Diamonds aren’t forever

Date: 30/01/2018

Key sectors: mining

Key risks: diamond dependence

One of the world’s poorest countries at independence in 1966, Botswana swiftly became one of the most successful examples of economic growth and development. Together with significant diamond wealth, good governance and prudent economic management, Botswana is now well established as an upper middle-income country.

Indeed, while the past year has seen several credit rating downgrades across the region, partly as a result of the downturn in commodity prices, political and corruption crises and poor economic management, Botswana is the only sovereign in sub-Saharan Africa that retains its investment grade rating after neighbouring Namibia and South Africa were downgraded in 2017. Moody’s and S&P rank Botswana as A2 and A-, respectively, with ‘stable’ outlook.

Since independence, annual GDP growth has averaged 5 per cent, making Botswana one of the world’s fastest growing economies. The economy expanded by 4 per cent in 2017, driven by improvements in the mining sector, services sectors and continued fiscal stimulus. Nevertheless, it remains heavily dependent on diamonds, which account for around a third of GDP, and two thirds of exports. This makes Botswana’s economy heavily exposed to international market volatility and the pace of economic growth in global markets. In the current climate, both continue to drag on growth.

Nevertheless, macroeconomic indicators presently remain sound. In 2016/7 Botswana achieved twin surpluses, while public debt is extremely low at around 11 per cent of GDP. Its fiscal deficit improved largely due to higher than expected mining revenues and stronger GDP growth. However, fiscal revenues are still highly dependent and vulnerable to two volatile sources of revenue inflows: mineral revenues (40 per cent of total revenue) and Southern African Customs Union Revenues (SACU) (over 25 per cent of total revenue). The current account surplus is projected to have been 16 per cent at end-2017.

A stable and democratic political system cannot be underestimated in securing Botswana’s status. Political institutions remain robust and policymaking prudent, including in its sovereign wealth fund. Multiparty democracy is entrenched with a strict term limit for leaders, but the ruling Botswana Democratic Party (BDP) has won every election since 1966. While this has afforded the country stability, changes are nevertheless afoot – a trend that can also be seen in South Africa and Namibia, both with dominant parties in a multiparty system. While it is expected that the BDP will win in the next general elections in 2019, the October 2014 elections saw opposition parties increase their number of seats and erode the BDP’s firm grip on Botswana’s political system.

Over the long term, Botswana will face a key policy dilemma: how to manage the decline in diamond revenues. While diamonds may not be fully exhausted for another generation, output is already well past its peak. Steps have been taken to reduce diamond dependency over the past 20 years, but the level of economic diversification required will be challenging. Furthermore, poverty levels remain high, at above 30 per cent, and there is a high level of state-dependence, with the sovereign being the main investor and employer. Nevertheless, while social sector expenditure has been high, the impact has been limited. Rebalancing the current economic model, including engaging the private sector, to create jobs and address unemployment and poor healthcare outcomes will also be vital to avoid the reversal of such strong performance over the coming years.