Monday, March 8, 2021

Botswana could experience steep recession in 2022

Courtesy of a now deceased Zambian soothsayer called Dr. Francis N’gombe, a good number of Batswana know what is likely to happen politically in the next couple of years.

Less known are the predictions of a French economist, Olivier Basdevant, whose crystal ball has yielded mostly disturbing images of a diamond-less Botswana.

While the latter’s readings were published in a 2008 report, they forecast a future that still lies a bit farther down the road.

From 2017 to 2021, diamond production is expected to decrease as diamond reserves are drawn down and surface mines are closed. Then, from 2021 to 2029, as diamond resources draw down, Debswana Mining Company will need to shift to underground mining. As diamond resources are drawn down, fiscal revenue is expected to shrink by about two-thirds in 2021ÔÇô29.

According to Basdevant: “Higher extraction costs and decreased output will result in lower profits; in fact, it is not clear that underground mining in Botswana will be economically feasible or profitable. However, Botswana’s market power could result in higher prices, reducing the impact of diamond resource depletion.”

Effort to diversify the economy has not gone as well as leaders want and in that regard, Basdevant warns that without diversification, government revenue per capita would fall sharply at the end of diamond production. Growth diversification will fully compensate for the decline in diamond production but if the economy diversifies more slowly, growth is likely to flag in 2022ÔÇô29, when diamond production slows and reserves are depleted.

“Botswana could experience a period of low growth in 2018ÔÇô24, including a steep recession in 2022 (-9.5 percent) as diamond production declines sharply. Government revenue per capita after 2021 would fall by 27 percent. This negative impact would be temporary, as diversification takes place.

However, prospects for diversification, notably with diamond processing activities, already exist. It is thus plausible that Botswana’s GDP growth could be between the rates projected in the baseline and the alternative outlined here.

Titled “Are Diamonds Forever? Using the Permanent Income Hypothesis to Analyze Botswana’s Reliance on Diamond Revenue,” Basdevant’s study used an analysis designed for oil-exporting countries, (which quantifies the impact of the adjustment of government revenue) to assess the sustainability of Botswana’s diamond-related fiscal revenue.

The study concluded that diamond reserves are not adequate to generate enough permanent revenue to sustain a high level of expenditure.

Botswana has adopted a fiscal rule that no debt may be accumulated but with fiscal revenue expected to fall from 42 percent of GDP to about 33 percent once diamond resources are exhausted, Basdevant says that the government would need to accumulate savings of about 1.2 percentage points of GDP per year to smooth the reduction of expenditure that will be needed under the current fiscal rule. He further states that additional savings early in the transition would prepare the economy for potential recession.

“By increasing savings an average of 2.5 percentage points of GDP through 2021, Botswana could prevent a decrease in per capita expenditure from 2022 on. However, since such savings would have a short-term impact on expenditure, this approach would require committed political and social support,” he says.

However, Basdevant’s forecast is not all doom and gloom. On account of Botswana being “a price maker in the diamond market,” if production in the country falls, world diamond prices are likely to rise.”

He adds though that the extent to which Botswana can offset future production declines with price increases is unknown.

“As Botswana’s production falls, the market’s structure (both its demand and supply features) could change, which could impact Botswana’s market power.

No hard data, however, are available to quantify this market power.

Also complicating the analysis is uncertainty about diamond reserves. Although both Debswana and the Ministry of Mineral and Water Resources expect aboveground production to decline from 2022 onward, diamond resources could prove greater than estimated. This would boost the net present value of diamond-related revenue, curbing reducing the need for a strong adjustment in public expenditure.”


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