The Botswana economy has to be reconfigured as the current growth model that sustained the country for over 50 years is no longer feasible, plagued by twin deficits and deteriorating financial position, said economists from the central bank in a new research paper.
According to the study analysing external sector developments in Botswana and policy implications, the findings point to a weak economic growth and skewed trading position that has caused the government to withdraw from the reserves to plug the widening budget deficits.
Recent developments, exacerbated by COVID-19 outbreak, have exposed the country’s long running developmental changes – failure to diversify the economy from diamonds economy and lack of productive capacity, according to Baby Mogapi and Karabo Badirwang, economists at Bank of Botswana.
“The macroeconomic stability was, among others, manifested by maintenance of low and sustainable public debt and, until recently, positive current account balances.”
The Balance of Payments (BoP) – made up of the current, capital, and financial accounts – has deteriorated at the fastest pace in the last five years, mostly due to the underperformance of the diamond sector. A surplus overall BoP generally increases a nation’s net foreign assets, and vice versa for a deficit.
“Botswana recorded favourable overall BoP from 2005 to 2014, except post global financial crisis during 2009 – 2010 and during 2012 – 2013, when imports of diamonds increased significantly due to the relocation of De Beers’ diamond aggregation and sales functions from the United Kingdom,” Mogapi and Badirwang said.
The BoP surpluses between 2005 and 2014 were driven by faster annual growth in diamonds compared to imports and receipts from the Southern African Customs Union (SACU). However, since 2015, the overall BoP has recorded consecutive deficits from P4.1 billion in 2015 to P20.1 billion in 2020.
Diamonds have the anchor of the Botswana economy since they were discovered in the late 1960’s, and more than fifty years later, they account for an average of 90.8 percent of total exports, with diamond exports constituting 92.8 percent of the mineral exports.
Additionally, revenue from mineral exports represented the largest proportion of total government revenue averaging 31.6 percent from 2011 to 2020 which, however, declined to 15.8 percent in 2020. The lower mineral revenue receipts in 2020 was mainly due to the global restrictions on the movement of people and products that negatively affected regular diamond sales, resulting in the cancellation of the third sight by DeBeers and subsequent implementation of flexible trading approaches, that included allowing customers to defer their allocations to a later date, thus shifting demand towards lower-valued goods.
The steep decline in diamond trade resulted in a larger current account deficit of P18.3 billion last year, from a deficit of P12.6 billion in 2019. This was a reversal of surpluses in current account, which on average, recorded overflow of P1.9 billion from 2005 to 2019.
“The performance of the current account over the years, largely reflects the performance of the merchandise trade account, which is in turn influenced largely by diamond trade; therefore, lack of traction, with respect to diversification of exports and substitution of imports,” the economists said.
The merchandise account, which records Botswana’s transactions with external markets and also part of the current account, moved from a revised deficit of P11.6 billion in 2019 to a deficit of P23.2 billion in 2020, due to a 16.7 percent decline in diamond sales abroad from P51 billion in 2019 to P42.5 billion last year.
The deterioration of the BoP has been unfolding alongside the slowdown in annual economic growth, which dropped considerably from an average of 7.1 percent during 2005 – 2007 to an average of 6.4 percent during 2010 – 2012. This was followed by an average of 4.6 percent, and 3.9 percent during 2013 – 2015 and 2016 – 2018, respectively. Annual GDP growth dropped further to 3 percent in 2019 and contracted by 7.9 percent in 2020.
Furthermore, the national budget has also been under strain as the government continues to spend against lowered revenues. Between 2017 and 2020, budget shortfalls have added to P35.8 billion, and were mostly funded through the government’s portion of foreign reserves. For the financial year 2021/22, Botswana is expecting a P7.75 billion budget deficit.
“The deterioration in the BoP since 2015 and resultant decrease in the foreign exchange reserves, coinciding with the deceleration in overall output growth, points to a need to reassess the sustainability of the country’s growth model, hitherto premised on harnessing the diamonds endowment to propel growth and increase in living standards,” Mogapi and Badirwang said.
The economists’ findings and recommendations are in line with the 2020 International Monetary Fund (IMF) Article IV Mission Report for Botswana, highlighting the need to relook at the growth model, and suggested for a deliberate transition from a mining and government-led model to a private sector and export-driven growth model
Apart from the BoP and budget deficits, Botswana has other pressing challenges to contend with. The country has one of the highest unemployment rates and income inequality in the world. According to the Global Economy 2020 report, Botswana ranks amongst the top 15 countries on unemployment rates and top 10 with respect to income inequality.