Relationship between Mining Revenue, Government Consumption, Exchange Rate and Economic Growth in Botswana

Abstract

This study empirically investigates the dynamic relationships between mining revenue, government consumption, exchange rate and economic growth in Botswana. Quarterly data from 1994 to 2012 were analysed through the use of unrestricted vector autoregressive (VAR) modelling consisting of impulse response functions, variance decomposition and VAR Granger causality. The impulse response functions showed the positive and negative response to mining shocks while variance decomposition indicates that mining revenue defines the variability in economic growth and government consumption. The empirical results also suggest that mining revenue and exchange rate granger cause economic growth while government consumption is caused by mining revenue and economic growth. These observations reveal how vulnerable the economy of Botswana is to external shocks. We conclude that, although mining sector has a significant role in the economy of Botswana,