Botswana has been trying to diversify its economy from minerals dependence over years, but there is nothing to show for it, something that has worried rating agencies.
While those in the government enclave might be punching the air after Moody’s Investors Service (Moody’s) affirmed the country’s A2 rating for both foreign and domestic bonds and the stable outlook are reaffirmed for the year, the agency does not see bullish future.
“The economy’s heavy reliance on the diamond industry and the relatively slow pace of economic diversification remain key weaknesses for the rating over the long term,” said the international Sovereign Credit Rating Agency.
Botswana relies heavily on minerals extraction although it has seen impressive growth in non-mining sector.
According to Statistics Botswana, mining contribution to GDP stood at 26.6 percent in second quarter of 2014 followed by Trade, Hotels & Restaurants and General Government at 14.5 percent and 13.7 percent respectively.
However, the contribution of mining to GDP has shrunk over the years with the economy now dominated by the services industry.
The services sector on the other hand contributes 45 percent to the GDP although they cannot be exported because of lack of capacity by local businesses.
Managing Director of Econsult Botswana, and former Bank of Botswana Deputy Governor Keith Jefferis said earlier in the year that services presents a quandary for the Botswana economy as exports have not become more diversified and that has become the biggest problem.
“We make lot of services without exporting services. As the economy moves to services that is where we have structural problems. The challenge facing Botswana is that exports will die.”
Equally, mining is no longer the economy’s largest sources of fiscal revenues and they have been replaced by revenues from Southern African Customs Union (SACU).
According to the budget speech of 2014, the projected total revenue and grants for 2014/15 amount to P50.18 billion. This comprised Customs and Excise at P15.97 billion or 31.8 percent; Non-Mineral Revenues (Income Tax and VAT) at P15.66 billion or 31.2 percent; and Mineral Revenue at P15.24 billion or 30.4 percent.
A paper by Prof Roman Grynberg and Masedi Motswapong of the Botswana Institute of Development Policy Analysis (BIDPA) on SACU Revenue Sharing Formula: The History of An Equation, points out that SACU revenue has become important for the country’s budgeting.
“However, the risk for even Botswana, the country with the highest GDP/capita in SACU, is that SACU revenue, which is used to cover both the recurrent as well development budget of the country, has now become such a significant portion of total government revenue that the macroeconomic adjustment to any change in the formula or movement to another trade regime would be extremely difficult and fiscally destabilising,” said the BIDPA scholars.
Moody’s rating is based on the assessment that weighs the Government’s relatively strong balance sheet, net external creditor position and low public debt, against potential challenges associated with the middle income status and a relatively small economy.
“As in previous years, Moody’s noted that, given the healthy financial position and the stable political and financial environment, the risks that could put renewed pressure on the ratings are considered low.”