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%. Economic growth strongly bounced back in 2013 (+9.9%) as driven by the diamond sector, but decelerated again in 2014 (+3.2%) to eventually turn negative in 2015 (-0.3%). The slowdown in China combined with falling commodity prices are among the main external factors behind this economic contraction. Continuing electricity and water supply disruptions have also impacted manufacturing, whereas the negative effects of a regional drought adversely effected agriculture. The economy is expected to rebound with projected GDP growth rates of 3.7% and 4.3% respectively in 2016 and 2017, driven mainly by an expected improvement in diamond prices as developed economies stabilize and fiscal stimulus that will propel non-mining activity. Lower fuel and commodity prices, slower credit growth and weakening economic activity will keep CPI inflation at the lower end of the Central Bank’s band of 3-6%.
The fiscal balance swung from a surplus of 3.8% of GDP in 2014 to an estimated deficit of 3.0% of GDP in 2015, as revenues have fallen and the government embarks on its Economic Stimulus Program. Government relies mainly on two volatile revenue streams, mineral revenues (which accounts for almost 40% of total revenue) and South African Customs Union (SACU) customs revenues (27% of total revenue). The recent fall in mining revenue is expected to gradually recover as demand from developed economies stabilizes. The decline in SACU transfers will persist due to the weak economic outlook for South Africa. However, the government has substantial fiscal savings and international reserves, which provides Botswana ample space to gradually adjust expenditures to the SACU shock in the long run, and to provide counter-cyclical stimulus in the near term. This combination of expenditure growth and lower revenue is expected to further widen the fiscal deficit to 3.9% of GDP in 2016, before a gradual return to balance by 2019.
Weak performance across the mining sector will narrow the current account surplus. In 2014, Botswana achieved a current account surplus of 15.7% of GDP. External factors mentioned above adversely affected exports in 2015, and the current account surplus narrowed to 9.3% of GDP, and will continue narrowing further in 2016 on continued weakness in the mining sector before gradual improvement. Foreign reserves remain strong at USD 7.5 billion at end-2015, or about 65% of GDP.
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. While Botswana has made some progress in reducing its dependence on diamonds in the past 20 years, the level of economic diversification needed to offset diminishing mineral revenues will remains a challenge.
Last Updated: Apr 12, 2016