Budget speech 2010 Economic outlook Presentation to Debswana – Jwaneng February 24, 2010 Bogolo Kenewendo Econsult Botswana

Outline Global economy: growth & developments Botswana Economy: Economic Output Sector Growth Budget: responses and economic outlook Fiscal policy Other policy responses Botswana outlook Outline

Four quarters of negative growth, with total decline in GDP of: USA – 3.6% Euro zone – 5.1% Japan – 6.2% Three year growth (2008- 10): USA +1.5% Euro zone –2.0% Japan – 4.0% Global growth slowdown – worse in advanced economies – but recovery well under way

Botswana Economy

Budget Theme: Transforming our economy post the global crisis Identifying new opportunities Finding additional sources of govt. rev Programs prioritization Every project must pay for itself: future and current benefits Restoring sustainability in public finances Reduce risk of too much debt Exercise caution in use of reserves & borrowing Budget Theme: Transforming our economy post the global crisis

Real Economic Output Deep fall in mining sector Healthy growth in non-mining sector - driven by govt Some diversification Real Economic Output

Sector growth: export sectors hard hit

Policy Responses & Economic Outlook BUDGET Policy Responses & Economic Outlook

Fiscal Policy Budget surpluses between 04 till o8 then deficit Steady decline in revenue Managing expenditure: modest cut in 2010/11, more to come Fiscal Policy

Deficit Deficit Rule of thumb: 3% of GDP Deficit of 3-5% of GDP is a criteria for most monetary union convergence e.g. SADC Deficit of 12% of GDP is unsustainable Deficit

Expenditure Sharp increase in development spending in recent years But recurrent spending makes up majority of total Both need to be cut for sustainability Expenditure

Sources of revenue

Govt. Net Financial Position Fast growth in net financial assets (savings minus debt) between 06 & 09 Deficit in 08/09 led to a decline Projected large deficits in 2009/10 & 2010/11 will consume much of what is left Credit rating downgrade is direct result Govt. Net Financial Position

Tax increase 2% VAT increase VAT still low by regional standards Reflects govt’s need for other sources of revenue But will cut real household income, depressed consumer spending Headline corporate tax still the same; effective rate increased Medium term structural change – more reliance on taxes on expenditure and income Tax increase

Deficit problem reflects medium-term structural change Accentuated by global crisis – but not caused by it Global recovery will not remove need for budget adjustment Govt spending must be cut in real terms, following declining revenue trends Otherwise debt will become unsustainable Greater economic efficiency in spending needed Improved planning and budgeting Key Budget Issues

Outlook - Botswana Speed and stability of diamond market recovery: promising but will take several years with slow US recovery Other mining/commodities prospecting/project development now recovering (China demand) Non-mining export sector (e.g. textiles, tourism) impact of global recession still being felt Economic recovery in SA lagging global emerging markets not supportive for Botswana Overall GDP growth likely to bounce back as diamond mining recovers Non-mining growth likely to decline: Consumer spending squeezed by tax increases, debt & declining real incomes Slowdown in government spending But helped by lower interest rates Concern about unemployment No major redundancies But few new jobs being created Outlook - Botswana

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