Sunday, October 25, 2020

Declining Diamond Production in Botswana has Economy-wide consequences – Report

Mining remains the bedrock of Botswana’s economy; in particular diamond production remains the most important export earner accounting for a large chunk of export revenue. However, “there would be a significant crunch in the economy when diamonds decrease in about 2027.”

This is according to a report compiled by leading economist Dr Rob Davies. The report states that, “The size of such a shock is enormous and its consequences for the welfare and the political economy of Botswana are immense,” it reads.

The report also assumes that the decline will take place between 2025 and 2027 although the predictions were not drawn on this precise timing. “GDP in diamond mining declines by 75% below its 2024 level and the decline leads to a total of 25% in 2028.” However, even though production stabilises, the economy will in the future decline. “Ten years after the presumed reduction in diamond production started GDP will be 48% below what it would have been.”

The report further states that this decline is driven largely by the impact the decline has on savings (and therefore investment). While some non diamond sectors initially expand lightly when diamonds decline, because of exchange rate effects, they quickly start to slow down and even contract as investment falls because of resources. These outcomes might be influenced in the short to medium term by policy responses. “Broadly speaking it may be possible to ameliorate the decline in the short term, but only by running up government and foreign debt,” said economist Rob Davies. “While such policies might take sense in the face of temporary down turns in the economy, they do not when, as in this case, the negative shock is permanent because the delay is inevitable and likely exacerbate the eventual adjustment that is required, adding a debt crisis to the diamond depletion.”

Davies added that the alternative (and preferred) policy would be to undertake measures now to put Botswana in a better position to cope with diamond depletion when it occurs. “We do not suggest what these might be,” he concluded. The 2015 preliminary African Economic Outlook report, takes the position that the medium term economic outlook for Botswana appears favourable underpinned by sustained expansion in mining, construction, transportation, tourism and by a rebound in financial services. Inflation is projected to remain in single digits, reflecting prudent monetary policy, while the objective of exchange rate policy is to maintain external competitiveness.

Increasing domestic revenue collection remains a priority for the medium term, and large infrastructure developments will certainly require additional resources. Investors are attracted by the country’s stable political environment and a flourishing economy that has posted an average of US$ 7,500 GDP per ca pita.

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