Botswana Lesotho - iuj.ac.jp · updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising

COUNTRY REPORT

Botswana

Lesotho

July 2000

The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom

At a glance: 2000-01OVERVIEWThe domestic political scene will remain stable throughout 2000 and 2001,although factional infighting within the ruling BDP will continue. IanKhama, the vice-president, is becoming increasingly discontented withdomestic politics, but is unlikely to resign from his position. Thegovernment will follow prudent economic policies in an attempt to increaseinvestment and reduce the economy’s dependence on minerals. A majorincrease in diamond output, due to the opening of the Orapa mine, willhelp increase real GDP growth to 8.5% in 1999/2000. Subsequently, withdiamond production hitting capacity constraints, real GDP growth will slow.A fall in the pula will add to inflationary pressures. A reduction in diamondexports from their 1999 total will cut the current-account surplus.

Key changes from last monthPolitical forecast• The resignation of Pontashego Kedikilwe as minister of education has

highlighted the divisions within the ruling party. President Festus Mogaeappears to have the cabinet under his control but, with the oppositionpreoccupied with its own problems, various BDP factions will attempt toincrease their standing within the party.

Economic policy outlook• The delay in the passage of the recent privatisation white paper is an

indication that the process will face further resistance. Nonetheless, theEIU expects the policy to remain on track.

Economic forecast• As a result of the fall in the South African rand against the US dollar in the

second quarter, we have revised down our forecast for the averageexchange rate for the pula to P5.15:US$1 in 2000 and P5.50:US$1 in 2001.Annual inflation, at 7.3% in May, is already rising, and the depreciation ofthe pula will add to inflationary pressures.

The Economist Intelligence UnitThe Economist Intelligence Unit is a specialist publisher serving companies establishing and managingoperations across national borders. For over 50 years it has been a source of information on businessdevelopments, economic and political trends, government regulations and corporate practice worldwide.

The EIU delivers its information in four ways: through our digital portfolio, where our latest analysis isupdated daily; through printed subscription products ranging from newsletters to annual referenceworks; through research reports; and by organising conferences and roundtables. The firm is a memberof The Economist Group.

LondonThe Economist Intelligence Unit15 Regent StLondonSW1Y 4LRUnited KingdomTel: (44.20) 7830 1000Fax: (44.20) 7499 9767E-mail: [email protected]

New YorkThe Economist Intelligence UnitThe Economist Building111 West 57th StreetNew YorkNY 10019, USTel: (1.212) 554 0600Fax: (1.212) 586 1181/2E-mail: [email protected]

Hong KongThe Economist Intelligence Unit25/F, Dah Sing Financial Centre108 Gloucester RoadWanchaiHong KongTel: (852) 2802 7288Fax: (852) 2802 7638E-mail: [email protected]

Website: http://www.eiu.com

Electronic deliveryThis publication can be viewed by subscribing online at http://store.eiu.com/brdes.html

Reports are also available in various other electronic formats, such as CD-ROM, Lotus Notes, on-linedatabases and as direct feeds to corporate intranets. For further information, please contact your nearestEconomist Intelligence Unit office

London: Jan Frost Tel: (44.20) 7830 1183 Fax: (44.20) 7830 1023New York: Alexander Bateman Tel: (1.212) 554 0643 Fax: (1.212) 586 1181Hong Kong: Amy Ha Tel: (852) 2802 7288/2585 3888 Fax: (852) 2802 7720/7638

Copyright© 2000 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication norany part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by anymeans, electronic, mechanical, photocopying, recording or otherwise, without the prior permissionof The Economist Intelligence Unit Limited.

All information in this report is verified to the best of the author’s and the publisher’s ability. However,the EIU does not accept responsibility for any loss arising from reliance on it.

ISSN 1356-4021

Symbols for tables“n/a” means not available; “–” means not applicable

Printed and distributed by Redhouse Press Ltd, Unit 151, Dartford Trade Park, Dartford, Kent DA1 1QB, UK

1

EIU Country Report July 2000 © The Economist Intelligence Unit Limited 2000

Contents3 Summary

Botswana

5 Political structure6 Economic structure6 Annual indicators7 Quarterly indicators8 Outlook for 2000-018 Political forecast9 Economic policy outlook

10 Economic forecast13 The political scene18 Economic policy20 The domestic economy20 Economic trends21 Mining24 Agriculture24 Telecommunications25 Financial services25 Foreign trade and payments

Lesotho

27 Political structure28 Economic structure28 Annual indicators29 Quarterly indicators30 Outlook for 2000-0130 Political forecast31 Economic policy outlook31 Economic forecast36 Economic policy and the economy

List of tables

10 Botswana: international assumptions summary11 Botswana: forecast summary15 Botswana: election results, 199926 Botswana: external debt37 Lesotho: budget41 Lesotho: external debt

2

EIU Country Report 3rd quarter 2000 © The Economist Intelligence Unit Limited 2000

List of figures

7 Botswana: foreign trade7 Botswana: foreign reserves

12 Botswana: gross domestic product12 Botswana: regional real exchange rates21 Botswana: inflation25 Botswana: Stockmarket index37 Lesotho: budget balance39 Lesotho: exchange rate40 Lesotho: foreign-exchange reserves

3


Summary

July 2000

Botswana

The resignation of the powerful education minister, Pontashego Kedikilwe, andthe apparent political disillusionment of the vice-president, Ian Khama, willintensify dissent within the ruling BDP but will not affect political stability.The opposition BNF will be preoccupied with a leadership struggle, which mayresult in the party moving to the left. There will be further discussion onchanging the electoral system, but nothing is likely to be implemented beforethe next election. Regional instability, particularly the situation in Zimbabwe,will give the authorities cause for concern, but most of the economic impactwill not be felt directly. A major expansion in diamond output will increasereal GDP growth to 8.5% in 1999/2000. With diamond production now atcapacity, real GDP growth will slow to 5.5% in 2000/01 and 4.8% in 2001/02.The fall in the pula and growing fuel, food and utility costs will increaseaverage inflation to 8.2% in 2000, which should fall back to 6.8% in 2001. Areduction in diamond exports will cut the current-account surplus to US$102min 2000. Higher non-diamond exports will increase the current-account surplusto US$122m in 2001.

The privatisation bill faced delays owing to internal opposition within the BDP.Mr Khama has spoken out against pay rises for MPs, and BDP members havecriticised him. The opposition parties have shown no signs of resolving theirinternal problems. The introduction of an alternative electoral system has beendiscussed. Pressure to reduce the number of foreign workers has increased.

The privatisation bill has now made it through parliament. The interest rate onloans to assist small and medium-sized enterprises has been reduced. Newcopyright legislation has been introduced. Civil service management has beenshaken up and the government has cracked down on indebted civil servants.

Rising fuel prices have increased inflation to 7% in April. The depreciation ofthe pula and rent rises will keep inflation on an upward trend in the comingmonths. In response to the international campaign against “conflictdiamonds”, the government has begun to lobby against restrictions that mayhurt Botswana. The beef industry has been hit by an outbreak of animalsleeping sickness. The Hyundai car assembly plant remains closed despite thepresence of around 1,750 unassembled car kits.

Foreign investors have shown further interest in opportunities in Botswana.According to the latest World Bank data, total external debt has fallen.

July 1st 2000

Outlook for 2000-01

Economic policy

Foreign trade andpayments

The political scene

The domestic economy

4


Lesotho

Legislative elections will be held between March and May 2000, outside thetimetable agreed with various foreign mediators. The opposition’s grudgingacceptance of the new timetable will reassure the international community.Political uncertainty will remain until the government clarifies the electoralmodel to be used. The choice of electoral system is now unlikely to be put to areferendum. Public division will continue to damage the opposition partiesand leave the LCD best placed to win the election. Economic growth will notbe high enough to stem the rise in unemployment. Business confidence willremain low until the elections have been completed. Expenditure targets in the2000/01 budget have exceeded those agreed with the IMF; nonetheless,agreement should be reached on an extended period of funding. Thedepreciation of the maloti will not improve export competitiveness.

The general election has been rescheduled on the advice of a Commonwealthteam. The government has wrested the initiative for the election process fromthe independent electoral commission. New commissioners have beenappointed to the independent electoral commission. A committee has beenformed to investigate the civil unrest in 1998. Several high-profile constructioncompanies are involved in the LHDA corruption trial, which began recently.

The 2000/01 budget focused on the themes of consolidating democracy, layingthe basis for strong economic growth and addressing the needs of the poor. Adeficit of 3.6% of GDP has been budgeted for—above the IMF target—owing toan increase in expenditure. The government has announced that VAT will beintroduced, but it has also acknowledged the weakness of the country’s taxadministration. A slow-down in food price rises reduced year-on-year inflationin the first quarter to 6.2%. There was only one bid for a 70% stake in LesothoTelecommunications Corporation. The external debt stock has increased,according to World Bank data.

Editor: Paul GambleEditorial closing date: June 29th 2000

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] report: Full schedule on www.eiu.com/schedule

Outlook for 2000-01

The political scene

Economic policy and theeconomy

Botswana 5


Botswana

Political structure

Republic of Botswana

Unitary republic

Roman-Dutch law; cases in rural areas are heard by customary courts

National Assembly consisting of 40 members elected by universal suffrage, the president,the attorney-general and four members appointed by the president. A 15-member Houseof Chiefs advises on tribal matters

October 1999 (legislative); next election due by October 2004 (legislative)

President, chosen by the National Assembly

The president, his appointed vice-president and cabinet

Botswana Democratic Party (BDP), the ruling party; Botswana Congress Party (BCP);Botswana National Front (BNF); Botswana Workers Front (BWF); Botswana People’s Party(BPP); United Action Party (UAP). The BPP and UAP are, together with several smallerparties, in the Botswana Alliance Movement (BAM) which contested the 1999 election asa single unit.

President Festus MogaeVice-president Ian Khama

(on sabbatical leave)

Agriculture Johnnie SwartzCommerce & industry Daniel KwelagobeEducation (vacant)Finance & development planning Baledzi GaolatheForeign affairs Mompati MerafheHealth Joy PhumaphiLabour & home affairs Thebe MogamiLocal government Margaret NashaLands & housing Jacob NkatePresidential affairs & public administration Tabelelo Seretse

(acting)Mineral resources, energy & water affairs Boometswe MokgothuWorks, transport & communications David Magang

Linah Mohohlo

Official name

Form of state

Legal system

National legislature

National elections

Head of state

National government

Main political parties

Central bank governor

The government

Key ministers

6 Botswana


Economic structure

Annual indicators

1995 1996 1997 1998 1999a

GDP at market pricesb (P m) 12,252 14,202 17,486 20,363 23,259

GDPb (US$ m) 4,420 4,272 4,790 4,819 5,030

Real GDP growthb (%) 5.1 6.9 4.0 3.5 8.5

Consumer price inflation (av; %) 10.5 10.1 8.6 6.7 7.1c

Population (m) 1.46 1.50 1.53 1.57 1.61

Merchandise exports fob (US$ m) 2,160 2,218 2,820 2,061 2,703

Merchandise imports fob (US$ m) 1,605 1,468 1,925 1,983 2,034

Current-account balance (US$ m) 300 495 721 170 513

Reserves excl gold (US$ bn) 4.8 5.1 5.7 6.0 6.3c

Total external debt (US$ m) 703 614 562 548 573

Debt-service ratio (%) 3.2 5.2 2.8 2.7 2.2

Diamond production (m carats) 16.8 17.7 20.2 19.7 21.7

Cattle slaughteringsd (‘000) 177 142 140 146 130

Exchange rate (av; P:US$) 2.772 3.324 3.651 4.226 4.624c

June 27th 2000 P5.14:US$1

Origins of gross domestic product 1998b % of total Components of gross domestic product 1998b % of total

Agriculture 3.0 Private consumption 28.4

Mining & quarrying 36.2 Public consumption 28.8

Manufacturing 4.9 Gross fixed capital formation 24.8

Construction 6.0 Change in stocks 3.4

Trade, hotels & restaurants 18.0 Exports of goods & services 56.2

General government 14.5 Imports of goods & services –41.5

Financial & business services 10.1 GDP at market prices 100.0

GDP at current market prices incl others 100.0

Principal exports fob 1998 US$ m Principal imports cif 1998 US$ m

Diamonds 1,429 Vehicles & transport equipment 452

Vehicles 229 Machinery & electrical goods 398

Copper-nickel 102 Food, beverages & tobacco 283

Textiles 72 Metal & metal products 241

Meat & meat products 71 Chemical & rubber products 205

Main destinations of exports 1998 % of total Main origins of imports 1998 % of total

EU 77 SACU 76

SACU 18 EU 10

Zimbabwe 3 South Korea 5

a EIU estimates. b National accounts years beginning July 1st. c Actual. d Years ending September 30th.

