Shining successes and critical challenges

Tom Minney

The economic lustre of diamonds risks fading, as the global financial crisis has recently demonstrated. A more diverse economy is needed to satisfy growing public expectations and to maintain Botswana’s good record

Diamonds have been Botswana’s best friend for 40 years. Between independence in 1966 and 1999, they gave the country the world’s fastest-growing economy with an average of 9 percent annual growth. But diamonds are not forever. The 2008-09 global financial crisis pushed Botswana’s people to confront what might be seen as ‘middle age’ problems, including a bulging spending deficit and a search for new economic directions. The after-shocks of the crisis are still being felt in 2011.

The 2009 cutbacks in Botswana’s diamond mining were temporary and part of moves initiated by world diamond giant De Beers – which operates the mines in a 50:50 joint venture partnership with the government – to hold up prices as global demand slowed. The strategy worked, and in 2010, world diamond prices rose by 27 percent, with De Beers saying demand is now particularly strong in China and India. Giant new investments are already under way.

After economic growth of 3.1 percent in 2008, the cuts in diamond production meant that GDP shrank by 3.7 percent in 2009, but the economy surged back, and growth of 8.6 percent in 2010 brought GDP per capita to about $7,500, one of the highest in Africa. Although the aim is to diversify the economy, other sectors will have to grow impressively fast to keep up with diamonds, and policy-makers will have to face up to other critical challenges too.

Botswana’s shining reputation reflects not only diamonds. It is one of the most cautious and well-run countries in Africa, scoring low in corruption and high in governance rankings. Credit ratings are glowing, reflecting the good economic management and impressive transparency. At the end of May 2011, Standard & Poor’s Ratings Services affirmed ‘A’ long-term and ‘A-1’ short-term local currency sovereign credit rating on Botswana and its central bank, with an outlook of ‘stable’.

In 2009/10, the government borrowed $1.5 billion from the African Development Bank and swelled spending towards a targeted budget deficit equivalent to 15 percent of GDP, which eventually turned out as an 11 percent deficit. The government’s increased spending was a calculated risk to counter the slow-down effects of the diamond cutback. It has since pledged to reduce the deficit progressively to zero within three years (by 2012/13). The slower spending, and some influence from popular uprisings in North Africa, set the scene for civil servants to go on strike in mid-April demanding a 16 percent pay rise (later tempered to 12 percent) following wage freezes since 2008 and coupled with inflation measured at 8.2 percent by April 2011.

The challenges are harsh. Around 30 percent of the population still live below the poverty line, unemployment is very high and the small population (1.8 million) is spread across a large geographical area. Botswana has some of the highest HIV/ AIDS rates in Africa (in 2009, rated at 24.8 percent prevalence among adults aged 15-49), which brings huge costs in government spending, including one of Africa’s best programmes of anti-retroviral treatment. One in five children could potentially be orphaned, and many skilled workers, including health workers and teachers, are dying or sick. Much of the infrastructure for development gains has already been built and returns on further development spending are diminishing, with education in particular not showing positive results to match the resources devoted to it.

Four out of five citizens earn their living from farming – chiefly cattle and subsistence agriculture – but erratic rains and poor soils mean they only produce half the nation’s food and contribute just 3 percent of GDP. The economy is particularly vulnerable to soaring oil costs and to the high world food prices, despite good harvests across some Southern African neighbours. Efforts to diversify the economy have met with mixed success; for instance, textile exports slumped 22 percent in 2010. Although manufacturing is growing, it still accounts for only 5 percent of GDP. Botswana may be at the heart of the Southern African Development Community (SADC) region, which encompasses 258 million people across its 15 member countries, but it does not seem the most attractive place to run a business. An international financial services centre for ‘offshore’ activity is yet to gain traction.

IMF deputy managing director, Naoyuki Shinohara, visiting the country in March, gave a public lecture in which he stated that Botswana stands at “a pivotal point in its history”. The key challenge was to search for new engines of growth “as the country’s long-term success on the back of natural resource exports seems to be fading”. The comparative advantages of stability and a well-run economy could attract foreign investment to tourism, trade and telecommunications, and Botswana could be part of multinational supply chains, he added. Shinohara echoed calls from the Botswana Confederation of Commerce, Industry and Manpower for more action to cut the cost of doing business – the low 15 percent corporate tax rate does not tell the whole story – and make it easier for firms to operate.

Hopes of broad-based growth are outlined by the Vision 2016 initiative, which runs through successive six-year National Development Plans. Big schemes include irrigated agriculture, the building of the Trans-Kalahari railway line to transport coal from the Mmamabula mine to a dry port in Namibia’s Walvis Bay (estimated cost around $5-9 million), and plans to use methane gas for power stations.

The country’s tourism continues strong and is well run. Financial services firms, including those listed on the Botswana Stock Exchange, are flourishing, and rising star Letshego, a new micro-lender, is busy in seven countries across the SADC region and is growing fast through strategic partnerships and acquisitions, such as Namibia’s Edu-Loan in 2009.

Botswana‘s shining reputation reflects not only diamonds. One of the most cautious and well-run countries in Africa, it scores high in governance rankings and its credit ratings are glowing

Noting that 2010 growth was broadbased, macroeconomist Dr Keith Jefferis, managing director of Econsult Botswana, said: “The fastest growing sectors were agriculture (mainly livestock) and construction, which both expanded by some 15 percent in 2010. Other sectors showing good performance were trade, hotels and restaurants (up 9 percent), and manufacturing (up by 6.6 percent, despite the continued contraction of the textiles subsector).The slowest-growing sector was government, at 0.4 percent growth for the year, due to the levelling-off of government spending.”

Botswana may look similar to turbulent North African and Middle Eastern countries by being rich in resources and having high unemployment and rising standards of living, but its public institutions are good and its government is democratic and widely supported, despite the obvious strains that became apparent during the recently ended public sector strike.

The growth challenge now is to create the right climate, including government responsiveness and labour productivity, for the private sector to exploit the opportunities found at the stable heart of Africa’s most promising economic region. Botswana’s leaders are heading one of the African countries where anything under 6-8 percent annual growth is seen as failure. But only such levels of sustained high growth will bring development to all the people.

About the author:

Tom Minney is an economic analyst specialising in African markets.


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