customs
Area ZimbabweOther
AfricaUnited
KingdomOther
EuropeRep. of
KoreaUnited
States All otherTotal
imports
1980 86.99 6.56 0.17 1.36 1.09 .. 3.03 0.81 100
1985 74.35 7.19 0.27 4.85 7.48 .. 2.80 3.06 100
1990 82.32 5.07 0.64 2.49 6.16 .. 1.14 2.17 100
1991 83.81 5.28 0.29 3.64 3.86 .. 1.24 1.86 100
1992 84.98 4.87 0.41 2.61 4.47 .. 0.98 1.68 100
1993 82.64 4.58 0.40 2.62 4.49 .. 3.29 1.99 100
1994 77.99 5.88 0.52 2.49 5.90 2.08 1.88 3.26 100
1995 73.95 5.52 0.34 2.54 6.02 7.12 2.02 2.50 100
1996a 78.23 6.39 0.48 3.03 4.74 1.58 1.54 4.00 100
.. Not available.
a 1996 figures are for the first six months only.
Source: Central Statistical Office, Botswana.
(ii) Internal and external factors affecting international trade
41. The international diamond market is the largest single factor affecting Botswana's exports.
De Beers, which markets some 85% of the gl obal supply of gem diamonds, has a 50% share in
diamond mining in Botswana.  Botswana has a quota of sales of rough diamonds to the Central
Selling Organization (CSO).  If international demand is weak, that quota may be cut, as happened in
1981, and again in the early 1990s;  thus export proceeds fell marginally in both 1990 and 1992.
More recently, demand has recovered;  the Antwerp index of diamond prices rose by 7.6% in 1996,
and the pula value of Botswana's diamond exports was further increased by a depreciation of the pula
against major non-regional currencies;  in the first half of 1996, this value was running at an annualrate 28% higher than in 1995.  Investment to do uble output at the second largest Orapa mine was
announced in 1996;  eventually (expected to be after the completion of the Orapa expansion in late
1999) this will add about 35% to production capacity, and will be accompanied by an increase in
Botswana's quota with the Central Selling Organization.  A major expansion project at the Jwaneng
mine began in early 1997.
42. The other two "traditional" exports are beef and copper-nickel matte.  Beef exports are
constrained by a growing shortage of grazing land and periodic droughts.  In recent years, Botswana
has not been able to fulfil its quota to the EU market, as a consequence of droughts, and the need to
rebuild the herds afterwards.  Beef exports are also vulnerable to outbreaks of disease, including
foot-and-mouth disease (now largely prevented by the use of quarantine fences) and others such as
cattle lung disease which led to a marked drop in exports in 1996.  Exports of beef and relatedBotswana WT/TPR/S/35
Page 15
products, having been virtually the only visible export at the time of independence, were only 3% of
total exports in 1995;  the percentage fell to 2.3% in the first half of 1996.
43. The mining of copper-nickel, and the export of copper-nickel matte, have frequently been
unprofitable, and the mine has almost continuously been under threat of closure.  There have been
several financial restructurings, and the Botswana Government has had to provide financial support.
The original problem was a failed experiment with  new technology, which resulted in the smelter
exploding, lengthy delays in starting operations, and additional expenditure on pollution control.  This
left the operation with a large burden of debt, and the financial position was made worse by low base
metal prices for most of the mine's life.  Exports of copper-nickel matte were 5.2% of total exports in
1995;  the percentage fell further, to 4.6%, in the first half of 1996.
44. The prolonged mining boom in Botswana might have been expected to cause the economy to
suffer from "Dutch Disease".  This would have resulted in a rising real exchange rate and a failure of
employment, and non-traditional exports, (mainly manufactured goods) to grow.  However, in
contrast to many other mineral boom economies, the authorities in Botswana never allowed the real
exchange rate to rise significantly, one of the main reasons why these non-traditional exports have
grown quite rapidly.  This growth was substantia lly enhanced by investment in manufacturing from
Zimbabwe, taking advantage of the absence of exchange control in Botswana on imported inputs, and
a bilateral trade agreement dating from 1956 which allowed the products to be exported back to
Zimbabwe.  In the 1980s, roughly two thirds of manuf acturing exports went to Zimbabwe.  This trade
suffered a major shock in 1992 because of the significant depreciation of the Zimbabwe dollar.  For
example, textile exports fell by 38% in that year.  However, there has since been some recovery of
manufactured exports, with the main destination shifting from Zimbabwe to South Africa.
45. Finished vehicles assembled in Botswana from semi-knocked-down kits, have been exported
to the region since 1993.  By 1996 (first half year statistics only), vehicle exports had risen to 17% of
total exports.  However, local value added is only about 16% of sales.  As this operation was based on
a loophole in the customs regulations, the company has been obliged to build a plant to assemble
completely-knocked-down kits (this plant is currently under construction).  When it is completed, the
operation will have to compete with existing assembly plants in South Africa, without its presentartificial advantage.
46. The other major new export is of soda ash.  This project was severely hampered at the outset
by a large fall in the international price of soda ash, and by predatory pricing from South Africa's
previous suppliers.
