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, based on the revised estimates and at the new constant 2006 prices increased at an average annual rate of 4.6% between 1994 and 2011.
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. In the general election held in October 2009, the BDP won 45 of the 57 parliamentary seats that were up for election. Former Vice-President and the son of Botswana’s first President Seretse Khama, Lieutenant- General Seretse Khama Ian Khama, was inaugurated as Botswana’s fourth President in October 2009. The next general election will be held in October 2014.
Botswana’s impressive track record of good governance and economic growth supported by prudent macroeconomic and fiscal management, stands in contrast to the country’s high levels of poverty and inequality and generally low human development indicators. While Botswana’s economic progress over the past 40 years has transformed living standards for many – with poverty rates declining from over 50% at independence to just above 19% today – significant and stubborn pockets of poverty remain, especially in rural areas. Education expenditure is among the highest in the world, at around 8% of GDP; and while significant achievements in the education sector have been attained, including the provision of nearly universal and free primary education, the sector has not created the skilled workforce Botswana needs to diversify its economy. Unemployment has remained persistent at nearly 20%, 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 country suffers from the second highest HIV/AIDS adult prevalence rate in the world, 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. Real GDP growth slowed considerably to around 4% in 2012 after two years of strong post-crisis growth, mainly as a result of significant contraction in the mining sector, due to continued subdued global demand (hitting both volumes and price). However, the economy bounced back in 2013, with estimated real GDP growth of 5.4%. The main driver of higher growth has been a rebound in the diamond sector as a result of (i) firming up of global demand, particularly in the leading US market; and (ii) specific production dynamics in Botswana.Inflation has declined considerably, from over 9% per annum in 2011 to 4.1% in 2014– the first time since early 2010 that the rate has come within the Bank of Botswana’s (BoB) medium term objective range. Despite the risk of rising fuel prices, lower demand-side pressures are expected to maintain the path of declining inflation for the remainder of the year. BoB has maintained its accommodative monetary policy stance to support the domestic economic recovery, reducing its policy rate three times, by a cumulative 150 basis points, during the period April to August 2013. The current Bank rate of 8.0% is its lowest level in more than 20 years. The exchange rate has been relatively volatile during the year, resulting from the weakness of the South African Rand against the US dollar. As of the end of August 2013, the Pula depreciated almost 11% against the US dollar over the year, while appreciating 8% against the Rand. Foreign reserves amounted to a comfortable 13 months of imports of goods and services by end-December 2012.
Export growth has been robust in the first half of 2013 – up over 50% during the same period in 2012. This was driven mainly by the growth in diamond aggregation activities (re-exports) after DeBeer’s moved its diamond aggregation activities from London to Botswana, but also reflects strong growth of beef exports, following their return to the EU market after nearly two years of suspension over traceability issues. Despite this growth, the current account remains in deficit, and the large trade deficits incurred since 2009 have placed a significant dent in Botswana’s historically deep pool of foreign exchange reserves. Import cover has remained stable in the first half of 2013, at a fairly comfortable 11 weeks – this is, however, just half the pre-crisis level.
The government’s budget was balanced in FY12/13 for the first time since the 2008/09 financial crisis. Botswana’s 2014/15 budget, introduced in February 2014, 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 SACU customs pool), while highlighting the importance of economic growth to address Botswana’s development challenges. After posting small surpluses in FY 2012/13 and 2013/14, the government projects a surplus of 1% of GDP in 2014/15, with total expenditure and net lending rising 8.5% to a projected at 35.9% of GDP. Revenues are expected to be robust (up 10.5%), buoyed by higher minerals revenue (up 15%) 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.
In addition to the short-term challenges to address external shocks, Botswana continues to face a key policy dilemma of how to grapple with the predicted decline in previously buoyant diamond revenues. Although projections of future diamond revenues are uncertain, government estimates that the main diamond deposits will be exhausted between 2025 and 2030. Diversification into sectors beyond diamonds, that can support sustainable growth and ensure the welfare of the population, is therefore a major challenge, as is improving the quality of growth to address high levels of unemployment. While Botswana has made some progress in reducing its dependence on diamonds over the past twenty years, the level of economic diversification needed to offset diminishing mineral revenues will remain an elusive goal unless concerted actions are taken now.
Another related challenge is the imperative of shifting towards a smaller public sector, from one that represents close to 35% of GDP today to a more typical middle income country share of 25% - 30%. Declining public revenues will have to address a long agenda of unmet social and economic needs. Botswana's public sector therefore needs to ensure fiscal sustainability while simultaneously improving the effectiveness and efficiency of service delivery. Smoothing the transition to face a new reality of significantly constrained resources will require building on Botswana’s highly successful economic model to ensure that it can best meet the pressing challenges of the 21st century.
Last Updated: Apr 16, 2014