RaboResearch - Economic Research

Country Report Botswana

Country Report

Share:

Botswana flag

Botswana’s economy remains largely dependent on diamond mining. As a result of weak external demand for diamonds, economic growth has slowed down last year. The fiscal position improved substantially, as a result of fiscal consolidation, and the budget is now recording a small surplus.

Author: Koen Brinke (trainee)

Strengths and weaknesses

Strengths

Strong external position

Botswana’s external creditor position remains comfortable. Botswana has USD 8bn in foreign exchange reserves, which cover 11 months of imports.

Low debt burden

Public debt is low at 14% of GDP. Interest and debt service ratios are excellent. External debt, meanwhile, equals only 14% of GDP and 28% of exports.

Weaknesses

Vulnerability to fluctuations in external demand for diamonds

Botswana’s exports still mainly consists of diamonds, the share of which in total exports has grown to 81%. An export diversification program has failed so far.

High income inequality

Botswana has one of the highest income inequalities in the world, with a Gini Index of 61. Meanwhile, Botswana faces high and persistent levels of unemployment.

Key developments

1. Weakness in mining sector hurts growth and trade

After an impressive recovery from the steep recession in 2009, economic growth slowed to 6.2% in 2012, down from 8.3% in 2011. This deceleration was mainly driven by the mining sector, which recorded an 8% contraction in output. The remaining growth was driven by a sharp increase in investment of 10%. The contraction in the mining sector was also reflected in the country’s current account balance. Exports declined with 5%, turning the current account surplus of 2011 into a small deficit. Since exports are expected to increase with over 7% in both 2013 and 2014, Botswana’s current account should register a surplus of around 2% of GDP in the coming years. We expect economic growth to decelerate further in 2013, due to lower growth in investment and government consumption growth. 

2. Fiscal outlook improves, as SACU revenues remain

The government’s fiscal consolidation policy has resulted in a budget surplus of 0.5% of GDP in 2012, after 5 years of posting budget deficits. Although this surplus was smaller than the planned 1.5% of GDP, the government did largely manage to curtail its overall expenditures, despite a 4% increase government consumption. For 2013 and 2014, small budget surpluses are forecast. This is having a positive effect on Botswana’s public debt, which fell to 14.4% of GDP in 2012, down from 17% in 2011, and a further decrease to 14.3% in 2013 and 12.7% in 2014 is expected. The budget balance outlook heavily depends on fluctuation in revenues from the Southern Africa Customs Union (SACU), which revenue-sharing formula is still under negotiation. SACU revenues consist of taxes on international trade and excise on imported goods as well as a development component derived from excises, which together are estimated to contribute 31% to Botswana’s government budget in 2013. In December, the SACU will unveil a new proposal for its revenue sharing arrangement. In April, member states agreed that member states should not be worse off under the new arrangement. This is good news for Botswana, as an earlier consultancy report had recommended significant revenue cuts for smaller member states, including Botswana. This would have implied that Botswana's share of SACU revenues would decline by almost 1 billion USD in the years to 2019. 

Figure 1: Public finances improve
Figure 1: Public finances improveSource: EIU
Figure 2: Economic growth decelerates
Figure 2: Economic growth deceleratesSource: EIU

3. Diamond sector retains importance

In 2012, the share of diamonds in total exports grew to 81%. Despite the established Economic Diversification Drive (EDD), the government has failed to diversify its exports so far. Although mining remains a major contributor to GDP, its contribution declined to 19.6% in 2012, compared to 24.7% in 2011. However, this decline was due to weakened global demand for diamonds in 2012, leading to a decrease of both rough and polished diamond prices with over 10%. This resulted in a 15% decrease in the value of rough diamonds sales. In 2013, moderate growth in demand for diamond jewelry is expected, primarily supported by growing demand from China and India. In September 2011, De Beers, the World’s largest supplier of rough diamonds, agreed with the government of Botswana to transfer its rough diamond sales activities, including professionals, skills, equipment and technology, from London to Gaborone by the end of 2013. In 2012, as part of the relocation, De Beers transferred its aggregation and quality assurance operations to Botswana. The company is still on track to complete the migration by the end of 2013. Thereafter, all rough diamonds sales will be carried out from Gaborone. Botswana’s diamond reserves are expected to decline sharply from 2020 onwards. However, recent constructions by De Beers will extend the life of Botswana’s diamond mines to at least 2028. Since Botswana’s economy is currently very dependent on diamond mining, more progress in diversifying the economy is needed to ensure long-term macroeconomic and fiscal stability.

4. More accommodative monetary policy stance

Botswana’s inflation declined from 8.5% in 2011 to 7.5% in 2012, which was, however, higher than the expected rate of 6.6%. This was partly due to a series of price increases in 2012, including water tariffs and transport fares. An increase in electricity tariffs in April, varying between 7% and 20%, will add to inflationary pressures this year. Nevertheless, the central bank of Botswana lowered its key policy rate by 50 basis points to 9.0% in the same month, increasing the risk that inflation will remain above the central bank's target range of 3-6%. The policy interest rate had remained unchanged at 9.5% since December 2010, and most analysts had confidently expected it to remain steady. The central bank stated that growth is below potential and could benefit from monetary stimulus to domestic demand. Despite the short-term upward pressure on prices, the central bank remains confident that inflation is on track to fall within the central bank’s target range again.

Factsheet of Botswana
National facts of BotswanaSource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank.

Background information

The Republic of Botswana is a landlocked country located in Sub-Saharan Africa. Botswana has a population of just over two million, of which 400 thousand people live in the capital and largest city Gaborone. Diamond mining is the leading industry and the main driver of the economy. Exports mainly consist of diamonds. Its dependency on external demand for diamond exports is the economy’s main weakness. Botswana suffers a persistently high unemployment rate. Most recent official figures are from 2009/10 and place the unemployment rate at 17.8%. According to unofficial estimates the unemployment rate stands even higher at 30%. Real GDP per capita is relatively high, but income inequality is very high as well. Compared to other Sub-Saharan African countries, Botswana scores relatively well on most social indicators. However, Botswana has a national HIV prevalence rate among adults ages 15 to 49 of 25%, one of the highest in the world. As a result, life expectancy at birth decreased to about 55 years. Botswana is politically and socially stable and is not embroiled in any international conflicts. The Botswana Democratic Party (BDP) has dominated Botswana’s political environment since the country’s independence from the UK in 1966. The BDP is expected to maintain its one-party dominance of the political scene. 

Economic indicators of Botswana
Economic indicators of BotswanaSource: EIU
Share:
Author(s)

naar boven