Botswana must diversify, reduce diamond dependency, IMF says
Supply-side structural reforms needed to support economic diversification and increase relative size of private sector
17 July 2023 - 17:25
Support our award-winning journalism. The Premium package (digital only) is R30 for the first month and thereafter you pay R129 p/m now ad-free for all subscribers.
Botswana, one of Africa’s strongest economies according to the IMF and regularly ranked first among African countries for governance and transparency, will experience a slowing in growth in 2023 reflecting a decline in diamond production and prices as weaker global growth depresses exports.
In its staff mission completed last week, the IMF said it now expects Botswana’s growth to slow from 5.8% in 2022 to 3.8% in 2023, further intensifying the need for the country to diversify its economic growth portfolio and curb its overdependence on diamonds.
“Supply-side structural reforms are necessary to support the diversification of the economy and increase the relative size of the private sector. This will help boost the economy’s growth potential, reduce unemployment and enhance resilience to external shocks,” said the IMF.
The Washington-based institution said that the country should also look to prioritise policy reforms in trade facilitation and integration, parastatal reform, more efficient and climate-resilient infrastructure investment, and more targeted support for high-productivity, export-orientated sectors.
While Botswana is one of the world’s smallest countries by population, it is one of the most interesting, important and remarkable economic studies out there. The country is located at the centre of Southern Africa, positioned between SA, Namibia, Zambia and Zimbabwe and it became richer, on average, than South Africans in 2021 with a per capita GDP of about $7,235 compared with SA’s $6,965. Standard Bank estimates 2022 SA GDP per capita to be $6,694 and puts Botswana’s at $7,257.
According to the Institute for Security Studies, an organisation which aims to enhance human security on the continent, SA’s GDP per capita will grow marginally, reaching $15,173 by 2043, while that of Botswana will overtake the region’s largest economy on GDP per capita, reaching $24,056 by 2043.
IMF data shows that after a strong recovery of almost 12% growth in 2021, Botswana’s economy grew 5.8% in 2022, significantly above the long-run average of 4%. The recovery from the Covid-19 pandemic was primarily reflected in elevated mining production, but also in robust manufacturing and construction.
In terms of headline inflation, data shows that after peaking at 14.6% in August 2022, inflation has fallen gradually to 4.6% in June 2023, with lower oil prices delivering a steep decline in transport inflation, helping return inflation to the Bank of Botswana’s medium-term range objective of 3-6%.
IMF data shows Botswana’s budgetary position also improved from a 2.4% of GDP deficit in financial year 2021 to a balanced budget in financial year 2022, mainly due to measured expenditure growth and higher mineral revenue.
On the monetary policy side, the Bank of Botswana has maintained its policy rate at 2.65% since August 2022, after raising it by a combined 151 basis points between April and August 2022.
“Going forward, growth is projected to slow to 3.8% in 2023. The expected slowdown reflects a decline in diamond production and prices this year, with weaker global growth likely to depress other exports,” IMF African department division chief Luc Eyraud said.
“This will be partly offset by growth in the non-mining sector, with a fiscal relaxation supporting household consumption and public investment. Growth is forecast to rebound gradually in 2024 and 2025, to above 4%, due to higher prices and quantities of diamonds produced.”
Eyraud said Botswana’s monthly inflation is projected to remain within the Bank of Botswana’s medium-term range objective of 3-6% this year and next.
“This reflects the decline in international oil prices, positive real lending rates, and the prospect of regulated prices remaining unchanged. The monetary policy stance is appropriate, but the central bank should stand ready to raise the policy rate if inflation risks materialise,” he said.
The IMF expects the fiscal deficit to widen by about 2% of GDP in financial year 2023, mostly due to higher budgeted capital expenditure.
Eyraud said in the subsequent two years, the government plans to improve the fiscal position by 2.5% of GDP and achieve a small fiscal surplus by containing the wage bill and transfers.
“Consolidation is critical to preserve fiscal sustainability and support foreign exchange reserves,” he said. “The large depletion of government deposits in recent years, combined with the longer-term prospects of exhaustion of diamond resources, calls for fiscal prudence.”
Eyraud said that while Botswana’s financial sector is sound, stable and resilient, financial stability could be further strengthened by operationalising the frameworks for emergency liquidity assistance, deposit insurance and bank resolution, as well as continuing to enhance financial sector supervision.
“Deepening the interbank and bond markets would support financial sector development while improving public financial management and monetary policy transmission,” he said.
Support our award-winning journalism. The Premium package (digital only) is R30 for the first month and thereafter you pay R129 p/m now ad-free for all subscribers.
