Botswana is a development success story. A small, landlocked country of two million people, Botswana was one of the poorest countries in Africa with a per capita gross domestic product (GDP) of about $70 when it gained independence from Britain in 1966. In the years that followed, supported by the discovery of diamonds, Botswana has been one of the fastest growing economies in the world and moved into the ranks of upper-middle income countries. Real GDP showed robust growth of average 5% per annum over the past decade.
The country has a mature democracy, with free and fair elections held regularly and the constitution provides for fundamental rights and freedoms. The Botswana Democratic Party (BDP) has been in power since the first elections were held in 1965. The BDP won the 2014 general election, and Lieutenant- General Seretse Khama Ian Khama was sworn in as President for a second term.
In contrast to Botswana’s impressive economic growth, good governance and prudent macroeconomic and fiscal management, the country faces high levels of poverty and inequality as well as low human development indicators. While poverty rates declined from 50% at independence to just over 19% today, significant pockets of poverty remain, especially in rural areas. Education expenditure is among the highest in the world, at around 9% of GDP and includes the provision of nearly universal and free primary education, however, the sector has not created the skilled workforce Botswana needs to diversify its economy. Unemployment has remained persistent at nearly 17.8%, and as a consequence, income inequality in Botswana is among one of the highest in the world. The HIV/AIDS pandemic has further exacerbated the situation; the HIV/AIDS adult prevalence rate remains at 22%, contributing to education and health outcomes that are below those of countries in the same income group.
Continued uncertainty in global markets and the slow pace of economic recovery in advanced countries continue to act as a drag on Botswana's economic outlook, mainly due to the country's heavy reliance on diamond exports. After two years of strong post-crisis growth, subdued global demand for minerals and metals in 2012 slowed real GDP growth considerably to around 4%. However, the economy bounced back in 2013 and 2014, with real GDP growing by 5.8% and 5% respectively and is expected to grow by a modest 4.2% in 2015. The main driver of recent growth has come from the diamond sector, with real mining value added up 23.9% in 2013. In 2014, however, mining grew by a modest 4.5% due to the weakening global demand for rough diamonds, whereas, growth in the non-mining private sector slowed to 4.3% – this continues its downward trajectory after growth of 6.9% in 2013, 7.4% in 2012 and 9.4% in 2011. Due to weakening economic activity, lower credit growth as well as lower fuel and commodity prices, inflation has remained around 3% in 2015 Q2. This is at the lower bound of the Bank of Botswana’s 3-6% objective range. Accordingly, the Bank of Botswana lowered policy interest rates twice in 2015 (100 bps in February and 50 bps in August). The outlook for 2015-2017 is modest with expected growth rates of 3.2%, 3.8% and 3.9% respectively. This is due to falling demand for diamonds particularly in light of the slowdown in China, severe water and electricity constraints, as well as reduced credit growth due to higher household indebtedness. The Pula experienced a depreciation against the Euro in 2014 and 2015, reflecting divergence between major trading currencies. At end-2014, foreign exchange reserves stood at P70 billion, and had reached nearly P90 billion by April 2015.
The current account registered a strong surplus of almost 10% of GDP in the year to March 2014, following a small deficit in the previous 12 months. Exports of goods and services increased by 7.2% y/y in Q1 2015, with diamond exports increasing by 9.5% y/y in the same period. However, due to falling demand for rough diamonds, growth forecasts for total exports in 2015 are expected to be almost stagnant at 1%.
Botswana’s 2014-15 budget emphasizes tight fiscal management, prioritization, and a need to continue to rebuild fiscal buffers in the face of vulnerabilities in the country’s two main revenue streams (diamonds and the Southern African Customs Union (SACU) customs pool). After posting small surpluses in FY 2012/13 and 2013/14, the government projects a surplus of 2.4% of GDP in 2014/15, with total expenditure and net lending rising 22.6% from 2013/14 to a projected at 34% of GDP. Revenues are expected to be robust (up 12%), buoyed by higher minerals revenue (up 16.7%) and continued strong revenues from the SACU customs pool (up 16.7%). The medium-term fiscal framework, however, sees a shift toward greater emphasis on expanding domestic revenue base, reducing heavy reliance on SACU transfers, which reached a peak of almost 35% of revenue (12.6% of GDP) in 2012-13.
Botswana faces a key policy dilemma of how to grapple with the predicted decline in previously buoyant diamond revenues. Projections of future diamond revenues are uncertain. While diamonds may not be fully exhausted for another generation, output is already well past its peak. Over the past 20 years, While Botswana has made some progress in reducing its dependence on diamonds, but the level of economic diversification needed to offset diminishing mineral revenues will remains a challenge.
Last Updated: Oct 08, 2015