The UNCTAD Investment Policy Review (IPR) of Botswana, published in 2003, analysed the legal and institutional framework for investment.

It made concrete policy recommendations to improve the general business environment and maximize the benefits from foreign direct investment (FDI), in line with Botswana’s national development objectives.

The IPR also proposed concrete elements for a coherent FDI strategy rooted in the investment attractiveness of the country. These included encouraging the development of a competitive local private sector, strengthening human resources and ensuring a proactive and targeted approach to investment promotion to support economic diversification and sustainable development.

In 2015, the Government requested UNCTAD assistance in preparing a report on the implementation of the IPR recommendations. A fact-finding mission took place in April 2016 to complement desk research undertaken in Geneva, Switzerland.

Key economic and foreign direct investment trends

More than 10 years after the publication of the IPR, Botswana maintains its reputation as a development success story, with robust gross domestic product (GDP) growth averaging 6.6 percent between 2010 and 2014, solid governance, sound macroeconomic and fiscal management, a generally positive and open investment climate, and a strong track record in attracting FDI. Major reforms have been undertaken in line with the IPR recommendations, including the establishment of a well-functioning competition authority and fully-fledged investment promotion agency – the Botswana Trade and Investment Centre (BITC). Other landmark reforms, including streamlining business permits or reforming the land administration, are ongoing, as discussed in more detail in this report.

Diversification remains a primary economic development objective, as reflected in the Government’s short- to long-term strategies between 2010 and 2016. Since the IPR, progress has been achieved towards that goal, and FDI has played a key in it. For instance, the share of mining in GDP decreased from over one third of GDP in 2003 to about 18 percent in 2015. The contribution of the services sector to GDP has increased, particularly in those activities led by FDI, such as trade, hotel and restaurants as well as banks, insurance and business services.

The country’s impressive economic accomplishments, however, contrast with its key social and economic development indicators, which continue to lag behind other countries in the same income group. Also, the external aspect of diversification, i.e. seeking new sources of sustainable foreign exchange earnings beyond diamonds, has proven difficult to achieve. Since 2003, Botswana has had the third highest export product concentration in Africa, behind Angola and Guinea-Bissau. The contribution of diamonds to exports stood at over 85 percent at the end of 2014, slightly higher than the 80 percent registered in 2000, a figure largely unchanged since 1990. The country’s over-reliance on the mining was revealed again in 2015, when GDP contracted by 0.3 percent, in response to a lower demand for diamonds.

In terms of FDI attraction, inflows have increased by almost tenfold from an average of $72 million per year in 1996-2000 to $633 million in 2011-2015. FDI stock has more than doubled since the completion of the IPR, reaching $4.8 billion in 2015. This, however, is largely the result of improved demand and prices of diamonds in two peak years (2010 and 2011). Since then, volatility has increased, due to global economic weakness and depressed diamond prices.

Botswana’s strong track record in attracting FDI is particularly evident in comparative terms. Since 2006, FDI inflows per capita, as well as relative to GDP and gross fixed capital formation (GFCF), have consistently stood above the average for the countries in the Southern African Development Community or for the group of high-income developing countries. They were also well above the average of the Group of 20 countries in 2011-2015.

The composition of FDI has, however, not changed significantly since the completion of the IPR. Over 70 percent of total inflows target mining activities, and just a few source countries dominate both in terms of inflows and stock, including Australia, Canada, Luxembourg and South Africa. Nevertheless, other activities have become more attractive to investors since the IPR, including finance as well as communication, real estate, and hotels and tourism.

Summary of main findings

Significant progress in implementing the recommendations of the IPR was recorded, in particular in the following areas:

• FDI entry. An investment code, which would have represented a significant tightening of the FDI regime, was scheduled for adoption at the time of the IPR. The proposed code sought to introduce several new general restrictions on the entry of FDI, including prohibiting projects below a certain size. The Government’s objectives behind the code were to attract only serious and bona fide foreign investors, curb the entry of economic refugees who may take away jobs from citizens and protect small local investors and, at the same time, open investment opportunities for them. The IPR assessed that the adoption of the code would be counterproductive to achieving the stated objectives and detrimental to the diversification of the economy. The code was abandoned and a negative list approach, including those activities reserved for nationals of Botswana was retained, as recommended in the IPR.

• Investment promotion agency. BITC was established with a mandate that encompasses investment attraction, export promotion and development, including the management of the national brand – Go Botswana. As recommended in the IPR, it engages in proactive and selective investor targeting based on research aimed at identifying growth sectors in the economy. In 2014, it set up the Business Facilitation Services Centre, which offers a range of services to investors and undertakes investor aftercare activities. BITC has representations abroad and works closely with the country’s foreign diplomatic missions. It has developed an advocacy framework to push forward key recommendations to improve the investment climate. The work of BITC is regularly evaluated on the basis of performance targets. Its latest annual report states that the BITC was responsible for the attraction of over $135 million of FDI, the generation of over $126 million in business expansion and the creation of 3,000 jobs in 2014-15.

• Competition. The Competition Authority of Botswana has been operative for several years. It monitors, controls and prohibits anticompetitive trade or business practices in the economy. In 2014-2015, it investigated over 30 merger and acquisition cases, many in the mining and retail sectors. Its latest annual report estimated that the Authority facilitated the injection of over $13 million into existing businesses.

• Tax regime. Botswana maintained a competitive tax regime across all sectors, as recommended in the IPR. The general company tax rate was revised from 25 percent to 22 percent. The tax regime remains transparent and relatively easy to comply with. A proliferation of special tax regimes has so far been avoided, with only two special regimes aimed at stimulating activities in finance and manufacturing having been established.