Botswana must diversify, reduce diamond dependency, IMF says
Supply-side structural reforms needed to support economic diversification and increase relative size of private sector
Botswana, one of Africa’s strongest economies according to the IMF and regularly ranked first among African countries for governance and transparency, will experience a slowing in growth in 2023 reflecting a decline in diamond production and prices as weaker global growth depresses exports.
In its staff mission completed last week, the IMF said it now expects Botswana’s growth to slow from 5.8% in 2022 to 3.8% in 2023, further intensifying the need for the country to diversify its economic growth portfolio and curb its overdependence on diamonds.
“Supply-side structural reforms are necessary to support the diversification of the economy and increase the relative size of the private sector. This will help boost the economy’s growth potential, reduce unemployment and enhance resilience to external shocks,” said the IMF.
The Washington-based institution said that the country should also look to prioritise policy reforms in trade facilitation and integration, parastatal reform, more efficient and climate-resilient infrastructure investment, and more targeted support for high-productivity, export-orientated sectors.
While Botswana is one of the world’s smallest countries by population, it is one of the most interesting, important and remarkable economic studies out there. The country is located at the centre of Southern Africa, positioned between SA, Namibia, Zambia and Zimbabwe and it became richer, on average, than South Africans in 2021 with a per capita GDP of about $7,235 compared with SA’s $6,965. Standard Bank estimates 2022 SA GDP per capita to be $6,694 and puts Botswana’s at $7,257.
According to the Institute for Security Studies, an organisation which aims to enhance human security on the continent, SA’s GDP per capita will grow marginally, reaching $15,173 by 2043, while that of Botswana will overtake the region’s largest economy on GDP per capita, reaching $24,056 by 2043.
IMF data shows that after a strong recovery of almost 12% growth in 2021, Botswana’s economy grew 5.8% in 2022, significantly above the long-run average of 4%. The recovery from the Covid-19 pandemic was primarily reflected in elevated mining production, but also in robust manufacturing and construction.
In terms of headline inflation, data shows that after peaking at 14.6% in August 2022, inflation has fallen gradually to 4.6% in June 2023, with lower oil prices delivering a steep decline in transport inflation, helping return inflation to the Bank of Botswana’s medium-term range objective of 3-6%.
IMF data shows Botswana’s budgetary position also improved from a 2.4% of GDP deficit in financial year 2021 to a balanced budget in financial year 2022, mainly due to measured expenditure growth and higher mineral revenue.
On the monetary policy side, the Bank of Botswana has maintained its policy rate at 2.65% since August 2022, after raising it by a combined 151 basis points between April and August 2022.
“Going forward, growth is projected to slow to 3.8% in 2023. The expected slowdown reflects a decline in diamond production and prices this year, with weaker global growth likely to depress other exports,” IMF African department division chief Luc Eyraud said.
“This will be partly offset by growth in the non-mining sector, with a fiscal relaxation supporting household consumption and public investment. Growth is forecast to rebound gradually in 2024 and 2025, to above 4%, due to higher prices and quantities of diamonds produced.”
Eyraud said Botswana’s monthly inflation is projected to remain within the Bank of Botswana’s medium-term range objective of 3-6% this year and next.
“This reflects the decline in international oil prices, positive real lending rates, and the prospect of regulated prices remaining unchanged. The monetary policy stance is appropriate, but the central bank should stand ready to raise the policy rate if inflation risks materialise,” he said.
The IMF expects the fiscal deficit to widen by about 2% of GDP in financial year 2023, mostly due to higher budgeted capital expenditure.
Eyraud said in the subsequent two years, the government plans to improve the fiscal position by 2.5% of GDP and achieve a small fiscal surplus by containing the wage bill and transfers.
“Consolidation is critical to preserve fiscal sustainability and support foreign exchange reserves,” he said. “The large depletion of government deposits in recent years, combined with the longer-term prospects of exhaustion of diamond resources, calls for fiscal prudence.”
Eyraud said that while Botswana’s financial sector is sound, stable and resilient, financial stability could be further strengthened by operationalising the frameworks for emergency liquidity assistance, deposit insurance and bank resolution, as well as continuing to enhance financial sector supervision.
“Deepening the interbank and bond markets would support financial sector development while improving public financial management and monetary policy transmission,” he said.
zwanet@businesslive.co.za
Global risks tilted to the downside, IMF says
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.
Most Read
Published by Arena Holdings and distributed with the Financial Mail on the last Thursday of every month except December and January.