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 Botswana is among the few select sub-Saharan economies expected to expand by more than 5% this year and beyond, on the back of rapidly normalising commodity prices and global trade.
The April report of the International Monetary Fund's World Economic Outlook released at the end of April predicted that Botswana's economy will expand by 6.3 percent this year, and by 5.1 percent in 2011/12. This is compared to the government's expectation of five percent economic growth in 2010/11.
Part of this strong recovery, the IMF says, is due to Botswana's policy decision to spend its way through last year's recession.
Instead of providing stimulus packages to affected sectors, Botswana opted to maintain or increase spending throughout the recession as a way of supporting the economy.
As a result, the country ran a deficit of P13.5 billion for 2009/10, partly financed by a P6.6 billion African Development Bank loan and a domestic bond programme.
However, not even Botswana can maintain double-digit deficits for long without jeopardis ing its fiscal sustainability. So says Zeinab Partow, senior country economist for the World Bank in Botswana.
Despite being pummeled by the global crisis - diamond production and exports contracted by 50 percent in 2009 - Partow said Botswana is in the enviable position of being able to cushion its people and the economy, thanks to large savings accumulated over the years and access to inexpensive financing. But it may have overdone the cushioning.
The government plans to run a P12 billion deficit in the current financial year, funded through drawing down on public cash balances and another domestic bond programme. As a result, the fiscal deficit for the 2009/10 budget year is projected at 14 percent of GDP.
Diamond mining has fuelled much of the expansion and currently accounts for more than one-third of GDP, 70-80% of export earnings, and about half of the government's revenues. Botswana's heavy reliance on a single luxury export was a critical factor in the sharp economic contraction of 2009.
The diamond industry suffered its greatest reversal of fortune in 2008 and 2009 since Botswana became independent in 1966. In the first quarter of 2009, real GDP dropped by 18.8% compared to the same quarter in 2008; whereas the mining and quarrying industry (mostly diamond mining) fell by an astonishing 68.6% over the same period. In the second quarter the economy grew by 1.3%, but the mining sector contracted by 18.7%. In the third quarter the mining sector again contracted, by 28.1%, causing the overall economy to contract by 3.1%. The drop in mining output was mostly as a result of the collapse in output volumes because of a collapse in international demand for and sales of rough diamonds. Tourism, financial services, subsistence farming, and cattle raising are other key sectors in Botswana’s economy. Although unemployment was 7.5% in 2007 according to official reports, unofficial estimates place it closer to 40%. HIV/AIDS infection rates are the second-highest in the world and threaten Botswana's impressive economic gains. An expected levelling off in diamond mining production within the next two decades overshadows long-term prospects.
“Although diamond prices are expected to rebound, production and exports will remain below pre-crisis levels and another double-digit deficit is expected in 2010/11. Not even Botswana can maintain double-digit deficits for long without jeopardising its fiscal sustainability, especially given the spectre of a rapid fall in diamond production - and eventual depletion of known reserves - in a few decades,” says Partow.
“At the same time, cutting spending is particularly painful in a country like Botswana where government expenditures are pivotal to economic activity and to sustaining non-mining private sector; (so) some tough choices (lie) ahead for one of Africa's best-managed economies.”
While recovery in the diamond industry has been only partial, with diamond exports between January and October 2009 at only 53% of their levels in 2008, the diamond pipeline has begun to function again and prices for rough diamonds are rising. This year, mining production and exports are seen improving - with copper and nickel exports benefitting from the recovery in global growth.
Diamond exports will do so to a lesser extent, as their sales depend on growth in developed countries whose recovery is still expected to be weak. Debswana forecasts a 13% increase in diamond production in 2010 over 2009 levels. Growth of GDP is expected to return to positive territory this year, but the World Bank forecasts that large fiscal deficits will continue – projected at 15.1 and 12.2 percent of GDP for 2009/10 and 2010/11 respectively - due to reduced mineral revenue combined with continued high expenditure levels as the government tries to cushion the country from the worst effects of the crisis.
PULL-QUOTE
Instead of providing stimulus packages to affected sectors, Botswana opted to maintain or increase spending throughout the recession as a way of supporting the economy.
By Alfonce Mbizwo |
