The Botswana economy faltered this year amid challenges in the diamond industry, with the contagion affecting trade, resulting in slowed output and widening budget deficits.
The diamond industry has struggled to maintain buoyancy in the first three quarters of 2019 following mild growth in the last two years. The global diamond crisis is still mired in a recession that has its roots in the 2015 downturn and was exacerbated by overproduction of rough diamonds in 2017, leading to higher inventory levels that generated a ripple effect through the supply chain.
The softer demand for polished diamonds was also driven by two major factors: geopolitical and macroeconomic tension which lowered consumer confidence and thus demand, and an increase in e-commerce created efficiencies in the supply chain that decreased the need for inventory on hand. This has affected diamond mining juggernaut De Beers’ revenue which has slumped following decline in sales of rough diamonds this year.
The fall in De Beers revenue will affect the Botswana government which has a 15 percent stake in De Beers and relies on diamond exports revenue which account for 35 percent of the country’s revenues. Already, the effects of the diamond industry recession are being reflected in Botswana’s trade statistics and budget projects.
In the first quarter of the year, the country recorded a trade deficit of P2.1 billion but recovered slightly in the second quarter with a trade surplus of P57.2 million. The third quarter’s deficit is pegged at P5.2 billion, making it the largest quarterly deficit since the 2008 financial crises. The fourth quarter will probably return another deficit, with current data showing that October trade data returned a P3.4 billion deficit.
The country is expected to run budget deficits in the next two financial years as government ramps up on job creation and improving civil service salaries. The budget deficit for 2019/20 is estimated at P7.7 billion or 3.8 percent of GDP, while the expected deficit for 2020/21 is set at P6.9 billion or 3.1 percent of GDP, and then another deficit of P4.4 billion in 2021/22.
In the face of the challenges in the diamond industry, Botswana’s economic growth was revised downwards this year. In November, the government finally caved in to the economic pressures, and finally slashed its growth prospects for the year months after being adamant that anticipated output will be higher despite other analysts downgrading the country’s economic prospects.
Botswana’s economy showed signs of weakness, growing at a lower pace since 2017, with real GDP advancing by 3.1 percent in the second quarter of the year (Q2 2019), which was a lower rate compared to the 5.2 percent growth registered in Q2 2018. The GDP growth was constrained by the mining sector.
The diamond led economy’s gross domestic product (GDP) is forecasted to grow by 3.6 percent in 2019, down from the initial projected 4.3 percent. The output for next year was also reduced to 4.4 percent after government officials had initially pegged the GDP growth for 2020 at 4.8 percent.
The sudden change in forecasts from the government follows months of resistance to accept that the economy is not performing as expected, while government officials had kept their growth rates higher than other analysts’ expectations.
Other economic developments this year saw consumer inflation hitting the lowest levels in over 34 years, as demand in the economy remains stubborn despite the lowest bank rate in the country’s history. The consumer price index (CPI) – which measures annual growth rate in consumer prices – has fallen from October’s rate of 2.4 percent to November’s 2.1 percent – making it the lowest annual inflation rate since 1975, and below the Bank of Botswana’s medium objective range of 3 – 6 percent.
It has been a period of low inflation environment in Botswana, which extends as far as 2011, with the inflation rate registering consecutive annual decreases. This year, the rate averaged 3.4 percent in the first quarter of the year, then slowed to 2.6 percent in the second quarter, and increased slightly to 2.9 percent in the third quarter. However, the inflation rate appears to be drastically dropping in the last quarter of the year as evidenced by the October and November rates.
Meanwhile, the central bank’s Monetary Policy Committee (MPC) in December, during the sixth and last meeting of the year, decided to keep the bank rate at 4.75 percent, the lowest rate in the history of modern Botswana. The rate hit the new lows in September after MPC slashed it from 5 percent, ending three years and nine months of the same rate.
The bank rate cuts have been part of larger efforts by Bank of Botswana (BoB) to stimulate demand in a low inflationary environment, which the bank attributes to subdued domestic demand pressures.
BoB anticipates consumer inflation to remain below the lower bound of the objective range for the remainder of the year. However, the bank’s officials revealed that inflation rate will increase slightly in the second quarter of 2020 on the back of increase in prices of electricity and water tariffs expected in the same quarter.