Botswana 7


Quarterly indicators

1998 1999 20002 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr

Central government finance (P m)Revenue & grants 1,518.8 2,708.6 1,540.8 1,909.4 n/a n/a n/a n/aExpenditure & net lending 2,135.6 2,156.9 2,364.2 2,408.7 n/a n/a n/a n/aBalance –616.9 551.8 –823.4 –499.3 n/a n/a n/a n/a

PricesConsumer prices (1995=100) 127.1 128.6 130.2 133.0 136.2 137.8 139.6 142.5 % change, year on year 6.9 6.1 6.2 7.0 7.1 7.1 7.2 7.1

Financial indicatorsExchange rate P:US$ (av) 3.97 4.66 4.42 4.61 4.65 4.62 4.61 4.72 P:US$ (end-period) 4.33 4.48 4.46 4.67 4.63 4.53 4.63 4.85Interest rates (%) Bank (end-period) 11.75 12.50 12.50 13.25 13.25 13.25 13.25 13.75 Lending (av) 13.25 13.44 14.00 14.17 14.75 14.81 14.81 15.06M1 (end-period; P m) 1,415 1,547 1,513 1,646 1,783 1,842 1,775 n/a % change, year on year 30.5 39.5 5.8 28.3 26.0 19.1 17.3 n/aM2 (end-period; P m) 5,085 5,676 5,722 5,880 6,328 6,818 7,229 n/a % change, year on year 38.4 37.3 39.4 30.6 24.4 20.1 26.3 n/aStockmarket index (end-period; 1989=100) Domestic companies index 949.2 951.3 946.7 990.3 1035.5 1,417.1 1,399.3 1,470.8

Foreign trade and reservesExports fob (P m) 2,218 2,781 1,269 1,799 2,707 2,737 n/a n/a Diamonds (P m) 1,393 2,131 682 1,240 2,234 2,000 4,331 n/aImports cif (P m) –2,178 –2,352 –3,013 –2,541 –2,375 2,574 n/a n/aReserves excl gold (end-period; US$ m) 5,917 5,824 6,025 5,742 5,802 5,769 6,299 n/a

Sources: IMF, International Financial Statistics; Bank of Botswana, Botswana Financial Statistics.

8 Botswana


Outlook for 2000-01

Political forecast

The political scene will remain stable throughout 2000 and 2001. However,disputes within the ruling Botswana Democratic Party (BDP) will continue, asdifferent groups try to increase their standing. The resignation of PontashegoKedikilwe, minister of education, only serves to confirm this. He remainschairman of the BDP and will use his new freedom to keep a check on theparty’s leaders, especially Ian Khama, the vice-president, who took a surpriseone-year sabbatical this year. At the same time, Mr Khama’s increasingdisillusionment with politics—demonstrated by his attack on parliamentariansfor demanding higher salaries—raises questions over his own political future.However, his strong sense of national pride and civic duty suggests he will notresign his position yet.

In any other country, the presence of a military strong man—Mr Khama iscommander of the Botswana Defence Force (BDF)—so discontented with thestate of politics would sound alarm bells, but military intervention is unlikelyin Botswana. The president, Festus Mogae, will try to appease Mr Khama; as atribal chief, Mr Khama commands a traditional support base in the centralregion that Mr Mogae would like his party to maintain. If Mr Khama were toresign it would damage support for the BDP at the next election. Mr Khamawould also probably continue a campaign against bad management andcorruption, possibly from a position in the House of Chiefs.

For now, Mr Mogae’s attempts to calm factional politics within his party maybe working, and the passage of the privatisation bill suggests that he hascontrol of the cabinet at least, helped by the presence of the technicallycapable new minister of finance, Baledzi Gaolathe. Any new challenge toMr Mogae is likely to come from outside the cabinet.

Whatever its problems, the ruling party will face little challenge from theopposition. The main opposition party, the Botswana National Front (BNF),will continue to focus on its own leadership question and will be embroiled inthe factional squabbling that this entails. One possible contender has arisen.The MP for Lobatse, Nehemiah Modubule, has resigned as leader of the UnitedSocialist Party (which is affiliated to the BNF), fuelling speculation that he iseyeing the BNF leadership. Mr Modubule is known for his left-wing views,adding to speculation that the next leader will offer a radical alternative to theBDP’s conservative policies. However, Mr Modubule will face stiff opposition inhis attempt to become party leader, not least because of his membership, untilnow, of a party affiliated to the BNF rather than the BNF itself.

The rest of the fragmented opposition will take comfort from an increasedinterest in adopting a form of proportional representation (PR) for the electoralsystem. At an all-party conference in late May, nine out of ten parties voted infavour of moving to a more representative system. The tenth, the BDP,abstained. It seems that there is division within the ruling party over this issue.

Domestic politics

Electoral reform

Botswana 9


Mr Mogae and the party’s executive secretary, Botsalo Ntuane, appear toacknowledge that the system has some benefits, whereas others in the party,notably Mr Khama and Jacob Nkate, oppose it. The most likely outcome is thatthe BDP will not make a firm decision and, although the debate will continue,no real progress will take place over the forecast period. If PR was introduced inBotswana, the plethora of small parties might expect better representation inparliament. However, the opportunity of gaining political power by winningeven a small number of seats is likely to discourage alliances between the smallopposition parties, which will work in the BDP’s favour.

Regional instability will continue to cause concern in Botswana. Instability inZimbabwe and the possibility of an influx of refugees from the Angolan civilwar pose the main threats.

Although the government remains wary of a diplomatic incident with theincreasingly erratic Zimbabwean leadership, the direct economic impact of acollapse in Zimbabwe would be limited (see The political scene). However, aninflux of refugees is possible. The impact on Botswana’s reputation would bemore significant, with a possible decline in foreign investment, as well as afurther fall in the currency. Botswana’s relations with Namibia remain calm,although tension over their joint border may yet resurface. A more immediatethreat is the possibility of an influx of refugees from the Angolan civil conflictspilling over from Namibia’s Caprivi strip.

Economic policy outlook

Prudent economic policies, aimed at reducing the economy’s dependence onminerals by increasing investment levels, will characterise the forecast period.Fiscal policy will continue to focus on improving expenditure control andincreasing receipts. In its efforts to contain inflationary pressure, thegovernment will keep monetary policy tight. The lacklustre privatisationprogramme should move ahead, although the delay to the recent passage ofthe privatisation white paper has shown that it will face some resistance.Nonetheless, foreign investor interest is expected to increase in both the assetsfor sale and in general opportunities in the country, as the governmentcontinues its investor-friendly policies. Attempts to combat the highunemployment rate and the impact of AIDS will also take a high priority.

There will be some slippage from the targets laid out in the budget for the2000/01 fiscal year (April-March). On the revenue side, diamond earnings areexpected to fall slightly, as the previous year’s figure was inflated by the sale ofstockpiled stones. The anticipated increase in customs union revenue is likelyto be achieved, as this comes from the largely predetermined Southern AfricanCustoms Union (SACU) pot. Controlling spending will be difficult after severalyears in which spending rose by over 20% year on year, and the target of 3%expenditure growth will almost certainly be exceeded (8-10% is more likely),especially with the reconstruction work needed after the floods earlier this year.

Fiscal policy

International relations

Policy trends

10 Botswana


In an attempt to curb the rise in inflation, the Bank of Botswana (the centralbank) is likely to stick to its tight monetary policy, whatever the economic cost.However, it will have little effect on the growth in bank lending (which is morea function of economic growth) and only limited impact on inflation, which isalso being driven up by rising import prices.

Economic forecast

The political and economic troubles in Zimbabwe have had an adverse effectthroughout the region. The EIU has lowered the forecast for South African realGDP growth from 4.2% to 3.7% in 2000, in response to the effect on investorperceptions of the situation in Zimbabwe, which has caused a sharp fall in therand and reduced the possibility of further interest rate cuts this year. The declinein the value of the rand will have a negative impact on the currencies of allcountries in the region, a large proportion of whose exports go to South Africa.

We forecast that real GDP growth in the OECD will accelerate to 3.7% in 2000,before falling back to 2.9% in 2001 as the rapid expansion in the US slows.World trade is projected to grow by 8.5% in 2000 and 7.5% in 2001.International oil prices are forecast to remain high in 2000, and will averageUS$24.50/b before falling back to US$20/b in 2001. The jump in the prices ofindustrial raw materials—expected to rise, by 16.8% in 2000 and a further 8.8%in 2001—will also feed through into Botswanan inflation.

Botswana: international assumptions summary

1998 1999 2000 2001

GDP (% change)US 4.3 4.2 5.0 2.9OECD 2.4 2.9 3.7 2.9EU 2.6 2.2 3.1 2.8

Exchange ratesUS$ effective (1990=100) 119.3 116.4 117.5 112.9¥:US$ 130.9 113.9 107.5 104.3US$:€ 1.12 1.09 1.00 1.06

Financial indicators (%)US$ 3-month commercial paper rate 5.34 5.18 6.52 6.55¥ 2-month private bill rate 0.72 0.27 0.05 0.64

Commodity pricesOil (Brent; US$/b) 12.76 17.86 24.50 20.00Gold (US$/troy oz) 294.1 278.8 285.7 290.0Food, feedstuffs & beverages –13.9 –18.6 –2.8 5.3Industrial raw materials –19.6 –4.3 16.8 8.8

A substantial increase in diamond output, the result of the expansion of theOrapa mine, will allow real GDP growth to reach 8.5% in the 1999/2000national accounts year (July-June). With capacity constraints limiting furthergrowth in mining, and manufacturing expected to slow, GDP growth will easeto 5.5% in 2000/01. Mining will remain stable in 2001/02, but cuts ingovernment expenditure on construction projects will reduce real GDP growthto 4.8%.

International assumptions

Monetary policy

Economic growth

Botswana 11


The government is forecasting real GDP growth of 10% for 1999/2000, theresult of a substantial increase in diamond output due to the expansion of theOrapa mine. However, we are expecting real GDP growth of 8.5% in1999/2000, as neither the collapse of the Hyundai car plant nor the effect ofthe February floods on agriculture was factored into official calculations. Boththese factors will inhibit growth in 2000/01, and with diamond productionnearly at full capacity only limited growth in mining can be expected.Although government plans to limit expenditure growth may slow theconstruction boom, cutbacks in spending will not be as large as anticipatedand rehabilitation work after the floods will cause continued growth inconstruction. The political situation in Zimbabwe may slow tourism inBotswana, but apart from that, however, the direct economic impact of crisis inZimbabwe will be extremely limited. We therefore forecast real GDP growth of5.5% in 2000/01.

In 2001/02, real GDP growth is likely to slow further as the proposedgovernment cuts in infrastructure projects are implemented. Mining outputshould be stable, but agriculture should improve slightly, if only because of thelow base in 2000. This also applies to manufacturing, especially if recentsmall—but important—investments are followed up. Real GDP growth of 4.8%is forecast for 2001/02.

