Botswana, which is largely dependent on mineral exports, particularly diamonds, is regarded as one of the best performing economies in Africa.
Its economy recorded strong GDP growth (averaging 4.3 percent) over the period 2004/05-2007/08, witnessed a reduction in inflation, continued strong balance of payments and fiscal surpluses.
Diamond sales also ranged between $200 million and $300 million per month prior to October 2008.
Rude awakening call
However, a rude awakening call came when the world economy made a complete volte-face in November 2008.
The slump in global gem prices by about 60 percent forced some of Botswana's diamond mines to close for the first time, resulting in lower export receipts and revenues for the government.
Diamonds contributed over 30 percent to the country’s GDP and over 50 percent to the government’s revenue.
Botswana’s budget deficit blew up to 15 percent of GDP, a move that forced the government to seek an emergency $1.5 billion loan from the African Development Bank to sustain its operations.
Consequently, public debt shot to about 18 percent of GDP, as did external debt to nearly 13 percent of GDP.
The erosion of government’s revenue base and the fall in government deposits with the central bank forced Standard & