ECONOMIC ENVIRONMENT

From an international market perspective, the year started and ended broadly in a similar fashion. The optimism surrounding global economic recovery and vaccination success contrasted with the policy error fears and the threat of new COVID- 19 variants. In the first half of the year, successful vaccine roll- outs paved the way for the reopening of developed economies against the threat of the new Delta variant which was first identified in India in December 2020. Data by and large confirmed a robust pickup in global economic activity, with accompanying inflationary pressures that stoked market fears for an earlier than expected monetary policy tightening. Overall, the level of optimism drove commodity and risky asset prices higher in the first half of the year.

In the second half of the year, although strong corporate earnings initially supported markets, this was overshadowed by near- term concerns around the spread of the new Delta variant, supply chain disruptions and ongoing uncertainty in emerging markets, primarily in China. Most developed countries, having fully vaccinated around 75% of their populations, were able to allow the lifting of many restrictions on travel and other activities. In November, the discovery of a new COVID- 19 variant in South Africa, named Omicron, prompted most developed economies to implement travel restrictions. Overall, optimism surrounding a strong corporate earnings and ongoing global economic recovery overshadowed the threat of the new variant, resulting in a strong rally for developed market equities and industrial metals in the second half.

In Botswana, sentiment remained somewhat downbeat in the first half of the year. Rising COVID- 19 infections continued to restrict freedom of movement and hampered business activity. In general, economic data releases reflected sluggish business activity with credit extension slowing on the back of weak credit uptake. Botswana headline inflation breached the upper target band ( 6%) of the Bank of Botswana ( BoB) largely due to the increase in value- added taxation to 14% and the increase of administered prices that came into effect on 1 April 2021. The local equity market reflected the international market optimism and turned positive in the second quarter, led by financial and consumer stocks.

In the second half of the year, optimism returned to the local market as declining COVID- 19 infections and a successful vaccination drive allowed the Government to declare the end of the State of Public Emergency. Economic data prints also confirmed that the local economy sharply recovered and grew by a whopping 36% ( year- on- year) in the second quarter of 2021. Headline inflation rose further and closed the year at 8,7% largely attributable to the seco ndary effects of the increase in administered prices, mainly fuel and transport. The BoB maintained its accommodative stance in support of the local economy by keeping the policy rate unchanged at 3,75%. Over the full- year, the Botswana Pula depreciated by 7,9% against the US Dollar, while it remained flat against the South African Rand.