BOTSWANA ECONOMIC OUTLOOK: CURRENT CHALLENGES & FUTURE PROSPECTS

Introduction

Botswana is currently facing significant economic challenges, primarily due to a sharp decline in its diamond industry, a vital pillar of the economy. This downturn has highlighted critical issues within the government's budgeting framework, raising concerns about fiscal sustainability and the future economic stability of the nation.

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Initial Revenue Projections

According to Finance Minister Peggy Serame's budget speech, total revenues and grants for the 2024/2025 financial year were projected to reach P93.58 billion. The largest contributor to this projection is expected to be customs and excise receipts, estimated at P26.46 billion, largely due to an increase in Botswana's share of Southern African Customs Union revenues. Mineral revenue, which includes diamonds, is projected at P25.05 billion, representing 26.77% of total revenues. Additionally, non-mineral income tax is estimated at P22.0 billion (23.5% of total revenues), while VAT is expected to contribute P15.24 billion (16.28%).

Despite these projections, total expenditure and net lending for the 2024/2025 financial year are expected to reach P102.28 billion, resulting in a projected budget deficit of P8.69 billion, or 2.8% of GDP.

Revenue Shortfalls

As of June 2024, actual total revenues and grants amounted to P18.2 billion, significantly lower than the anticipated P23.4 billion. This shortfall reflects a continued decline in diamond sales, which fell by 46.1%, from US$2.428 billion in 2023 to US$1.949 billion in the first half of 2024. Serame acknowledged the changing economic landscape and its impact on budget expectations, emphasizing the weak performance in the diamond market.

Increased Spending

Government expenditures have risen considerably, driven by various commitments. These include payments of personal emoluments totaling P5.75 billion, P1.5 billion allocated for pension augmentation through the Botswana Public Officers Pension Fund (BPOPF), and a P1.5 billion tariff subsidy to the Botswana Power Corporation. Other significant expenditures included P939.3 million for land acquisition from Tati Limited Company, P623.1 million for water projects, and P200 million for Chema Chema Funds. The sustained increase in spending has further strained the budget amid declining revenues.

Monetary Policy Adjustments

In response to these economic challenges, the Monetary Policy Committee (MPC) has reduced the Monetary Policy Rate (MoPR) to 1.9%. This adjustment aims to lower borrowing costs, potentially boosting retail spending more than business investment. Governor Cornelius Dekop noted that while these rate cuts are designed to make borrowing cheaper for both the government and corporations, the positive effects on economic growth may take time to materialize.

The MPC remains optimistic that the non-mining sector will compensate for the downturn in diamond revenues, projecting a growth rate of 5.7%. However, the International Monetary Fund (IMF) has revised Botswana's GDP growth forecast for 2024 down to 1%, primarily due to the continued decline in the diamond industry.

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The MPC believes the economy will continue to operate below full capacity, with no immediate demand-driven inflationary pressures. They forecast inflation to average around 3% in 2024, largely influenced by low international food prices and regulated electricity tariffs maintained through government subsidies.

Dr. Keith Jefferis highlighted that these subsidies have resulted in artificially low inflation, while the government’s financial burden grows due to regulated prices lagging behind production costs. The MPC is cautiously optimistic that easing monetary policy will help stimulate the economy, though the benefits may not be widely felt.

Market Volatility

In light of the upcoming elections, Stanbic Bank anticipates increased market volatility, particularly in currency markets. Onalethata Letlole, the Global Markets Corporate Dealer at Stanbic Bank, noted that political uncertainty surrounding potential policy changes could significantly influence investor behavior.

As the elections approach, Letlole warns of heightened market volatility as investors react to the shifting political landscape. “Certainly, there would be political uncertainty around policy changes if the government changes,” he stated. This sentiment is mirrored in broader global contexts, such as the potential implications of the U.S. elections on currency markets, where any significant policy shifts can lead to fluctuations in investor confidence.

The rand's recent performance against the dollar serves as a pertinent example. Letlole highlighted that various domestic and international factors have weakened the rand since the start of 2023, including upcoming elections in South Africa and persistent investor concerns about weak trend growth and fiscal sustainability. He remains hopeful that positive outcomes from elections could bolster the rand’s position as it adjusts to the broader economic climate.

Botswana's own currency may face similar challenges as political uncertainty looms. Investors are likely to gravitate toward safer assets, such as the USD and gold, as they reassess risks in the run-up to the elections.

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Historically, Botswana relied on the Government Investment Account (GIA) to mitigate economic shocks, maintaining debt levels below 20% of GDP. However, the GIA has experienced a dramatic decline, dropping from P30.5 billion in 2008 to just P5.1 billion in April 2024. This decline limits the government’s ability to absorb fiscal shocks effectively, raising alarms about the sustainability of public finances.

Minister Serame has indicated the necessity of mobilizing additional resources, including utilizing fiscal savings and domestic borrowing through new instruments such as inflation-linked bonds and green bonds. However, Dr. Jefferis has warned about the lack of legal requirements for the Ministry of Finance to seek parliamentary approval for budget adjustments, leading to potential overspending and fiscal irresponsibility.

Botswana's economy stands at a critical juncture, grappling with the ramifications of a declining diamond market and significant budgeting flaws. The government’s inability to adjust spending in line with falling revenues poses a substantial risk to fiscal sustainability. To navigate these challenges, strategic reforms and a diversified approach to revenue generation will be crucial for stabilizing the economy and fostering sustainable growth.

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