Financial Sector Adds Sparkle to Economy

Global Finance, Sep 2004 by Fittipaldi, Santiago

Botswana is betting on its financial sector to diversify the economy.

Since gaining independence from Britain in 1966, Botswana transformed itself from one of the world's poorest countries into a middleincome emerging market. The southern African nation's 9% average annual growth over the past three decades gained it the continent's highest sovereign credit ratings (A by Moody's and AA by Standard & Poor's). Yet with an economy overly dependent on diamond exports, the government has embarked on a diversification plan that includes turning Botswana into a regional financial hub.

The government has tried its hand at diversification in the past, but several factors are lending recent efforts a greater sense of urgency. Diamond production, which accounts for some 80% of the value of Botswanan exports and is by far the government's main revenue source, appears to be peaking. Debswana, the local mining company jointly owned by IJe Beers and the government, is under pressure to find new diamond deposits.

Labor issues are another major concern. Unemployment is near 16%, and an HIV/AIDS epidemic has infected 38.5% of the population-the world's highest infection rate, affecting mainly people in the prime 15-40 age range. This increases the cost of employee benefits, boosts absenteeism, depletes the workforce, drains public resources and cuts household income. A mid-year economic review by Stanbic Bank, released in June, voiced optimism over Botswana's prospects, however:"The improved global economic outlook, the 7.5% devaluation of the Botswana pula (BWP) in February and the hike in rough diamond prices by 8.5% so far this year by the Diamond Trading Company should result in a welcome boost to mining value added in 2004-2005," the report said. It went on to predict that mining sector output will also benefit from the Mupane gold mine, which is expected to produce its first gold later this year. Copper and nickel mining also contribute to sector revenues. At the same time, organizations such as the Bill and Melinda Gates Foundation, drug maker Merck and the US government are trying to help fight the AIDS/HIV epidemic with the ahn that antiretroviral drugs will become available to all who need them within five years.

New Ideas for New Growth

The government is also taking steps to develop new revenue sources. Botswana's Ninth National Development Plan for 2003-2009, which focuses on diversifying the economy away from mineral production, targets the financial sector and tourism as key growth areas. As part of this plan, the government has created the International Financial Services Center (IFSC), a legal mechanism that grants financial institutions and rela ted companies such benefits as a maximum 15% tax rate through 2020 and an exemption from local withholding taxes. In return, companies must commit to increasing employment, transferring know-how to local workers and proving they will generally benefit the local economy. Certified companies can set up shop anywhere in the country, although BIFM, a large local pension fund manager, is developing an office complex in Gaborone to house IFSC firms. There are plans for other developers to establish similar complexes.

The scheme is available only to foreign companies, but a recent amendment to the income tax code allows IFSC companies to conduct business with related local parties. More than 20 companies, including Barclays Africa Finance and Aon Risk Management Services, have received IFSC certification. Regional banks, fund managers, a credit rating agency, investment management firms, hedge funds and software companies are among them, while a major business process outsourcing call center and a German telecom firm are said to be engaged in a site selection process.

Botswanan President Festus Mogae says the fundamental aim of the IFSC initiative is to establish in Botswana a "world-class hub for cross-border financial services with a view to creating job opportunities for the increasing flow of educated graduates from our educational institutions, developing new skills and technologies, and creating linkages with major institutions in this globally traded business."

Lipalesa Siwawa, CEO of Capital Securities, a Botswana-based stock brokerage house, says, "What needs to happen in order to attract even more companies is for government institutions to have the same mindsets as the companies coming to the IFSC, and they must also have systems in place to match those of the companies coming in."

According to Letsebe Scjoe, marketing executive for the IFSC in Gaborone, the government is already addressing these issues. "The government is formulating a national ICT policy, among various other aims, to establish a leading-edge legal and regulatory environment to enable data protection and provide cyber security" says Sejoe, who adds that the ICT pokey also seeks to pave the way for telecom sector liberalization: "More recently, the government invested significantly on upgrading the telecom infrastructure."