Landlocked Botswana is located at the center of Southern Africa, a strategically positioned bridge between South Africa, Namibia, Angola, Zambia, and Zimbabwe. It has a relatively small population of a little more than 2 million people. One of the world’s poorest countries at independence in 1966, afterwards it rapidly became one of the world’s development success stories. Significant mineral (diamond) wealth, good governance, coupled with prudent economic management, has made it an upper middle-income country. The World Bank’s engagement is thus focused on helping it consolidate its progress while addressing a range of persistent and emerging challenges. Poverty is still widespread and the economy remains undiversified and vulnerable to macroeconomic and climatic shocks. Botswana also suffers from especially high rates of inequality and vulnerability, many of which threaten the gains it has made so far.
Botswana has a stable political environment with a multi-party democratic tradition. General elections are held every five years. The ruling Botswana Democratic Party (BDP) has been in power since 1966. While it is widely expected that the BDP will maintain its dominant position in the next general elections in 2019, the 11th general elections held in October 2014 saw opposition parties increase the numbers of their parliamentary seats and reduce the BDP’s stronghold.
President Lieutenant General Seretse Khama Ian Khama is serving his second term of office, which is due to end on March 31, 2018.
Since gaining independence from Britain, Botswana’s has been one of the world’s fastest growing economies, averaging 5% per annum over the past decade. But its reliance on commodities renders it vulnerable to international market fluctuations. The prolonged uncertainty of global markets and slow pace of economic recovery in advanced countries both continue to act as a drag on Botswana's economic outlook.
Botswana’s fiscal deficit narrowed in fiscal year 2016/17 to 0.7% of GDP compared to -4.7% in the previous fiscal year, which starts in April. The fiscal deficit improved largely due to higher than expected mining revenues and stronger GDP growth. However, fiscal revenues are still highly dependent and vulnerable to two volatile sources of revenue inflows; mineral revenue (which accounts for almost 40% of total revenue) and Southern African Customs Union Revenues, (SACU), which account for over one quarter of total revenue. In aggregate, revenues increased by 0.8% of GDP in the fiscal year 2016/17, and reached 31.9% of GDP, although they are still low compared to the historical average of around 37%. Expenditures declined by 2.7% of GDP compared to the last fiscal year, and equaled 33.2% of GDP, mostly due to higher than anticipated GDP growth.
The economy is expected to rebound with projected GDP growth of above 4% in 2017, driven mainly by improvements in the mining sector, services sectors, and continued fiscal stimulus that will propel non-mining activity. This intensification of economic activity and domestic demand, combined with the gradual increase of the commodity prices, will raise inflation to around 4%, which is still within the Bank of Botswana’s medium term band of 3-6%. Budget revenues are expected to increase; if they do, this will be from higher mining revenues as industrialized economies stabilize and SACU receipts grow.
The combination of expenditure growth and higher revenues are expected to reduce the fiscal balance until 2019. The current account will moderately narrow in 2018 and 2019 as a result of higher imports triggered by the recovery of domestic consumption.
Despite Botswana’s economic growth, the country faces high levels of poverty and inequality, especially in rural areas and in the southern part of the country. It is expected to make slow progress on poverty reduction over the medium-term, with poverty falling only slightly from 13.2% in 2013 to 12.3% in 2018. Accelerating poverty reduction will require bold decisions that encourage greater private sector job creation, higher value-added agricultural production and services, credit expansion, and lower household debt.
While Botswana’s social sector expenditures have been generous, they have not yielded the impact one might expect. Education expenditure, for example, is among the highest in the world—at about 9% of GDP—and includes the provision of nearly universal free primary education. But the sector has not created a skilled workforce. Unemployment has remained stubbornly high at nearly 17.8% and, in consequence, Botswana’s income inequality is one of the highest in the world.
The HIV/AIDS pandemic has further exacerbated the situation; the HIV/AIDS adult prevalence rate remains where it has been for some time, at 22%, contributing to education and health outcomes below those of other upper middle-income countries.
Key Development Challenges
Botswana’s extraordinarily high inequality is holding the country back, making it difficult for sustained growth to lead to rapid poverty reduction. Poverty remains high in rural areas, female-headed households, and those with low levels of education. Alarmingly, poverty is concentrated among children and youth, with significant implications for social inclusion and inter-generational effects.
Botswana is also marked by high levels of vulnerability, with approximately 30% of the population just above the poverty line. A broad range of macroeconomic or climate-related shocks could push this group back into poverty, significantly eroding Botswana’s hard-won gains. In short, Botswana’s significant social expenditures seem to have had little impact on inequality and vulnerability, suggesting that improved management leading to greater efficiencies would be possible.
Botswana faces a key policy dilemma of how to grapple with the predicted decline in previously buoyant diamond revenues. Projections for future diamond revenues are uncertain: while diamonds may not be fully exhausted for another generation, output is already well past its peak. Botswana has made some progress in reducing its dependence on diamonds in the past 20 years, but the level of economic diversification needed to offset diminishing mineral revenues remains a challenge. Recent projections for diamond production indicate that output should remain stable at current levels for the next 35 years, which provides a useful base for GDP, government revenues, and exports. At the same time, it is estimated that non-diamond GDP will need to grow at an average of 6.4% annually for the next 20 years (through to 2036) to reduce the country’s unemployment rate to 5%.
Botswana’s economic model will need significant adjustments if it is to meet the population’s current and future needs. The current economic model has delivered important results, but it has also generated strong state-dependence (as both the main investor and employer) and little in the way of innovative value-added manufacturing or services in the economy. More importantly, the model has not facilitated private sector-led job creation, which in turn has exacerbated national inequality. Policies designed to facilitate: a stronger investment climate for private sector-led growth; the more efficient management of social sector spending; and to strengthen its human and physical assets are essential if Botswana’s future development is to be even more inclusive and avoid the “middle-income trap.”
Last Updated: Oct 05, 2017