8  The company went bankrupt, but was able to resume production under the
ownership of the previous shareholders.  Soon after it resumed operations in 1996, it was furtherhandicapped by severe flooding, but has so far managed to survive.  Exports of soda ash were at
record level in the first half of 1996, although they only amounted to 0.8% of total exports.
47. The biggest internal constraint on further growth of manufacturing exports is, as with all
economic activity in Botswana, the shortage of skilled labour.  There have also been shortages of
serviced industrial land, which the Government has been active in alleviating.  The Government is
also concerned about the high cost of utilities and indications of low labour productivity.  Botswana is
fortunate, however, to have the relatively large South African market nearby, to which exports have
                                                     
8The Government of Botswana does not have an independent anti-dumping policy (Chapter III).
Currently there is a 10% protective tariff,  imposed on soda ash under SACU provisions to protect the Botswanacompany, but it has proved to be insufficient to cover the differences in costs.WT/TPR/S/35 Trade Policies Review
Page 16
free access under SACU rules.  Memb ership of SACU is seen by the authorities as having certain
disadvantages as well, notably the cost-raising effect of the common external tariff (discussed further
in Chapter III).  The reduction of the SACU common external tariff under the Uruguay Round and
autonomous programmes may help to ease this problem.
(iii) Exchange rate policies
48. As noted above the Botswana pula is not a member currency of the Common Monetary Area
with other members of SACU.  Neve rtheless, the authorities maintain a crawling peg system based on
a basket of the South African rand and the SDR.  Exchange policy seeks to reconcile the objectives of
keeping down imported inflation (through appreciation against the rand) and maintaining the
competitiveness of the traded goods sector (by main taining a stable real exchange rate vis-à-vis the
rand and other foreign currencies).  Given the importance of South Africa and other neighbouring
countries (mainly Zimbabwe) in Botswana's trade pattern, the authorities have, in periods of rand
depreciation, tended to move the pula peg with the rand, most recently in 1996 when the rand
depreciated by some 22%.
49. The real exchange rate vis-à-vis the rand has remained relatively stable over the long run.
Reflecting movements in the rand, the real exchange rate against the SDR has depreciated,particularly in 1985 and more recently in 1996.  This process has led to windfall gains for the
diamond sector, and hence for government revenue, contributing to the build-up of the unused
balances noted above.  Over the long run (1976-90) this exchange rate policy has contributed to a
lower domestic rate of inflation in Botswana than that in South Africa;  nevertheless, since 1990,
inflation has risen above the South African level, partly due to the impact of such windfall gains.
Since most of Botswana's exports are sold outsid e the region, then purchasing power in rand terms
tends to increase;  similarly, most international re serves are also held in non-regional currencies, also
increasing in purchasing power.
50. A chronology of exchange rate developments is given in Box I.1.
(iv) Foreign direct investment
51. Since independence in 1966, the Botswana Government has welcomed foreign investment.9
In the large-scale mining sector (diamonds and copper-nickel), foreign investment has been the only
practical source of finance;  however, foreign invest ment in other sectors has also been significant.
Net flows of foreign investment (with the exception of loans to the loss-making copper-nickel mine)
have been relatively small since 1992, when a major soda-ash mining project was completed.
                                                     
9The statistics of private direct investment in Botswana are deeply distorted by the unusual
circumstances of the loss-making copper-nickel mine.  The company has accumulated foreign debt, mostly inthe form of loans from its foreign shareholders.  The interest owing on these loans is unlikely to be paid, but
shows up in the balance-of-payments statistics as a current account outflow, financed by a private capital inflow,
both flows being imputed.  The net figure was large and negative in 1993, when the Government bought out oneof the major foreign shareholders in the copper-nickel mine:
"For the sum of about P 20 million, the Government of Botswana acquired AMAX's paper claims on
the assets of BCL [the copper-nickel mining company], which included the accumulated losses (in
large part the interest had accumulated on the subor dinated debt of BCL) that had been financed by
shareholder loans, that were valued on the books at over P 650 million ...  The standard rules balance ofpayments accounting, however, require that this be recorded as a capital outflow at the full face value
of the loans."  Thus the data for net private long-term capital flows, positive in every other year,showed an outflow of P 708 million in 1993.  (Bank of Botswana Annual Reports)Botswana WT/TPR/S/35
Page 17
Box I.1:  Chronology of  exchange rate events
Date Action Comments
1966-1976 Participation in rand Monetary Unit No independent exchange rate or monetary policy.
August 1976 Introduction of the pula;  pula pegged
to U.S. dollar at P 1=US$1.15RSA rand pegged to the U.S. dollar at the same rate,
hence P 1=R1.
April 1977 5% pula revaluation. Anti-inflation measure.
January 1979 rand taken off U.S. dollar peg and
floated.Rand appreciates against the dollar as gold price
rises.
June 1980 Pula taken off U.S. dollar peg;
introduction of pula basket
consisting of SDR and rand.To reduce the volatility of rand/pula exchange rate.
November 1980 5% pula revaluation. Anti-inflation measure as imported inflation rises
following pula depreciation against rand.
