diamonds are then calibrated to be consistent with the mining growth rates and information obtained from Debswana, taking into consideration the short- and long-term effects of the Cut 8 project. Non-mining sector growth is assumed to accelerate in the early years of the Plan, boosted by investment in the power sector (Morupule B power project). The baseline assumptions on inflation and the exchange rate are taken from the latest IMF Staff Report (2010).<sup>19</sup> The 7-year Plan period is then extended for 20 years till 2029/30 taking the 2015/16 assumptions, except for the growth rate of mining and non-mining sectors. The medium-term mining growth rates are calibrated assuming a certain path of diamond output and profit per carat, considering the projected increases in mining costs and production profile as described in NDP10. As regards non-mining GDP, it is assumed that annual growth rate would remain at 4 percent in the medium term, dampened by lower government spending. Table 2 provides the summary of baseline macroeconomic assumptions.

**Table 2.  Baseline Macroeconomic Assumptions**

||2010/11|2011/12|2012/13|2013/14|2014/15|2015/16|
|---|---|---|---|---|---|---|
|Real GDP growth (annual percentage change)|6.6|5.2|6.9|5.4|3.8|2.6|
|Real mining GDP growth (annual percentage change)|11.0|7.0|5.5|2.9|1.4|-0.1|
|Real non-mining GDPgrowth(annualpercentage change)|4.4|4.3|7.7|6.8|5.0|4.0|
|Inflation(period average,inpercent p.a.)|7.3|6.1|5.7|5.5|5.4|5.3|
|Exchangerate (Pula/US$)|7.5|8.0|8.3|8.7|9.1|9.4|

Sources: See text.

# **_Fiscal Policy Strategy_**

The Baseline Scenario takes the policy strategy described in the 2010/11 Budget and NDP10. First, in line with the 2010/11 Budget, the Baseline Scenario assumes the retention of the public sector wage freeze in 2010/11. For the remainder of the Plan, the government is assumed to allow no further net increase in the established posts (NDP10 policy commitment), in order to limit the growth of government expenditure (NDP10, para. 6.50). For simplicity, it is assumed that existing vacancies will remain unfilled during the Plan. Other recurrent expenditures, i.e., recurrent expenditure other than the wage bill and interest payments, are assumed to grow at low rates, as indicated in NDP10 (Table 6.6, p. 81).<sup>20</sup> Development expenditure is front-loaded for critical investment projects, but is assumed to decline rapidly at the rate also indicated in NDP10 (Table 6.7, p. 81). This assumption suggests that both other recurrent and development expenditures will decline rapidly as a percentage of GDP.<sup>21</sup> See Table 3.

**Table 3.  NDP10 Expenditure Projections**

(annual real percentage change)

||2010/11|2011/12|2012/13|2013/14|2014/15|2015/16|
|---|---|---|---|---|---|---|
|Recurrent expenditure|0.4|0.3|1.6|1.5|1.4|1.3|
|Development expenditure|-4.6|-4.6|-4.6|-4.6|-4.6|-4.6|
|GDP|6.6|5.2|6.9|5.4|3.8|2.6|

Sources: NDP10, Tables 6.6 and 6.7.

> 19 NDP10 does not provide the exchange rate and inflation assumptions.

> 20 Note that for recurrent spending we deviate from NDP10 assumptions by projecting the wage bill, interest payments and other recurrent expenditure separately.  This will allow us to examine how each variable would respond to changes in macroeconomic and policy assumptions.

> 21 Note that NDP10 emphasizes that these growth rates are upper limits (para. 6.41).

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