The diamond industry is bouncing back to the pre-crisis levels pulling itself along with the country from the worst recession in nearly half a century, the International Monetary Fund (IMF) said in its report that was put on Bank of Botswana website this week.
The global financial watchdog said the developments bodes well for the country but urged fiscal restraint, which include a hike in fuel prices, broadening tax bases, locking in inflation to target range, freezing government staff recruitment and new developments, cancel scare skills allowance in a bid to bring back the country’s finance on track.
The IMF said over the last few years government embarked on major spending spree on recurrent and developmental budget, which is threatening the solvency of the country.
“The economy is likely to see some rebalancing this year, as lower government spending dampens growth in the non mining sector while recovery in the diamond sector accelerated,” a report compiled by IMF team said.
The IMF team was in the country in July to snoop around but left the country with some stern warning as it suggests tough and unpopular measures that need to be taken. The IMF measures are likely to make the current administration the most unpopular since independence.
Botswana, which is the size of Texas, is heavily dependent on diamond revenue, which contributes over 50 percent of government revenue and accounts for over 70 percent of the country’s exports. In the report IMF said government need to tighten the belt to ensure the sustainability or face being added to the list of African failed states.
“Much of the adjustment will need to come from the lower public spending, as mineral revenues are on the declining trend; and the scope for raising non mining taxes is limited by the size of the private sector.
“Plans to balance the budget by 2012/13 and register surpluses thereafter are ambitious but warranted. Recent increase in public debt, and more challenging fiscal environment going forward, will require a clear framework for management of government assets and liabilities,” the report said.
“Spending would shift towards maintain existing infrastructure, and capital expenditure spending would decrease from recent exceptionally high levels. Recurrent spending would be held in check, in part by allowing no net new hiring into the public service,” the report said.
However, IMF said in the medium term the outlook is favourable with the GDP forecast to grow by six percent thanks to the recovery in the diamond sector.
“Diamond production is projected to recover gradually, in line with the moderate recovery of consumption in advanced markets. However, a double-dip recession in advanced economies could prompt a further collapse in the markets whereas new demand from China and India could drive a stronger recovery,” the report said.
“Sustaining the high growth rates will require an ambitious set of policies and reforms to create a leaner and more effective public sector and promote private sector growth.