January 1981 Steep drop in world gold price. Rapid rand depreciation as RSA export earnings
collapse.
May 1982 10% pula devaluation. Part of stabilization measures in response
to 1981/82 balance-of-payments crises.
February 1984 Foreign debt standstill for
South Africa and run on the rand.Rapid depreciation of pula against U.S. dollar as
rand continues to deteriorate.
July  1984 5% pula devaluation. Competitive measure following rand collapse and
rapid pula appreciation against rand.
August 1984 Rand weight in pula basket adjusted. To reduce drift of pula from rand.
January 1985 15% pula devaluation. Additional competitiveness measure in response to
rapid pula appreciation against rand.
January 1986 New pula basket introduced. Due to rapid rand appreciation against U.S. dollar
with re-introduction of financial rand.
June 1989 5% pula devaluation. Ant-inflation measure.
August 1990 5% pula devaluation. Competitiveness measure.
August 1991 5% pula devaluation. Competitiveness measure.
June 1994 Technical adjustment
1996 Technical adjustment In response to a sharp depreciation of the rand
against the U.S. dollar and a corresponding
depreciation of the pula against the U.S. dollar
1997 Technical adjustment
1997-Feb. 1998 U.S. dollar strengthens;  Asian currency
crisisRand weakens several percentage points against the
U.S. dollar.  However, overall rand and pula remain
relatively stable.
Source:  Bank of Botswana.WT/TPR/S/35 Trade Policies Review
Page 18
52. The distribution of ownership of foreign investment by region of origin in 1992/93 is shown
in Table I.13.  However, the proportion of investment originating from Europe is greatly exaggerated,
being dominated by the investment in diamond mini ng by De Beers, which is in essence a South
African company, but whose investment in Botswana is held by a company resident in Europe.  There
is also substantial South African investment in the trading and transport sectors.  Some investment is
owned by holding companies based in tax havens, which also distorts the statistics.
Table I.13
Foreign investment by sector and region of origin, 1992-93
Region Share % Sector Share %
Europe 68.5 Mining 69.0
United States 22.2 Trading 16.4
South Africa 8.5 Construction 5.0
Other 1.1 Other  9.6
Source:  Bank of Botswana (1994), Annual Report.
53. A favourable macroeconomic environment is a necessary, though not a sufficient, condition
for attracting foreign direct investment.  The macroeconomic environment in Botswana is good withrelatively liberal exchange controls
10, no shortage of foreign exchange, no restrictions on imported
inputs, relatively low inflation, and large financial surpluses in the budget and the balance of
payments which should provide assurance that controls are unlikely in the future.  Botswana has also
provided specific incentives to investors (Chapter III(4)(viii)).
(4) Outlook
54. Botswana's real GDP is estimated to have grown at 7% in 1995/96, a significant improvement
over the 3.1% growth rate recorded during the previous year and the 4.1% in 1993/94;  growth ofbetween 5 and 6% was projected for 1996/97.  Real GDP growth is projected to average 4.5%
per annum over the period between 1995/96 and 2020 /21, assuming that capital stock will grow at
4% per annum and the available labour force will grow by 3% annually.
55. The balance of payments remained positive in 1994/95, with a reported US$253 million
surplus and the country's US$5 billion in foreign exchange reserves now represent approximately
2.5 years of import cover.  Botswana's impressive financial balance sheet remains dependent on
diamond mining, in spite of progress towards economic diversification.
56. To encourage investment and diversify the economy, the Government lowered corporate
taxes in 1995 from 35% to 25% overall, and for manufacturing firms to 15%.  Either directly or
through parastatals, the Government has invested heavily in partnerships with private firms, both
domestic and foreign.  Unemployment remains relatively high, however.  While Botswana has made
great strides over the past generation in raising literacy rates and ensuring almost universal basic
education, a lack of technical and managerial skills among its work force and relatively low worker
productivity limit growth and employment generation.
                                                     
10It should be noted, however, that some neighbouring countries, e.g. Zambia and Zimbabwe, have
recently completely liberalized exchange controls, reducing Botswana's previous relative advantage.Botswana WT/TPR/S/35
Page 19
57. Official estimates suggest growth of GDP of  around 6% in 1997/98, as against 6.9% in the
previous fiscal year, mainly due to sluggish grow th in the mining sector.  Non-mining sectors are
expected to grow rapidly, thanks to strong expans ion in construction, transport, finance, social and
community services, including government services.  Longer term forecasts suggest an annual
average growth of employment of around 4.8% ov er the next six years, accompanying strong
expansion in the non-mining private sector.
58. Botswana has been a leading advocate of economic integration among the 14 members of the
SADC11, viewing the creation of a large, liberalized market as essential to attracting substantial flows
of foreign direct investment.  The success of SADC will have a significant impact on the economic
and commercial prospects for the entire region.
                                                     
11The 14 member States of SADC are:  Angola, Botswana, the Democratic Republic of Congo
since 1997, Lesotho, Malawi, Mauritius since 1995, Mozambique, Namibia, the Seychelles since 1997, SouthAfrica since 1994, Swaziland, Tanzania, Zambia and Zimbabwe.