Burns: I believe that's within the realm of possibility. We believe the Botswana economy contracted by about eight percent last year and even if it grows by five percent this year, it will still be below what we saw before 2008 and thus the social issues like unemployment and spare capacity in industry will continue. Without demand, the gap between what the country is producing and what it could be producing will continue growing.

However, the most important factor is the inventory cycle. During a recession, a firm may reduce production and pull down on its inventories, meaning that levels of activity fall even below demand. When it gets to a situation where that uncertainty is better and firms are seeing improvement in demand even if it's not rapid, the firm will have to start up production and restock as the levels of inventory will be quite low.

For example, diamond production could be growing more rapidly than underlying demand. Thus, for 2010, growth could reach five percent, but for 2011, the inventory cycle drops out of the system and firms peg production based on underlying demand.
Mmegi: Botswana expects to run a P12.1 billion deficit for 2010/11, having financed a P13.5 billion deficit in the 2009/10 budget. However, the government expects to balance its budget by 2013. In your opinion, looking at the various internal and exogenous factors, is this feasible?

Burns: When an economy faces a sharp slowdown, government revenues drop and deficits rise, and that has happened in Botswana. Botswana has been very lucky: the government's finances were in such good condition that they were able to maintain spending levels and were also able to finance the deficit. Many other countries did not and don't have that possibility. For them, their governments were forced to cut spending and thus worsen the problem.

Botswana has had a very positive financial position that has helped the country smooth through the global recession. However, maintaining a high deficit is not sustainable and part of the answer will be growth of output.  There will also be a need to step back on government spending. Thus, I believe, it was necessary for the government to run deficits and it is possible for the budget to be balanced by 2013.

Mmegi: With the government expecting to finance part of the 2010/11 deficit from local borrowing, what would you recommend Botswana do to lower the cost of this anticipated capital.

Burns:The cost of borrowing internationally or locally is a function of the efficiency of the market - risk factors, the amount of overall debt the country is carrying, future revenue prospects and a subjective evaluation of the macro-economic stability. Botswana is doing well in most of that and on that basis I would expect that there's not a lot you can do to lower the borrowing costs because they are close to the least the government can secure capital for. The trick is not to accumulate too much debt so that the favourable balance of debt to GDP remains healthy.

Mmegi: Economists and the private sector have raised concern that the government's move to finance the deficit partly from the local capital markets could crowd out the private sector, thus curtailing growth in the short to medium-term. Your opinion?

Burns: Any time the government goes to market, it is competing for funds with other people. If it goes in to finance its deficit, it will crowd out other players. How serious this will be is a question for a lot of debate. For a small country like Botswana, the international capital market dwarfs - by a big margin - the amount that the government wants.

But domestically, it is a more difficult question to answer. You are generally trading off between short-term crowding out and the deepening of the domestic capital market, which is very positive. Many other developing markets do not have bond markets. Thus, the development of a domestic bond market can be an important long-term development tool.

Mmegi: Given that Botswana's economy is powered by investment from companies that are frequently funded in international capital markets, what challenges do you expect for the country with the anticipated tightening of international capital markets in 2011 and beyond?

Burns: As a result of the tightened financial conditions globally, the capacity of investors to finance projects will be constrained. That being said, however, the attractiveness of the resources here will be a major drawcard for investors as the returns will still be attractive.

The recovery in global activity is positive and we expect that GDP growth globally will grow by between 2 and 2.7 percent this year. Global trade declined by 14 percent last year and it is expected to recover this year. The issue is whether the level of demand will be as much as it was in 2008 and it is already clear that it will not, even by 2011. This is going to be a period of adjustment globally and also for Botswana.

Mmegi: The World Bank in Botswana is in the process of reviewing public spending with a view to providing some form of assistance in the national budget- making process. Please shed more light on this.

Burns: The public spending review is an exercise that has been done and is ongoing in every country where the World Bank maintains an office; it's not targeting Botswana alone.

The idea is to look at how the long-term budgeting process is done and see if there are ways that Botswana can learn from the experiences of other countries to conduct this process in a more efficient way and ensure minimal surprises.  Overall, it is about providing technical assistance to the government and to help them improve the efficiency of their budgeting processes.