Botswana: forecast summary(% unless otherwise indicated)

1998a 1999b 2000c 2001c

Real GDP growthd 3.5 8.5 5.5 4.8

Industrial production growthd 2.5 10.3 5.1 3.1

Agricultural production growthd 3.5 –1.0 –0.5 0.5

Gross fixed investment growthe –8.8 –6.0 4.0 3.0

Consumer price inflationAverage 6.7 7.1a 8.2 6.8Year-end 6.4 6.9a 9.0 5.8

Short-term interbank rate 13.5 14.6a 15.5 14.9

Government balance (% of GDP) –6.8 2.9 0.4 2.2

Exports of goods fob (US$ bn) 2.1 2.7 2.3 2.4

Imports of goods fob (US$ bn) –2.0 –2.0 –2.1 –2.2

Current-account balance (US$ bn) 0.2 0.5 0.1 0.1 % of GDP 3.5 10.2 2.0 2.3

Total foreign debt (year-end; US$ bn) 0.5 0.6 0.5 0.5

Exchange rates (av)P:US$ 4.23 4.62a 5.15 5.50P:¥100 3.23 4.06a 4.79 5.28P:€ 4.73 4.93a 4.99 5.72

a Actual. b EIU estimates. c EIU forecasts. d National accounts years beginning July 1st. e Fiscal yearsbeginning April 1st.

The recent depreciation of the pula, higher oil prices, increases in public utilityprices, rising imported food costs because of the regional floods, and risinghousing prices will all contribute to inflationary pressure. Higher interest rates,

Inflation

12 Botswana


aimed at slowing the growth in bank lending, will therefore be unable toprevent inflation rising above 9.5% in the third quarter for the first time since1996. We expect inflation to average 8.2% in 2000, before falling back to 6.8%in 2001 when interest rates will start to have some effect and imported pricepressures will ease. Similar movements can be expected in South Africa’s targetCPIX (the consumer price index that excludes interest rate movements).

Botswana has managed its exchange rate to follow the South African rand in itsrecent fall against the US dollar. The authorities will continue to shadow therand over the forecast period. We are expecting an annual average exchangerate of P5.15:US$1 in 2000 and P5.50:US$1 in 2001.

Botswana’s inflation rate is higher than South Africa’s headline inflation rate,although it is broadly similar to South Africa’s CPIX. The volatility of the rand,and the perceived (but not necessarily real) divergence in inflation rates, maystir debate within Botswana about the wisdom of the current exchange-ratepolicy of tracking the rand. However, nothing is expected to come of this.South Africa is the main market for Botswana’s non-diamond exports, andcompetitiveness in that market will remain paramount.

The trade balance will fall over the forecast period as the rise in expenditure onimported fuel and food outpaces the growth in diamond exports. Thestructural deficit on the services account will ensure the balance of trade ininvisibles remains in deficit. Overall, a current-account surplus of US$102m isforecast for 2000, rising to US$122m in 2001.

Exports are expected to fall to US$2.3bn in 2000. Although diamondproduction may rise slightly, actual sales will be lower than in 1999, whenlarge sales were made from stockpiles built up during the previous year. Inaddition, vehicle sales will drop following the closure of the Hyundai plant,which will also slow the import of foreign components, and beef exports seemset to slump further owing to the outbreak of animal sleeping sickness. Higheroil and food prices will push import spending to US$2.1bn, which will help totrim the trade surplus to US$276m. The trade surplus is expected to decline to

Exchange rates

External sector

Botswana 13


US$235m in 2001, because import spending will rise as the rebound inmanufacturing increases the demand for imported inputs.

Higher international oil prices in 2000 will push up transport costs, with anegative impact on Botswana’s services account. The fall in oil prices expectedin 2001 will help to reduce the services deficit. With yields on internationalgovernment bonds forecast to rise slightly this year, the returns on Botswana’ssubstantial foreign-reserve holdings will improve and will keep the incomeaccount in surplus throughout the forecast period. Transfers from migrantworkers in South Africa are gradually dwindling, as the number of Batswanaemployed there falls, reducing the current transfers surplus.

The political scene

After their trouncing at the 1999 election, Botswana’s small opposition partiesremain relatively ineffective. Political infighting continues to be largelyconfined to the ruling Botswana Democratic Party (BDP). Since the October1999 election, two factors have increased dissent in the ruling party. The first isthe disillusionment of some of the old guard. The president, Festus Mogae, is atechnocrat, chosen by former president Sir Quett Ketumile Masire to diffuseinternal party tensions. Mr Mogae has brought in others from outside BDPranks, such as Ian Khama, the politically well-connected but inexperiencedformer head of the army, as vice-president, and Baledzi Gaolathe, also atechnocrat, as minister of finance. With the new cabinet in place, some of theold guard, including George Kgoroba, Chapson Butale, Lesedi Mothibameleand Ronald Sebego, feel that they are unlikely to make it back into cabinetafter they were removed in the post-election reshuffle, and therefore they feelthat they have little to lose by criticising government policies. The secondsource of internal dissent is the influx of new MPs who feel that now is thetime to make an impression.

The appointment of a replacement for Pontashego Kedikilwe, who resigned asminister of education in early June, will give some indication of whether thisdissent will grow. Mr Kedikilwe’s resignation was not expected, but his growingfrustration with Mr Khama, whom he saw as an outsider, may havecontributed to his decision. Mr Kedikilwe is a party heavyweight who, for now,retains his position as chairman of the BDP. He is likely to find it easier tocement his own support base, and criticise the vice-president, from outside thecabinet. His replacement has yet to be named, but has been the subject ofspeculation. As Mr Mogae will not want to offend any faction within his party,the most likely candidate is someone without ties to any BDP faction. Therehave been no indications that there will be other resignations in sympathywith Mr Kedikilwe.

Specific examples of internal dissent abound, but two instances stand out.There were indications that BDP backbenchers were planning to vote withmembers of the opposition Botswana National Front (BNF) to reject theprivatisation bill of the finance minister, Baledzi Gaolathe, which had cabinet

Internal opposition hitsthe BDP

Privatisation bill gets arough ride

14 Botswana


backing. There was even talk of cabinet members voting against the bill. Thebackbenchers claimed that there had not been enough consultation within theparty or the nation at large. They fear a political backlash if locals are not seento benefit from privatisation. The backbenchers delayed the bill beyond itsexpected date of passage but were unable to block it completely, showing thatMr Mogae and Mr Gaolathe have enough influence to ensure the passage ofimportant bills.

The following week, BDP members closed ranks against the vice-president, IanKhama, in a debate on a motion calling for a review of salaries of MPs,ministers and local councillors. Mr Khama spoke out against the motion onthe grounds that MPs have had regular pay increases, and he challenged thosewho felt they do not receive enough to leave politics and take up a morelucrative profession. He called for parliamentarians to represent theirconstituents and not themselves and disassociated himself from the motion.MPs receive an average salary of P64,860 (US$12,900) per annum, a dailysitting allowance of P190.8—some farm workers earn this in a month—transport and travel allowances, subsidised car loans and other perks.Mr Khama’s comments on this issue struck a chord with ordinary people andstudents—the measure caused University of Botswana students to take to thestreets in protest in Gaborone in April. However, Mr Khama’s calls for restrainthave hardly endeared him to other party members. Mr Khama is already richand this is not the first time he has found himself at odds with other BDP MPs,not least because of his easy passage to the upper echelons of power, which wasswiftly followed by an unorthodox one-year sabbatical. Citing the extraexpenditure required to repair the damage caused by recent floods, Mr Mogaerejected the demand, which seems to have killed off the issue for the moment.

At the BDP’s national council held in Gaborone in March, Mr Mogae was againasked to explain why he had granted a one-year sabbatical to Mr Khama.Mr Mogae managed to convince his sceptical audience that, as president, hehas the right to grant special leave. However, he had less success in explainingwhy Mr Khama was granted leave, citing personal reasons as an explanation—aresponse that has so far failed to satisfy BDP members (April 2000, page 13).

The struggle for control of the BDP’s youth wing has continued to attractinterest from the local press. The outcome is important because this influentialbody sometimes provides a forum for the discussion of issues affecting theparty generally. The current chairman, Lesang Magang, was standing againstGomolemo Motswaled, a popular university administrator with grass rootsappeal. Mr Magang is well-connected politically—his father is an MP—but hehas a reputation for arguing with senior party members, and enraged BDPleaders when he openly challenged the decision to grant Mr Khama asabbatical. Mr Magang had subsequently decided that he would not stand inthe election, perhaps as a result of pressure from above. However, at the time ofwriting he seems set to resume his defence of the post, after widespread callsfor him to stand; his earlier decision may well have been a deliberate ploy. If hesucceeds, this may be seen by the BDP as an indication of the strength ofinternal opposition to Mr Khama’s leave.

Mr Khama speaks outagainst MP’s pay rises

BDP members speak outagainst Mr Khama

Youth elections causecontroversy

Botswana 15


The resurgence of petty factional politics was evident in the Kgatleng Eastconstituency in May. One faction of the local BDP has aligned itself withopposition BNF members in order stop the BDP’s chosen candidate, the wife ofthe national assembly speaker, Ray Molomo, becoming chair of the districtcouncil. The dissident BDP faction wants its own representative appointed.

The BNF, the leading opposition party, faces further problems with its centralcommittee. This time it is in dispute with the local party body in the north-central region. In May the regional committee tried to convene a meeting of allthe BNF’s main institutions to discuss the party’s state of affairs. Not only issuch a meeting a direct challenge to the role of the central committee (whichshould lead all such debates), but it was also scheduled to take place at thesame time as a meeting organised by the central committee. Although theregional committee’s meeting does not appear to have taken place, a mini-conference still seems possible. This is just the beginning of the factionalismthat is likely to increase as speculation grows over a successor to the ageingparty leader, Kenneth Koma.

At a regional conference convened in May by the parliamentary forum of theSouthern African Development Community and Sweden’s InternationalInstitute for Democracy and Electoral Assistance, Mr Mogae told delegates thatAfrican countries should consider using proportional representation (PR) inorder to ensure democracy. Botswana, upheld as one of Africa’s most successfuldemocracies, uses a first-past-the-post system that appears to favour the rulingBDP to the detriment of the opposition parties (see table below).

Botswana: election results, 1999(Distribution of parliamentary seats under different voting systems)

% of vote First-past-the-post PRa Difference

BDP 57 33 23 –10

BNF 26 6 10 +4

BCP 12 1 5 +4

Others 5 0 2 +2

a The actual system discussed at the conference was a hybrid of PR and first-past-the-post, the exactdetails of which were not given.Source: EIU.

Mr Mogae’s comments come at a time when pressure for electoral reform inBotswana is growing. The opposition has called for the leadership of theIndependent Electoral Commission (IEC) to be reviewed because of perceivedbias towards the BDP. The IEC has been in trouble since the elections in 1999,when its blunders over voter registration caused a state of emergency to bedeclared (4th quarter 1999, page 11). There is widespread support for PR acrossthe range of small opposition parties, as well as for the funding of politicalparties—also proposed at the conference—in order to break the BDP’sentrenched hold on power.

Factional politics continueto plague the BDP

The opposition shows nosign of solving its problems

The nation discusseselectoral reform

16 Botswana


The government’s stand on human rights, with regard to the minority Basarwapopulation, is still in question. The director of the Hotel and TourismAssociation of Botswana, Moodisagape Mothoagane, has distanced hisorganisation from the government’s attempts to relocate the Basarwa awayfrom the Central Kalahari Game Reserve. The policy is supposedly designedprimarily for ecological reasons, in order to protect the reserve and thus boostthe tourism industry, but it has long been criticised as ill-conceived. The hotelassociation claims that it does not support the policy because the reserve is stillviable as a tourist operation if the Basarwa remain. Indeed, if all Basarwa aremoved out there is a danger that an international boycott on tourism inBotswana may result. Mr Mothoagane has also claimed that the government isactually implementing the policy to clear the way for further diamondexploration. There is legitimate concern about the government’s approach tothe Basarwa—there has been little consultation with the Basarwa themselves,and a lack of respect for their traditional rights to the land—but it seemsunlikely that the government has a hidden agenda for diamond exploration.Nonetheless, the government’s policy on human rights will continue to attractclose scrutiny from international pressure groups, especially because of its newpolicy of screening all prospective scholarship students for HIV/AIDS (see Thedomestic economy).

