Botswana is one of the world’s great development success stories. A small, landlocked country of two million people, Botswana was one of the poorest countries in Africa with a per capita GDP of about US$70 when it gained independence from Britain in 1966. In the nearly five decades since, Botswana has transformed itself, moving into the ranks of upper middle-income status to become one of the fastest growing economies in the world, with an average annual growth rate of about 9 percent.
Botswana takes pride in its mature democracy. Free and fair elections are 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.
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 significantly raised living standards for many --with poverty rates declining from over 50 percent at independence to around 21 percent today --significant and stubborn pockets of poverty remain especially in rural areas. Education expenditure is high at eight percent of GDP and significant achievements in the education sector have been attained, including 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 close to 20 percent, 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 now suffers from the second highest HIV/AIDS adult prevalence rate in the world, and education and health outcomes are below those of countries in the same income group.
Botswana has rebounded well from the effects of the global economic crisis but its diamond-led economy model remains highly vulnerable to external shocks and global economic uncertainty. The diamond export recovered more quickly than anticipated in 2010, but signs of weakness were already visible toward the end of 2011. Economic growth estimates for 2011 indicate that the economy grew at a robust rate of 6.7 percent up to the third quarter after experiencing a strong growth recovery of 7.2 percent in 2010. Viewed against the backdrop of global economic uncertainty, Botswana lowered its projected economic growth for 2011 from 6.8 percent to 5.7 percent. For 2012, GDP growth is expected to be an even lower rate of 4.4 percent. While Botswana’s counter-cyclical fiscal policy led to accumulation of large fiscal, and external, deficits, it corrected the budget balance by reducing particularly development expenditures. Government aims to eliminate the deficit for FY2012/2013, after incurring fiscal deficits for four consecutive years. In the event of another global recession, Botswana does not have sufficient fiscal space to mitigate the shock as it was able to do in FY2008/2009.
The enclave nature of the mining sector has helped to contain the effects of the global financial crisis from spreading to the rest of the economy. As the mining sector accounts for less than four percent of the paid employees, unemployment rates are not thought to have risen substantially above pre-crisis levels although labor market data is sparse. The government has also implemented the public work program to mitigate the impact of the crisis on wage earners generally, and on the poor in particular. The non-mining private sector, which is highly dependent on government spending, also weathered the crisis better, due to the expansionary fiscal policy, but slowed down slightly in 2011 to 6.5 percent, down from 7.3 percent in 2010.
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 40 percent of GDP today to a more typical middle income country share of 25 to 30 percent. 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 a fundamental review of Botswana’s highly successful economic model that is beset with a new set of pressing challenges in the 21st century.
A Country Partnership Strategy (CPS) for Botswana was presented to the Bank’s Board of Executive Directors in May 2009. The strategy presents the World Bank’s indicative program for Botswana for the period of FY09 to FY13. This first-ever Bank strategy came in response to increased interest from the Government of Botswana for a scaled-up World Bank Group program. The strategy was developed in consultation with the Botswana government, and is linked to core national development priorities as set forth in Botswana’s long term development strategy “Vision 2016,” and the National Development Plans (NDPs).
The WBG’s Botswana program will focus on four elements of the government’s short- and long-term development agendas, as reflected below.
- Enhancing Public Sector Effectiveness
- Fighting HIV/AIDS and Improving Education Outcomes
- Increasing Competitiveness through Infrastructure, and Improving the Climate for Investment and Growth
- Protecting the Environment
As of February 2012, the Bank’s portfolio had four active projects: (i) Botswana National HIV/AIDS Prevention Support (US$50 million); (ii) Integrated Transport (US$186 million); (iii) Morupule B Electricity Generation and Transmission (US$379 million financing package); and (iv) Human-Wildlife Conflict Prevention (US$5.5m grant from the Global Environment Facility). In addition to the lending program, the Bank is undertaking analytical work to better understand the apparent contradiction between the strong track record in governance, macro-fiscal management and growth vis-a-vis high levels of poverty, inequality and human development indicators, and to continue identifying key bottlenecks to economic diversification.
Based on the recent and on-going analytical work, the Bank is currently in dialogue with government to develop a comprehensive program to assist the country’s agenda on economic diversification and competitiveness. The program will cover five pillars jointly identified by government and the Bank: doing business, industrial and trade policies, infrastructure, access to finance, and skills development. In November 2011 and March 2012, the GoB partnered with the World Bank in co-hosting two major South-South knowledge-sharing conferences on processing of diamonds and doing business reforms respectively. Increasingly, such events are helping to bring global and regional knowledge to bear on economic diversification issues for the benefit of Botswana and other African countries.
Botswana joined the International Finance Corporation (IFC) in 1979 and the Multilateral Investment Guarantee Agency (MIGA) in 1990. The IFC supports the competitiveness agenda through selective strategic interventions;
The MIGA will also support the country’s competitiveness agenda through the provision of political risk insurance, if and when needed by foreign investors active in the country. To date few investors have sought such support from MIGA, primarily due to the market’s perception of low political risk. Nevertheless, MIGA’s insurance can be used as a credit enhancement tool (to improve lending terms and conditions of private projects) in middle income countries like Botswana. In this regard, MIGA will continue to work closely with the Bank and IFC, especially on infrastructure projects and extractive industries’ sectors, given their significant potential to impact growth.
The Bank arranged a partial credit guarantee under the Morupule B project to extend the maturity of an US$825 million commercial loan to Botswana from 15 years to 20 years, which will reduce consumer tariffs by up to US$0.05 cents per kilowatt hour. The project is on-schedule. Once operational the plant will eliminate Botswana’s dependence on power imports from South Africa. Also, the Bank is supporting analytical work for development of low-carbon energy alternatives such as coal bed methane and renewable energy, including concentrated solar power.
The Bank is bringing global and regional experience to increase the efficiency of the national HIV/AIDS program by and enable the government to transition from an “emergency” response to a broader, more strategic and sustainable approach. The Bank has also been able to leverage a contribution of US$20 million from the European Commission using an innovative, performance-based “buy-down” structure to improve the performance of the National AIDS Coordinating Agency. This instrument relies on donor resources to lower the cost of an IBRD loan targeted at priority health activities. The release of the donor funds is dependent on project performance, as measured against jointly-agreed indicators, within a specified time frame. Given that its upper middle-income status excludes Botswana from the World Bank’s no-interest or low-interest-rate IDA resources, the government requested that the proposed operation be financed utilizing the IBRD “buy-down” facility.
Given Botswana’s strong economic performance, the number of active donors is limited and improved donor coordination . In September 2007, the Ministry of Finance and Development launched a Development Partners Forum, a welcome initiative to improve donor coordination. Through the “buy-down” arrangement of the HIV/AIDS project, the European Commission has emerged as the Bank’s main partner with a substantive portfolio targeting a pressing development challenge of slowing the epidemic. The Bank is also collaborating with OFID which is providing US$30 million in co-financing for the Integrated Transport project.