In March senior representatives of the Department of Immigration confirmedthat officials had taken bribes in the past, and promised to stamp this practiceout. However, in May the police detained two immigration officers inconnection with a large pile of passports found in an office. Reports suggestthat corruption was so widespread that foreigners trying to pass immigrationusing legitimate methods found themselves forced to bribe officials in order toget through. It appears that the sale of resident permits and passports waswidespread, and a number of immigration officers’ wives were running“consultancies” specialising in facilitating passports and work permits. Forexample, the officers arrested were arranging extended stays for groups ofZimbabweans. The investigations come at a time when there are growing callsfor a reduction in the size of the foreign workforce.

Owing to the largely homogeneous nature of Botswana’s ethnic make-up, thepressure to localise employment has always been great. The fact that rapideconomic development has not really filtered through to the majority of thepopulation, particularly those people in rural areas, who remain poor, has onlyadded to this pressure. However, several recent events seem to have conspiredto increase the push for localisation. Firstly, concern about potentialimmigration from neighbouring countries is increasing as the situation inZimbabwe deteriorates (and as a result of the scandal at the immigrationoffice). Secondly, Botswana has recently had bad experiences with foreigninvestors. In particular, the collapse of the Botswana Motor Company (see Theeconomy) has fuelled suspicion that foreign investors are only investing inBotswana to gain the time-limited government subsidies and tax breaks.

Human rights on theagenda again

Corruption is exposed

Pressure for localisationincreases

Botswana 17


Recent examples of growing nationalism in Botswana

• Sea Food Company employees went on strike ostensibly for higher pay, but the mainthrust of their argument was that the (largely Indian) company should localise.

• Local surveyors have complained that Chinese surveyors hired by the governmentare inefficient, despite receiving much higher salaries.

• The national TV project is in disarray after the removal, amid concerns aboutirregularities, of the British consultant in charge.

• Workers on strike at the First National Bank of Botswana have claimed that they aretreated unfairly compared with foreign employees.

• Pressure on the tourism industry to employ more locals has increased. The formercommerce minister, George Kgoroba, claimed the industry was controlled by foreignersand did not create employment for locals.

• The American vice-chancellor at the University of Botswana is facing criticism of hismanagement style, and also of his reported request for a higher salary than theuniversity is allowed to pay.

The situation in Zimbabwe, Botswana’s eastern neighbour, has continued todeteriorate in recent months. The invasion of white-owned farms and theintimidation of—and violence against—farmers and political opponents of thepresident, Robert Mugabe, have succeeded in grabbing global attention.

The impact on Botswana of the crisis in Zimbabwe

• Economic linkages are relatively small. It is estimated that less than 10% of non-diamond exports go to Zimbabwe. Zimbabwe provides a tiny fraction of totalforeign-exchange earnings including diamonds, so any fall in bilateral trade will notdestabilise the economy. Botswana has not made any large loans to Zimbabwe.

• The impact on South Africa’s reputation has been more important. Investors in SouthAfrican bonds have taken fright, leading to a fall in the rand (part of the basket ofcurrencies tracked by the pula) by about 15% against the dollar this year. This has led toa fall in the pula of 11% against the dollar. More directly, there has been some selling onthe local bourse that may be linked to pessimism about the region (see below).

• There has been media speculation about the possibility of copycat land invasions inneighbouring countries. There is very little chance of this happening in Botswana.Putting aside the fact that the political and legal institutions are much stronger inBotswana than in Zimbabwe, there is only limited arable land. Complaints are madeabout the amount of prime commercial plots belonging to foreigners, but theirpresence is not as visible as it is in Zimbabwe. In the countryside, the big issue appearsto centre around cattle barons. These are mainly locals who have sprawling farms,sometimes applying for extra tracts in the names of employees. Botswana does havesimilar wealth disparities. The many young people who are unemployed may becomemore vociferous in time, but this is only likely to surface fully in the next generation.

• Refugees may become a problem if the situation deteriorates further.

Mixed impact of Zimbabwecrisis

18 Botswana


Botswana, regarded as a model democracy in Africa, has been increasing its rolein foreign affairs this year. In May the minister of defence, Mompati Merafhe,was appointed the chair of the Commonwealth Ministerial Action Group, arelatively high-profile group that looks into political issues in other memberstates. This appointment also gives Botswana a forum through which to exertpressure on Zimbabwe—it is unable to do this directly for fear of aggravating itsmore populous neighbour. Laurent Kabila, the president of the DemocraticRepublic of Congo, has rejected the mediation efforts of Botswana’s formerpresident, Sir Quett Ketumile Masire, and has asked the Organisation of AfricanUnity to appoint a new mediator for the country’s civil conflict.

Economic policy

A backbench revolt threatened the passage of the government’s latestprivatisation bill (see The political scene). Opposition to the white paperpresented by the minister of finance, Baledzi Gaolathe, largely centred on thefear that there would be low participation by nationals, whom backbench MPsconsider to be unready, and too poor, to buy shares. The prospect of large-scaleredundancies also raised the possibility of a political backlash against theBotswana Democratic Party (BDP) over the policy.

The backbenchers claim that the only people to benefit from the policy wouldbe those Batswana who are already rich, and foreigners. However the whitepaper does contain measures designed to ensure local participation: the statecan buy parts of the enterprises and sell them on at a later date; and a fund toassist local people to buy shares in newly privatised enterprises will beestablished, probably associated with the small and medium-sized enterprises(SME) fund and administered by the same national development bank.

The backbench opposition to the presentation of the privatisation policy is aprecursor of the hostility each sale will face. The key will be to convince theelectorate that each privatisation is benefiting them. The real test case willprobably be the sale of Air Botswana, which looks set to proceed next year. Thegovernment has appointed the International Finance Corporation tolead-manage the process.

The cost of the floods that affected the Southern African region in early 2000—displacing 160,000 people and destroying 40,000 dwellings—is likely to be inthe region of P850m (US$163m) for Botswana. Although the governmentmaintains that it will not help people repair damaged dwellings, it will repairand rehabilitate the infrastructure damaged by the floods. The reconstructionof roads and bridges alone may cost up to P650m, and repair to buildings maycost another P194m. Botswana has received food relief aid of P11.6m to helpthose displaced by the floods.

Botswana raises itsinternational profile

Privatisation policy makesit through parliament

Floods add to theexpenditure bill

Botswana 19


The president, Festus Mogae, announced in March that the interest rate for thescheme to assist small and medium-sized enterprises would be cut from 18% to15%, to make the scheme more accessible. Since its inauguration in May 1999(3rd quarter 1999, page 13), the scheme has accumulated arrears of P2.5m. Ofthe 27,148 loan applications received, 11,210 have been approved, to a valueof P80m (53% of the amount budgeted to be lent over three years). This cut ininterest rates, at a time when other domestic rates are moving in the oppositedirection, appears to be a political ploy to counteract concerns over the lack oflocal economic empowerment. There is no evidence to suggest that makingbusiness loans marginally cheaper will improve the efficiency of the fund. Amore likely outcome is a rise in bad debts, because the cheaper rates will leadan increasing number of people to try to access the cash without a viablebusiness plan. The already high level of bad debt suggests that the SME fundwill go the way of other development finance funds, becoming a slush fund forpolitical patronage with little discernible impact on production andemployment.

The Ministry of Commerce is presenting a series of bills to parliament this yearwith the specific aim of improving the environment for the private sector. Thefirst was a Copyright and Neighbouring Rights Bill, passed in April, whichreplaces the 1965 act. The new act improves protection and brings Botswanamore in line with international standards, something the US is particularlykeen on if preferential access to its markets is to be assured. A new competitionbill and trade and liquor act will be introduced later in the year.

The Ministry of Presidential Affairs and Public Administration presented a reporton civil service reforms to the BDP in March. Four reforms have beenimplemented to increase productivity and efficiency in the civil service. Progresshas been made in decentralisation; permanent secretaries have been given moreinfluence over their own staff, the computerisation of employment histories hasbeen implemented in all ministries and more human resources training hasbeen provided. These steps are all part of the final reform, which is theintroduction of a performance management system throughout the civil service.

A meeting of civil service department heads, pay officers and the accountant-general in early May decided that civil servants suffering what was termed“pecuniary embarrassment” would face disciplinary action, and possiblydismissal. Some banks have made arrangements to deduct loan-servicing costsdirectly from salaries. Some civil servants have borrowed so much in advancethat their monthly salaries are effectively zero. This situation is a typicalexample of the over-extension of loans. Government car loans, easy bank loansand a plethora of retailers offering their own in-store credit have allcontributed to the situation. Credit decisions are based mainly on whetherrepayments can be met from the monthly salary. This is a growing problemand the level of bad loans from banks is expected to rise in 2000-2001,reducing bank profits.

SME scheme interestrate is cut

New copyright legislationis introduced

Civil service managementis shaken up

Government cracks downon indebted civil servants

20 Botswana


Mr Mogae’s 10-year-old Gulfstream aircraft (with a normal life span of 30 years)has suffered a number of mechanical faults in recent months. In April,Mr Mogae was unable to attend an official function in South Africa after the jetbroke down for the third time in three weeks. The difficulties led to calls for anew jet to be purchased. The president’s office moved quickly to reject thesecalls, indicating Botswana’s desire not to be associated with other high-spending African states.

The domestic economy

Economic trends

The Hyundai car assembly plant owned by the Motor Company of Botswana(BMC) continues to stand idle, having gone into liquidation at the beginningof the year (April 2000, page 22). About 1,750 car kits remain unassembled atthe plant, and although the liquidators, Deloitte & Touche, want themassembled and exported, Hyundai Korea rejects this, preferring to export carsdirectly to South Africa itself. The collapse of Hyundai has had a significantimpact on the Botswana Development Corporation, which recorded a P145m(US$28m) loss for the year ending June 1999 because of increased provisioningfor BMC losses, as signs of the financial difficulties facing the firm emerged.Creditors’ claims on the plant are being superseded by those of the customsand excise department, which has impounded spare parts from the companyto clear sales tax and excise duty debts of around P20m.

The Botswana Institute of Policy Analysis has prepared a report on theeconomic impact of AIDS for the Ministry of Health. The as yet unreleasedreport concludes that the HIV/AIDS pandemic will cumulatively causegovernment revenue to drop by 7% over the next decade while increasingexpenditure by 15% compared with what it would otherwise have been. AIDSdeaths will lead to an 8% drop in the unemployment rate among unskilledlabourers (currently above 20%), while the shortage of skilled labour willintensify, leading to a 12-17% rise in wages. Botswana’s overall real rate ofannual GDP growth will be cut by as much as 1.5 percentage points.

The government is taking steps to try to limit the impact of HIV/AIDS on itsexpenditure. It has suggested that it will test all students applying forscholarships for overseas study, and will reject those who test positive for HIV.This initiative does not sit well with the official policy that all testing isvoluntary and that there can be no discrimination in the workplace based onHIV status. The government’s comments came a month after strong commentsfrom Louis Nchindo, the managing director of Debswana—Botswana’s leadingdiamond producer—which is introducing HIV tests for its scholarship studentsand wants to do the same for new employees at the company’s three mines,which employ 6,000 people.

Call for new presidentialjet is rejected

BMC continues tocause problems

The economic impact ofAIDS is assessed

Botswana 21


Botswana will be one of four African countries to receive funds from the Billand Melinda Gates Foundation to combat AIDS. The money will be channelledthrough the UN Population Fund. Botswana is also planning to launch a polioimmunisation campaign, and wants to eradicate the disease from the countryby end-2000. The real reason for the campaign seems to stem from the risk ofimporting the disease from the growing number of Namibian and Angolanimmigrants on Botswana’s north-western border.

Consumer price inflation bounced back from the 15-month low of 6.4%recorded in March to reach 7.3% in May. The rising price of fuel seems to havebeen the main factor pushing up a number of the individual indices, includingpower and transport. In March the price of petrol increased by 12.8% and theprice of diesel rose by 6.9%, reflecting high international oil prices, which alsohit the May inflation figure owing to an increase in bus and taxi fares on May1st. Inflation looks set to continue rising because of the recent depreciation ofthe pula. House prices are also likely to rise sharply, as the Botswana HousingCorporation has announced rent increases of 15-25% from July, reflecting therising value of private land and rentals in Gaborone.

Mining

De Beers’ long monopoly on the distribution and sale of diamonds may becoming to an end. This monopoly has allowed De Beers to maintain highprices by withholding large amounts of supply from the market, building upmassive stockpiles in the process—Debswana, Botswana’s leading diamondproducer is a 50:50 partnership between De Beers and the government.However Debswana has found it increasingly hard to maintain its monopolyon the rough diamond trade. Its share of the market has fallen from 80% toabout 65%. De Beers itself now only produces 40% of all diamonds. Thereasons are twofold; first, producers have been less co-operative, and De Beershas struggled to maintain its monopoly in some countries (Russia, forexample); second, civil wars have made it extremely hard to control thediamond trade.

Inflationary pressures areincreasing

De Beers may end itsmonopoly in new strategy

22 Botswana


De Beers has tried to maintain supply restrictions by buying diamonds on theopen market. This has proved extremely expensive, especially as it has oftenfunded these buying activities through borrowing. The influx of diamondsfrom war zones has also prompted an international campaign, led by theorganisation Global Witness, against any diamond trade that funds warfare.With diamonds accounting for over 30% of Botswana’s GDP, around 60% ofgovernment revenue and over 70% of exports, a shift in international demandfor diamonds may jeopardise the country’s long term budgetary anddevelopment plans.

De Beers’s new strategy

De Beers will focus on building up demand for gems in general and for its owndiamonds in particular (it has branded its diamonds with a tiny logo for about a year).The company will concentrate more on marketing and branding. It will require itsbuyers to share the increased marketing costs, while stepping up the pressure not tobuy diamonds if their origins are not known.

Reasons for the new strategy:

• An acknowledgement of how difficult—and expensive—it is to control the globalsupply of diamonds.

• The Global Witness campaign is causing it concern.

• To try and ease US anti-trust restrictions. Although its gems are sold there De Beersitself is not allowed to operate (including marketing) in the US.

• Increasing shareholder pressure for improved return on equity. The cross-shareholding with Anglo-American may be untangled, and De Beers may then seek alisting in London.

It is too early to predict the outcome of this shift in strategy but several scenarios arepossible:

• De Beers’ monopoly slips but there is greater market segmentation. The main impacton producers is more volatile (and probably lower) prices. Futures markets may develop.The illegal diamond trade falls away.

• No change. The De Beers shift is a marketing ploy to stave off criticism from GlobalWitness.

• There is a free-for-all on the diamond market, and De Beers sells all of its stock. Pricesdrop sharply and producer revenue falls.

• Global demand collapses as wearing diamonds attracts a social stigma. Producers’export revenue falls sharply.

Mr Mogae has made great efforts to ensure that Botswana plays an active rolein the conflict diamond debate. His public statements have acknowledged thedamage that diamond revenue can do in war, but have also emphasised themassive role played by diamond revenue in the development of his owncountry. This contrasts with statements made by the head of Debswana, LouisNchindo, who claimed angrily that guns and not diamonds cause war and thata campaign should be focused on stopping the illegal trade in arms. Thegovernment is working closely with De Beers to lobby against restrictions on

Botswana is taking amoderate stance

Botswana 23


the diamond trade that may hurt Botswana. This campaign appears to bemaking some headway: The US deputy assistant secretary of state for Africanaffairs, Howard Jetter, has given unequivocal assurances that the US will notimpose any restrictions on the diamond trade that might damage theeconomies of Botswana, Namibia or South Africa (Mr Jetter is a former USambassador to Botswana). However, a directive demanding improved cert-ification may well arise from the UN, which seems sure to set a blanket ban onall diamonds from Sierra Leone. The political will surrounding such measures,given the strength of feeling about Sierra Leone, may lead to strong UN orother international measures for certification of origin.

Concerns that illegal diamonds were making their way into Botswana and thenbeing exported were heightened in April. A group of local journalists, visitingthe Belgian Diamond High Council in Antwerp, were told that in 1999 50,000carats—20 kg or P1bn (US$200m)—had entered Belgium from Botswana—all ofBotswana’s legitimate output goes to De Beers’s London-based Central SellingOrganisation—leading to the obvious conclusion that these were diamondsfrom a conflict area. After the initial shock in Botswana it emerged that thecouncil had got its figures wrong, and in fact just 9 carats had come to Belgiumfrom Botswana. The mistake made by the council, which was widely reportedin the local press, clearly demonstrates the difficulties involved in determiningthe real source of diamonds. A mistake like this, although quickly rectified,may have very expensive consequences for Botswana if repeated under thetighter conditions of sale that Global Witness is pushing for.

Further questions about the role played by Botswana in the smuggling ofdiamonds from war zones were raised when a British foreign office minister,Peter Hain, claimed in the UK parliament that a citizen of Botswana wasplaying a role in breaking sanctions against the UNITA rebels in Angola. Theman, of Irish origin, is being investigated by the Botswana police.

Tati Nickel Mining has announced that it is planning to double production atits Phoenix mine near Francistown. Rising global copper nickel prices make theinvestment of P500m appear increasingly attractive. Financing is not yet inplace and agreements on water and power supplies have to be finalised but, ifsuccessful, costs should decrease substantially. The mine will shift fromselective to bulk mining, and nickel recovery is forecast to improve by some80%, with a 90% improvement in copper recovery. The mine, which currentlyemploys about 500 people, plans to employ another 700 people if theinvestment goes ahead.

Botswana has also had to contend with the demands of other lobby groups. Atthe Convention on International Trade of Endangered Species (CITES),Botswana’s delegation had to argue against a proposal to upgrade the country’selephants to Appendix 1 of CITES, which would raise their risk profile and ban allsales of local ivory stocks. Botswana’s delegation was successful in defeating thisproposal, but was disappointed that CITES placed a two-year ban on ivory sales.Botswana has a population of 106,000 elephants, growing at an estimated 5% ayear. Conservation officials in Botswana argue that this level endangers the

Good and bad news for theivory trade

Tati Nickel expands

Stricter diamond controlsmay be enforced

24 Botswana


environment and threatens human life, and that the 1990 population of around55,000 elephants is sustainable for the country. Hence Botswana supportsmanaged culls and official auctions of ivory, the proceeds of which are placedinto a conservation fund. In 1999 CITES allowed a sale of stockpiled ivory fromBotswana, Namibia and Zimbabwe in Japan, and Botswana argues that there hasbeen no discernible increase in poaching as a result.

Agriculture

In May Botswana confirmed an outbreak of animal sleeping sickness in thenorth. The disease, spread by tsetse fly, has killed at least 21 animals. Attempts tocontrol it were hindered by heavy rains earlier this year which left large areas ofOkavango and Ngamiland inaccessible. The outbreak raises concern about thesustainability of the cattle restocking that has been carried out in the area inrecent years, after lung disease depleted stocks. Animals imported from otherareas may not have natural immunity to local diseases (such as sleeping sickness),posing risks to the long-term viability of the cattle industry in the north.

The bad news from the north comes at the end of the worst-ever year for theBotswana Meat Commission (BMC). The commission made a P17m (US$3.3m)loss in 1999/2000 as the supply of cattle fell, leaving the BMC with sparecapacity, while international prices have still not recovered from the bovinespongiform encephalopathy (BSE) scare. Although producer prices wereincreased by 10% across the board in 1999, this may not be enough toencourage increased supply, especially as producers were not paid theirstandard annual bonus this year. The situation does not look set to improve inthe near future. The national early warning unit at the Ministry of Agriculturehas produced figures showing that the number of cattle killed in the country’stwo working abattoirs was down by around 50% in February 2000 from thesame month in 1999. To date the BMC has financed deficits from reservefunds, but this is not sustainable in the long term. However, the political andcultural importance of Botswana’s meat industry suggests that the governmentwill not allow the BMC to suffer too much financial distress, even though thiswill add yet another strain to public finances.

Telecommunications

At a time when privatisation policy is being pushed through, controversy haserupted over claims that the Botswana Telecommunications Corporation (BTC)is using its monopoly on landline telecoms to build up a similar position as anInternet service provider (ISP). Other local ISPs claim that the BTC isdeliberately slow in providing them with the bandwidth and fixed lines theyneed to provide their services. They claim that the BTC’s own ISP, Botsnet,which entered the market late, receives preferential treatment. There has beenfurther disquiet because the regulator, the Botswana TelecommunicationsAuthority (BTA), has not taken action on this issue (although the BTCcomplains that the BTA is not taking action against unlicensed ISPs). Botswanaclaims to be developing a diversified economy and if projects such as the inter-

The beef industry is hit bysleeping sickness outbreak

The BMC reportsits worst-ever results

The telecommunicationsmonopoly is questioned

Botswana 25


national financial services centre (1st quarter 2000, page 20) are to succeed, afirst-class telecommunications infrastructure is vital. If the BTC hinderscompetition and the regulator does not act promptly, the risk of localtelecommunications remaining relatively undeveloped and uncompetitive willincrease.

Financial services

The Botswana stock exchange domestic companies index, which had recordedtwo years of steady gains, has slumped recently. The fall is largely because of awithdrawal of foreign funds, arising from two factors. The first is the generalturmoil that emerging markets have experienced in May, owing to concernover the pace and magnitude of future interest rate rises in the US. The second,more significant factor is the situation in Zimbabwe. This has had a directeffect, as foreign investors have questioned previous assumptions aboutstability in the region. The concomitant fall in the South Africa rand, andtherefore the pula, against the US dollar has brought negative foreign currencyreturns for foreign investors holding local stock.

RPC Data is to issue more equity to fund the acquisition of two newinformation technology companies in Botswana. RPC will issue P12.6m(US$2.3m) of stock to shareholders of the software developer, Acumen, andnearly P2bn for computer education company NIIT. The move will furtherestablish RPC as the dominant player in Botswana’s software market.

Foreign trade and payments

In March the Botswana Export Development and Investment Authority(BEDIA) announced that the Mauritian knitwear group, Floreala, will startoperations in Botswana by the end of the year. An investment of around P15m(US$2.9m) will create over 400 jobs in the production of T-shirts for export.BEDIA also claims to have had some success with Indian manufacturers, six of

Foreign investment ispicking up

Stock exchange falls afterZimbabwe contagion

RPC Data issues equity tofund acquisitions

26 Botswana


whom have acquired licences recently. Botswana’s concessional manufacturingtax rate of 15%, and its access to South Africa, the EU and the US by variouspreferential trade agreements, are the main features marketed by BEDIA.

Botswana is also trying to reassure foreign investors about its own politicalstability, at a time when investor confidence in the region is hitting a lowpoint. In May Botswana and Germany concluded an investment protectionagreement safeguarding German investors against the risk of political turmoilin Botswana.

According to recently published data in the World Bank’s Global DevelopmentFinance, total external debt stock in 1998 was US$548m, equivalent to 64% ofGNP. Of this, around 70% was owed to multilateral creditors (notably theAfrican Development Bank, the European Investment Bank and the WorldBank). Bilateral official creditors accounted for almost all of the rest. Thegovernment borrows externally on concessional terms—mainly to financeinfrastructure projects—as this remains more efficient than using its ownforeign-exchange reserves. However, because of Botswana’s relative wealth, thegovernment is finding it increasingly hard to borrow on concessional terms.With the government unlikely to borrow at commercial rates when it can drawon its own savings, total external debt is expected to fall further over thecoming years. To make it easier for local entities to borrow abroad, thegovernment will try to obtain a sovereign credit rating in 2000. If successful,some forays into international money markets can be expected, firstly fromparastatals and then from private companies.

Botswana: external debta

(US$ m unless otherwise indicated)

1994 1995 1996 1997 1998

Public & publicly guaranteed long-term debt 678 693 608 522 508 Official creditors 628 646 572 494 484 Multilateral 497 486 433 383 372 Bilateral 130 160 139 112 113 Private creditors 50 47 36 28 24

Short-term debt 11 10 6 40 40 of which: interest arrears on long-term debt 8b 6b 0 0 0

Total external debt 688 703 614 562 548

Debt service paid 93 92 152 102 76

Ratios (%)Total external debt/GNP 16.5 14.5 12.6 11.7 11.8Debt-service ratio, paidc 4.1 3.2 5.2 2.8d 2.7Short-term debt/total external debt 1.6 1.4 1.0 7.1 7.3Concessional long-term debt/long-term debt 42.6 48.3 52.5 51.6 54.0

a World Bank estimates. b These arrears are disputed by the Botswana authorities and probably reflect differences in accounting definitions.c Total debt service as a proportion of exports of goods and services. d EIU estimate.Source: World Bank, Global Development Finance.

Reassurances aboutpolitical stability are given

External debt stock falls

Lesotho 27


Lesotho

Political structure

Kingdom of Lesotho

Monarchy

Based on Roman-Dutch law

Bicameral National Assembly elected according to the terms of the 1993 constitution;80 elected members in the lower house; 33 non-elected members in the upper house(Senate), 11 of whom are nominated by the king on the advice of the prime minister,plus the 22 principal chiefs of Lesotho. The Interim Political Authority (IPA), establishedin November 1998 to oversee preparations for the next election, consists of 24 members,representing 12 political parties. Agreement has been reached for a revision to themethod of electing the lower house following the 2000 election, when 80 members willbe elected on a first-past-the-post basis, and 50 members elected by proportionalrepresentation. Subsequent elections are proposed to have a 50:50 split betweenmembers elected on the basis of first-past-the-post and proportional representation,however, following delays in holding elections, the status of this agreement becameunclear (see The political scene)

May 1998 (legislative); in May 2000 the government announced that the next electionwould be held between March and May 2001

Monarch; the succession is governed by custom; King Letsie III was sworn in onFebruary 7th 1996 and crowned on October 31st 1997

Prime minister and a 16-member cabinet, last reshuffled in August 1999

Party political organisation was legalised in May 1991. The main parties include:Lesotho Congress for Democracy (LCD, the ruling party); Basotho Congress Party (BCP);Basotho National Party (BNP); Marematlou Freedom Party (MFP); Kopanang BasothoParty (KBP); Popular Front for Democracy (PFD); Progressive National Party (PNP);Lesotho Labour Party (LLP); Communist Party of Lesotho (CPL)

Prime minister, defence & public services Pakalitha MosisiliDeputy prime minister, & minister of financeand development planning Kelebone Maope

Agriculture, co-operatives & land reclamation Vova BulaneCommunications Nyane MphafiEducation Lesao LehohlaEmployment & labour Notsi MolopoEnvironment, gender & youth Mathabiso LeponoForeign affairs Tom ThabaneHealth & social welfare Tefo MaboteIndustry, trade & marketing Mpho MalieJustice, human rights, law, constitutional

affairs & rehabilitation Shakhane Mokhehle

Local government & home affairs Mopshatla MabitleNatural resources Monyane MolelekiPrime minister’s office Sephiri MotanyaneWorks & transport Mofelehetsi Moerane

Stephen Swaray

Official name

Form of state

Legal system

National legislature

National elections

Head of state

National government

Main political parties

The government

Central Bank governor

Key ministers

28 Lesotho


Economic structure

Annual indicators

1995 1996 1997 1998 1999a

GDP at market pricesb (M m) 3,384 4,040 4,715 4,849 5,528

Real GDP growthb (%) 6.1 9.7 4.1 –8.6 4.5

Consumer price inflation (av; %) 9.2 9.3 8.5 7.8 8.7c

Population (m; mid-year) 2.03 2.08 2.13 2.20a 2.25

Exports fob (US$ m) 160 187 196 193 200

Imports fob (US$ m) 985 999 1,024 866 910

Current-account balance (US$ m) –323 –303 –269 –280 –315

Reserves excl gold (year-end; US$ m) 457 461 572 575 500c

Total external debt (US$ m) 677 670 660 692 705

External debt-service ratio, paid (%) 6.0 6.4 6.2 8.4 7.5

Migrant miners (year-end; ‘000) 103.7 101.7 95.9 80.4 68.8c

Exchange rate (av; M:US$) 3.627 4.299 4.608 5.528 5.952c

June 27th 2000 M6.81:US$1

Origins of gross domestic product 1998b % of total Components of gross domestic product 1998b % of total

Agriculture 16.6 Private consumption 111.9

Industry 37.3 Public consumption 19.4

Manufacturing 16.5 Gross domestic investment 47.9

Construction 19.1 Exports of goods & services 26.4

Services 46.1 Imports of goods & services –105.6

GDP at factor cost 100.0 GDP at market prices 100.0

Principal exports fob 1998 US$ m Principal imports cif 1995d US$ m

Manufactures 144 Capital goods 368

Food & live animals 8 Food 328

Wool & mohair 4 Fuel & energy 216

Total incl others 193 Total incl others 1,168

Main destinations of exports 1998d % of total Main origins of imports 1998d % of total

Southern African Customs Union 65.1 Southern African Customs Union 89.6

North America 33.8 Asia 6.3

EU 0.7 North America 1.7

a EIU estimates. b Fiscal years ending March 31st. c Actual. d Official estimates

Lesotho 29


Quarterly indicators

1998 1999 20002 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr

Government finance (M m)Revenue & grants 549.5 568.5 549.7 611.0 515.5 582.3 n/a n/aExpenditure & net lending 607.3 547.4 586.9 725.9 547.6 550.0 n/a n/aBalance –57.8 21.1 –37.2 –114.9 –32.1 32.3 n/a n/a

Employment, wages & pricesBasotho miners in South Africa Employed (av) 82,701 77,641 72,950 69,699 68,979 69,224 67,404 n/a Remittances (M’000) 23,589 20,549 21,775 26,151 18,163 21,275 26,394 n/aConsumer prices (1995=100) 123.1 125.2 129.1 132.1 134.1 136.8 137.8 140.3 % change, year on year 7.33 7.33 4.65 7.33 8.95 9.26 6.76 6.2

Financial indicatorsExchange rate M:US$ (av) 5.17 6.21 5.78 6.09 6.13 6.10 6.13 6.30 M:US$ (end-period) 5.87 5.87 5.86 6.19 6.04 6.01 6.15 6.56 Nominal effective (1995=100) 76.9 64.2 67.9 65.5 66.3 66.9 66.7 n/a Real effective (1995=100) 89.6 76.1 82.8 81.3 83.0 84.7 84.9 n/aInterest rates (%; av) Treasury bill 12.35 18.54 17.43 15.39 12.70 11.55 10.18 9.14 Lending 17.57 23.33 22.25 21.00 19.25 18.33 17.67 17.00M1 (end-period; M m) 822.2 844.1 971.4 973.5 980.8 908.0 943.9 982.6 % change, year on year 23.4 17.2 27.4 20.3 19.3 7.6 –2.8 0.9M2 (end-period; M m) 1,565.9 1,468.1 1,746.7 1,730.8 1,694.7 1,625.1 1,658.0 1,701.4 % change, year on year 14.7 3.4 20.5 11.8 8.2 10.7 –5.1 –1.7

Foreign trade and reservesExports fob (M m) 288.05 304.81 314.67 205.29 231.02 304.63 n/a n/aImports fob (M m) –1,399.27 –1,007.81 –1,141.58 –1,062.05 –1,305.22 –1,240.16 n/a n/aTrade balance (M m) –1,111.22 –703.00 –826.91 –856.76 –1,074.20 –935.53 n/a n/aServices balance (M m) 20.99 –10.73 –18.60 –24.61 –15.22 –17.44 n/a n/aIncome balance (M m) 324.45 363.90 342.79 378.92 339.19 359.28 n/a n/aCurrent transfers (M m) 208.49 187.30 175.60 239.58 219.34 226.45 n/a n/a SACU non-duty receipts (M m) 175.75 165.26 159.82 168.85 208.05 212.31 n/a n/aCurrent-account balance (M m) –599.27 –162.53 –327.12 –262.87 –531.19 –367.24 n/a n/aReserves excl gold (end-period; US$ m) 559.6 586.4 575.1 410.1 520.0 535.4 499.6 469.2

Sources: IMF, International Financial Statistics; Central Bank of Lesotho, Quarterly Review.

30 Lesotho


Outlook for 2000-01

Political forecast

In mid-May the government announced its intention to hold the legislativeelection in about 10-12 months’ time. This falls outside the time limit of June2000 agreed with the Commonwealth, the UN and various states of theSouthern African Development Community (SADC) in December 1999.Nonetheless, the Independent Political Authority and the leading oppositionparties have grudgingly accepted the new timetable. The main stated reason forthe latest delay—a new electoral roll needs to be prepared—follows the adviceof international experts. As such it can be accepted without appearing to be acapitulation to a unilateral government decision, and should be enough tosatisfy the international community.

The announcement of a new timetable has helped ease political tension, as hasthe appointment in April of new members of the Independent ElectoralCommission. The timetable is likely to be adhered to, as the initiative inmoving the electoral process forward is now firmly with the government, andfurther delays on its part would be damaging.

The likelihood of a referendum on the new electoral system prior to theelection has receded. However, the government has yet to make clear itsintentions regarding the electoral model that will be used. Until it does so,considerable uncertainty will remain. Mistrust of the government has beenfurther fuelled by the appointment of a commission to investigate the causesof the 1998 unrest and to identify those responsible. In such a climate, thepossibility of further—potentially violent—unrest remains very real.

The Lesotho Congress for Democracy (LCD) remains best placed to win theelection, whenever it is held. The LCD may have serious internal divisions, butit shows more discipline than its principal opponents and, bound together by adesire to retain political power, is likely to maintain this unity until theelection at least. Divisions in the other main parties remain very public. TheBasotho National Party, the leading opposition party, is particularlyhandicapped—both by a dispute between its leadership and its youth wing,and by negative perceptions surrounding its leader, a former military ruler—and is unlikely to pose much of a threat to the LCD.

The formal signing of security accords in April with other SADC members is anindication of the continued regional interest in supporting strengtheneddemocratic institutions in Lesotho. However, with the regional focus firmly onZimbabwe, foreign interest in Lesotho will remain limited unless there is areturn to violence. South Africa’s offer to pay for the costs of its militaryintervention in 1998 will help to ease the tension this caused. But withdomestic troubles threatening to spill over the border, bilateral relations areunlikely to be smooth.

Domestic politics

International relations

Election watch

Lesotho 31

EIU Country Risk Service July 2000 © The Economist Intelligence Unit Limited 2000

Economic policy outlook

Confidence in the economy is low, and restoring it will be a leading priority overthe forecast period. Measures contained in the budget for the 2000/01 fiscal year(April-March) should ensure that financial support from the IMF is forthcomingonce a nine-month staff-monitored programme is completed in September.However, there is little prospect of the full normalisation of business conditionsuntil after the elections are successfully held, which, given the new timetable, willnot be until the second half of 2001, at the earliest. The effective implementationof the privatisation programme has been a significant bright spot in the domesticeconomy, but it too may be held up by lack of business confidence—there wasonly one bid in the sale of 70% of Lesotho Telecommunications Corporation.

Economic growth is not expected to be strong enough to stem the rise inunemployment, which is already at the very high rate of around 40%. Thissituation was worsened by a further decline, in early 2000, in the number ofBasotho working as miners in South Africa. This will put increasing pressure on thegovernment to find ways to alleviate the social problems, especially poverty,arising from unemployment. The government’s resources are already fullystretched because of its commitment to provide funding to support its free primaryeducation policy. In order to meet these additional challenges it must make seriousefforts to improve revenue collection. Financial assistance from the IMF will help,but logistical problems will have to be overcome. For example, the government iscommitted to introducing value-added tax (VAT) to broaden the revenue base, butthere are concerns that the tax administration is not yet prepared to deal with this.

The policy measures announced in the 2000/01 budget, such as the intention tointroduce VAT, follow very closely the programme agreed in February with the IMF.There has been some slippage in the budget, with the forecast deficit (includinggrants) for 2000/01 rising to 3.6% of GNP, but it still represents a tightening ofpolicy compared with the previous two years (before grants). Prospects for thesuccessful completion of the nine-month programme appear to be good, althoughcareful fiscal management will be needed to avoid further resort to domesticborrowing. After this negotiations with the Fund for a more extended period offormal support, including financial resources, are expected.

Economic forecast

The government has forecast real GDP growth of 2.2% in 2000/01 (April-March)and is only expecting slight improvements in subsequent years. These growth ratesare the best that can be hoped for in the current circumstances. With furtherdelays in holding the election—and given the effect of the recent fall in the malotion business confidence—these rates might even be considered optimistic. Theimpetus for future growth will be based on the development of a competitiveexport sector. This is unlikely in the current climate. The depreciation of the

Policy trends

Fiscal policy

32 Lesotho


currency in line with the rand in the first half of 2000 will not improve exportcompetitiveness; most of Lesotho’s exports are to the Southern African CustomsUnion, where the rand is the main trading currency. Inflation fell further in thefirst quarter of 2000. Whether it remains low is highly dependent on price trendsin South Africa. Explicit targets for low inflation have been introduced in SouthAfrica, but there is a risk that the fall in the value of the rand will lead to costpressures that may push inflation upwards again.

The agreed programme for holding the election in mid-2000 (1st quarter 2000,page 26) began to unravel in mid-February when the National Assembly,dominated by the ruling Lesotho Congress for Democracy (LCD), unexpectedlyamended the required legislation. Since then, the political scene has beencharacterised by great uncertainty. In March, the upper house of parliament, theSenate, rejected the amendments. But this did little to clarify the matter:government supporters said that this rejection meant that the whole process ofdevising a format for elections had to start afresh; while opponents argued that theoriginal, unamended, proposals of the Interim Political Authority (IPA) should nowbe followed.

Criticism of the government for its role in further delaying the election has beenwidespread, both inside and outside Lesotho. However, despite intervention fromvarious international mediators the government refused to bow to pressure toreturn to the IPA’s programme. In May, following a visit by a team ofCommonwealth experts, the government announced that elections would be heldin about 10-12 months’ time. This announcement was sufficient to partly diffusetension, especially as it came before May 16th, the date when the term of the IPAwas originally scheduled to end and which opposition parties had seen as a keydeadline. The IPA accepted the proposed new schedule. In particular, it endorsedthe view that the timetable was realistic given the Commonwealth team’s keyfinding that a new voters’ roll needed to be compiled, making the holding ofelections before March 2001 unrealistic. The opposition Basotho Congress Party(BCP) and Basotho National Party (BNP) also accepted the proposal, althoughboth, and in particular the BNP, continued to express anger about thegovernment’s stance.

The announcement of a timetable for holding the election has gone some way toreducing uncertainty and provides hope that the political process is now back ontrack. The government made the need to strengthen democracy in the country oneof the main themes of the budget speech, presented in March (see Economic policyand the economy), which also contributed to this feeling of hope. The budgetincluded an explicit commitment to consult with opposition parties and otherbodies with a view to finding lasting solutions to political problems. But muchremains to be settled. Most importantly, there is still no agreement on the electoralmodel to be used. The IPA urged that this be clarified as a matter of urgency so thatthe electoral process can proceed smoothly. The BCP, while supporting the revisedtimetable, explicitly restated its support for the original model proposed by the

Schedule for new electionsis agreed

Much uncertaintyremains

Lesotho 33


IPA. The idea of holding a referendum prior to the elections to ratify the newelectoral model seems to be receding. Given the time needed to prepare the newelectoral roll, it would seem very difficult to hold both a referendum and anelection within the proposed timeframe.

There have also been some reports that the government wishes to use theintroduction of a new electoral model to abolish the Senate. The case for this isthat the upper house was established (after the 1990 review of the constitution) inorder to include in parliament views that would not otherwise be heard. But with asystem of partial proportional representation being proposed for electing theNational Assembly, it is argued that such inclusiveness will make the Senateunnecessary. A major consequence of such a move would be a reduction in thepowers of the traditional chiefs holding two-thirds of the Senate’s 33 seats. This isseen by some observers to be in line with the aims of the LCD, whose foundingleader, the late Ntsu Mokhehle, believed that the influence of these chiefs and, byextension, the Monarchy should be reduced. Given the strong support thattraditional leadership structures continue to enjoy, abolition of the Senate wouldbe controversial. If it were to go ahead, the king’s powers of patronage would alsobe reduced, as he appoints the Senate’s other 11 members, although this is doneafter consultations that include the various political parties.

One important consequence of these events is that the government has wrestedthe initiative from the IPA and is now clearly in charge of the electoral process. TheIPA will continue to exist beyond its original May 16th deadline, as it is supposedto function until the day after the election takes place, but it is now in theweakened position of reacting to government proposals rather than making itsown. Its muted response to the announcement of the new electoral schedule—itonly called on the government to clarify the electoral process—may reflect this.Achieving this balance seems to have been one of the government’s majorobjectives. It has emphasised several times that the IPA is not a law-making bodyand, in fact, owes its existence to laws that the government, through parliament,can itself amend or abolish. One positive consequence of this is that any furtherdelays in holding the elections are unlikely. The new timetable is the government’stimetable, so any subsequent postponements would damage its credibility far morethan the actions that caused the breakdown of the agreement with the IPA.

The appointment in April of new commissioners for the Independent ElectoralCommission (IEC) should help smooth the way for the new election. The previouscommissioners had been removed in January, following allegations of corruptionarising from the 1998 elections. The new chairman of the IEC is LesheleThoahlane, a former minister of finance and most recently the executive secretaryof the Harare-based Africa Capacity Building Foundation. His fellow commissionersare Mokhele Likate and Mafole Sematlane, both private businessmen with careersthat have included involvement in the public sector. The appointment of aneffective IEC is important for the proposed timetable for new elections as the IEC is

Doubts arise over thefuture of the Senate

The LCD has the initiative

New IEC commissionersare appointed

34 Lesotho


expected to be heavily involved in drawing up the new electoral roll. The usualquestions have been asked about whether the commissioners will be able tomaintain their independence, but both the IPA and the main political parties havequickly and warmly endorsed the appointments.

Opposition to the government’s electoral plans has taken several forms. As well asthe opposition political parties, in April the self-styled “parliament of the people”,consisting of around 200 opposition figures, met in Maseru and called for the IPAto take steps to dissolve parliament. More worryingly, there have been repeatedsuggestions that violent unrest may resume if rapid progress is not made towardsholding the election. This culminated in May with calls for a mass work boycott,accompanied by thinly veiled threats of violence against those who ignored theboycott, especially foreign businesses. In response security was stepped up both inLesotho and in bordering areas of South Africa. Despite this, many businesseschose to remain closed rather than risk further violence, a clear demonstration ofthe continuing lack of confidence in the security situation in the country.

The extent to which the opposition parties are involved in stoking such unrest isunclear. The major parties officially distanced themselves from the May boycottcall. However, calls from the supposed boycott ringleader to a local radio stationsuggested covert involvement by the youth leagues of several opposition groups,including both the BNP and the BCP. The opposition, particularly the BNP, areknown to seek leverage from the potential for unrest. In March remarks made bythe BNP general secretary, Majara Molapo, clearly suggested that the party wouldsupport civil disobedience if elections were not held by mid-May, while the partyleader, Justin Lekhanya, has also talked of the unrest of 1998 reoccurring.

In a surprise move, the government has established a commission of inquiry toinvestigate the unrest of 1998. The commission, which started work in late April, iscomprised of the three judges who make up the country’s court of appeal, and wasgiven the task not only of establishing the causes of the unrest but also ofidentifying those responsible. It is puzzling that the government chose to take sucha step at this time. The stated reasons are that such an inquiry will promote peace,stability, and the rule of law. Inevitably the opposition parties saw it as anaggressive action, designed to undermine progress towards free and fair elections.Ts’eliso Makhakhe, the leader of the BCP, said that his party would not co-operatewith the commission unless forced to do so. This was before the new timetable forthe election was announced, but there are still fears that the commission’s workmay give the government reason to further postpone or interfere with the election.

After more than two years and many delays, the trial of police officers chargedwith subversion and high treason is at last drawing to a close. After a final delay toallow Justice Baptista Molai to finishing writing the judgement, the verdict wasscheduled to be announced on May 30th, but was adjourned.

The threat of civil unrestremains

Commission to investigate1998 unrest appointed

Marathon trial drawsto a close

Lesotho 35


In the build up to elections, attention will focus on the parties’ abilities to dealwith internal divisions. Of the country’s three main parties, the LCD still seems tobe the most disciplined. The spill-over of internal divisions into the public viewhas largely been avoided. It seems this discipline will be maintained so as not tojeopardise the party’s electoral prospects, which are helped by the advantage ofincumbency and a faithful support base in rural areas. This is in stark contrast toboth the BCP and BNP. The factional infighting within the BCP, based mainly oncompeting personalities, has been highly public. The BNP should be strong, as ithas the most extensive organisation of all the parties, considerable financialbacking, and, like the LCD, a substantial core following. However, there remains abig divide between the party leadership and the youth league; the youth leader,Thetsele Maseribane, was suspended from all party activities for 12 months earlierin the year. The leadership of Mr Lekhanya may also be a hindrance, as votersremember the military coup he led in 1986, and his opponents in the 1999leadership elections have yet to be reconciled with him.

In May the trial of Masupha Sole opened. The former executive director of theLesotho Highlands Development Authority, he is charged with corrupt practices inthe award of tenders associated with the project (4th quarter 1999, page 25). Alsoaccused are several major international construction companies. The stakes arevery high. The accused wish to maintain their reputation within the industry,while the Lesotho government and the World Bank, which was heavily involved inthe financing of the project, are publicly committed to demonstrating that theywill not tolerate corruption.

The regional spotlight has remained on Zimbabwe, but the Southern AfricanDevelopment Community (SADC) is continuing to support the peaceful resolutionof political problems in Lesotho. In April representatives of the troika of SADCstates that are guarantors of the process—South Africa, Botswana and Zimbabwe—visited Maseru to sign security accords with the Lesotho government. Theseaccords formalised arrangements under which the Lesotho Defence Force has beenreceiving assistance aimed at increasing its professionalism. The Lesothogovernment described the agreements as a vote of confidence, but other observerswere quick to suggest that the troika had used the opportunity to place additionalpressure on the government to move, without further delay, towards holdingelections. South Africa has now offered to meet the costs of its militaryintervention in 1998. This reverses its earlier stated intention of billing the Lesothogovernment for the costs, estimated at M57m (US$8m). This gesture should help todiffuse tension and the legacy of bitterness that has lingered after the intervention.

All major parties faceinternal problems

LHDA corruption trialbegins

SADC maintains interest

36 Lesotho


Economic policy and the economy

At the end of March the minister of finance, Kelebone Maope, announced hisbudget proposals for the 2000/01 financial year (April-March). The budget speechwas much earlier than in 1999, when it was not presented until June, but it wasstill not in line with the government’s intended date of January. The delay wasattributed in part to exceptional factors, including the work needed to prepare forpossible Y2K compliance problems. However, some ministries had also contributedto the delay by being late with their submissions.

Highlights of the 2000 budget speech

Consolidating democracy

• M130m set aside for the holding of a general election

Laying the basis for strong economic growth

• Accelerate the reform of the utilities sector

• Improve domestic financial intermediation (Central Bank of Lesotho to announce newpolicies by September 2000)

• Improve the government revenue base, with the introduction of value-added tax (VAT),increases in the oil levy and administrative fees, and improved tax administration

• Maintain control of government expenditure while committing to increasing expenditureon health and education (education allocated largest share—22 %—of recurrentexpenditure)

Addressing the needs of the poor

• Lesotho Fund for Community Development (LFCD) restructured and supplemented bypublic works programmes in rural areas

The speech, which was generally well received, was particularly praised for itsclarity. Mr Maope, presenting his first budget speech, was very candid in admittingthat economic growth had faltered but must be resumed if serious progress is goingto be made in dealing with the problems of unemployment, which he estimated at40-45%, and poverty. The emphasis on the need for poverty reduction wasappropriate, coming at a time when an independent report on poverty in Lesotho,conducted by a local company, Sechaba Consultants, has concluded that despiterapid economic growth during much of the 1990s, the poor had benefited little, ifat all. Poverty in the mountain areas is said to have increased despite improvedaccess to social services. The principal causes identified are rising unemploymentand declining agricultural conditions.

Budget speech presented

Lesotho 37


Lesotho: budget(M m)

1999/2000 2000/01 2000/01Actual Budget IMF programme

Revenue 2,198.5 2,470.3 2,286.4 of which: customs revenue 1,183.1 1,123.2 1,126.0 non-customs tax 641.7 759.1 749.4 non-tax revenue 364.7 585.5 411.0

Grants 150.0 280.7 235.0

Expenditure 3,234.4 3,007.0 2,613.6 Current 2,179.7 2,365.1 2,103.6 Capital and net lending 1,054.7 641.9 510.0

Overall balance –885.9 –255.5 –92.2

Overall balance excluding exceptional items 26.1 –125.5 67.8

Domestic financing 916.9 279.5 75.5

Sources: Lesotho Budget Speech 2000; IMF.

The speech did not refer directly to the programme of economic and financialpolicies for January-September 2000, announced in February, to be monitored bythe IMF. However, it clearly reflected the priorities set out in the programme (April2000, page 35). This is hardly surprising, given that the government hopes thenine-month programme will lead to a sustained period of more formalised supportfrom the Fund, including access to financial resources.

Despite the budget coming shortly after the announcement of the agreement of aprogramme with the IMF, there were some differences between the twodocuments. On the positive side, revenue was forecast to be slightly higher,mainly owing to greater than expected non-tax revenue. But increasedexpenditure was also projected, lifting the deficit to M255.5m, the equivalent of3.6% of GNP, compared with a deficit of M92.2m agreed with the Fund. This is asignificant slippage, especially as the exceptional item covering election costs islower than in the programme. A deficit was forecast for the budget, excludingexceptional items rather than a modest surplus. Moreover, a greater proportion ofthe financing of the deficit is to fall on the domestic financial sector, given thatnet borrowing from abroad is lower than planned. This raises doubts aboutwhether the government will be able to keep to its performance benchmark of nonet borrowing from the domestic financial sector. However, the IMF programmecovers only the first half of the financial year, so the government should be able toplan its spending outlays in a way that meets its targets. This is particularly likelyas the main expenditure on the election will not come until towards the end ofthe financial year. The budget is also based on a sharp fall in capital spending,from M1.1bn in 1999/2000 to M642m. However, much of the 1999/2000 figurewas due to net lending of P576m, arising from the recapitalisation of the LesothoBank prior to its privatisation.

Broadly in line with IMFbenchmarks

Forecast deficit is increased

38 Lesotho


The budget speech confirmed the planned introduction of value-added tax (VAT),with the legislation soon to be put before parliament. It seems that thegovernment is planning to introduce the new tax during the 2000/01 financialyear. However, there is concern that this schedule is too tight. The government hasemphasised the self-policing nature of VAT, but it still requires understanding andco-operation between the tax administration and business community to workeffectively. The budget speech itself described tax administration in Lesotho asbeing characterised by “extreme weakness”. Smaller businesses in particular mayface problems of compliance. By way of comparison, in Botswana, which is alsointending to introduce VAT, a programme of more than two years was allowedfrom the announcement of its introduction—this includes a substantial periodbetween the passing of legislation and the actual introduction of the tax.

In addition to setting out economic priorities, the budget speech emphasised thegovernment’s commitment to strengthening democracy. This included a specificbudgetary allocation of M130m to fund the next general election, over five timesthe M20.3m spent on the election in 1998. This increase was doubtless intended tobolster the government’s democratic credentials, but the large budgetary allocationwas criticised in some quarters as being disproportionate, and likely to be used tofund costly political gimmicks. This is a one-off expense, but it is more than threetimes the M40m allocated to the Lesotho Fund for Community Development, themain vehicle for poverty alleviation.

The economy is still very much in the doldrums. There are some indications thatgrowth resumed in 1999, but the signals are mixed and any recovery is still veryfragile. The reaction in May to calls for a national work boycott in protest at thedelays in holding the election—most businesses closed down despite the enhancedsecurity levels—demonstrates the continuing general lack of confidence (see Thepolitical scene). Foreign-owned businesses continue to be the target of variousthreats, which does not help to encourage the foreign investment the governmentsees as essential to stimulate the economy. Economic recovery is contingent on thesuccessful holding of elections, and as such cannot be expected until the secondhalf of 2001, at the earliest.

The government has forecast real GDP growth of 2.2% in 2000/01, with only verymodest increases in subsequent years, while Mr Maope has predicted a growth rateof 1-2%. Both these forecasts are well below the sustained real annual growth of8-10% that the government sees as necessary if progress is to be made in reducingunemployment. The government estimates that 40,000 net new jobs per year areneeded. The long-term fall in the number of Basotho mineworkers in South Africahas further increased unemployment, and although numbers seemed to havestabilised during 1999 it has been reported that a further 10,000 jobs were lost inthe first few months of 2000. According to the Mineworkers’ DevelopmentAuthority, agreement had been reached that job cuts would not occur during 2000but many miners have been tempted into accepting the severance packages thatremain on offer.

The economy is still besetwith problems

Unemployment will tocontinue to rise

Lesotho 39


Unemployment will therefore continue to increase, at least in the short term, andthis will add to social problems. At the same time low growth also means that thegovernment will have few resources to call on to alleviate the situation. Thisreinforces the need for revenue collection to be enhanced as a matter of urgency.The government is already committed to increasing allocations to social spending.For instance, the introduction of free primary schooling for new standard one(first-year) pupils, from January 2000, led to an increase of M41m (1.7% of totalrecurrent expenditure) in the education budget. Similar additions (in real terms)must be expected over the next six years as the policy is gradually extended tocover all primary classes. The government is also committed to increasingspending on health in real terms.

In the first quarter of 2000 inflation was 6.2%. This was 0.7 percentage points lowerthan the rate in the previous quarter, which was itself much lower than in the restof 1999. The sharp fall in inflation is mainly a reflection of a slow-down in foodprice rises. Price movements in South Africa will largely be determined by theextent to which this lower rate of inflation will be maintained. South Africaninflation has remained low, but there is concern that the depreciation of the rand in2000—the rand has fallen from R6.15:US$ at the end of 1999 to R6.81:US$ on June27th—may have an adverse effect on inflation, as the maloti is tied to the rand.

The continued smooth implementation of the privatisation programme remains abright spot in Lesotho’s economic performance. The commitment, as part of theprogramme agreed with the IMF, to bring the Lesotho TelecommunicationsCorporation (LTC) to the point of sale by the end of June remains on target. Thedate for the submission of final bids for 70% of LTC was delayed slightly, until thebeginning of May, to allow for additional information to be provided to potentialbidders. By this time only one of the three pre-qualified investors had in factsubmitted a bid. This was Mountain Kingdom Communications, a consortiumconsisting of two South African companies and Mauritius Telecom. Before it is

Inflation falls, but maygrow to a higher rate

Privatisation on track

40 Lesotho


announced whether the bid is acceptable, it is to be subject to scrutiny, withtechnical assistance being provided by Pricewaterhouse Coopers. The fact that onlyone bid was received may be a further sign that investors have little confidence inthe economy—the two investors that did not bid were dominated by non-regionalinterests.

In mid-April bids were opened for the 12% stake held by the state in VodacomLesotho. Three bids were received from a short list of seven groups, and these arebeing evaluated according to both the price of the bid and the intended level ofBasotho participation. The Lesotho Privatisation Unit has also invited interest inmanaging a unit trust, which is to be a vehicle for encouraging Basotho ownershipof privatised enterprises.

In 1999/2000 the balance of payments deteriorated sharply. For the first time inmore than a decade, foreign-exchange reserves were drawn down to financeimports. In the nine months to December 1999, reserves declined by M420m(US$70m). This reflects the unrest of 1998, which was followed by both a slump inexports and a surge in imports as destroyed property was rebuilt and businessesrestocked.

The fall in the maloti will have little effect on the balance of payments. Althoughthe domestic currency value of exports to the United States—which over the pastfew years have accounted for over one-third of total exports—will be increased, thecost of imports will also rise. Because the fall in the currency is due in large part toinstability in the region, notably the pre-election unrest in Zimbabwe, it will causefurther harm to business confidence.

According to the latest available data from the World Bank’s Global DevelopmentFinance, total external debt stock in 1998 was US$692.1m, equivalent to 64.7% ofGNP. Despite Lesotho’s rising indebtedness, the debt-service ratio, at 8.4% in 1998,remains low and is expected to fall in future. Concessional lending in 1998

External debt has increased

Balance of paymentsdeteriorates

Lesotho 41


continued to make up almost 70% of total long-term debt. Average terms have,however, been hardening as a result of increasing recourse to IMF facilities. As partof the Fund-monitored programme in 2000, there is to be no further borrowing onnon-concessional terms, except for some related to the operation of the LesothoHighlands Water Development Project.

Lesotho: external debt(US$ m unless otherwise indicated)

1994 1995 1996 1997 1998

Public & publicly guaranteed long-term debta 571.8 630.7 627.9 624.2 660.6 Official creditors 554.5 602.7 593.8 580.5 605.7 Multilateral 429.1 466.0 471.6 467.9 498.4 Bilateral 125.4 136.7 122.2 112.6 107.2 Private creditors 17.3 28.0 34.1 43.7 55.0 of which: commercial banks 2.8 14.9 22.8 33.4 44.5

Short-term debt 7.4 7.9 8.0 7.9 7.9

Use of IMF credit 40.3 38.4 33.8 27.5 23.6

Total external debt 619.5 677.0 669.7 659.6 692.1

Debt service 27.7 37.0 32.9 40.8 45.7

Ratios (%)Total external debt/GNP 53.8 53.7 52.5 51.9 64.7Debt-service ratio, paidb 5.4 6.0 5.4 6.2 8.4Short-term debt/total external debt 1.2 1.2 1.2 1.2 1.1Concessional loansa/total long-term debt 71.0 69.3 69.4 69.1 69.9

a Maturity of over one year. b Total debt service as a proportion of exports of goods and services.Source: World Bank, Global Development Finance.

Documents

Botswana Lesotho - iuj.ac.jp · updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising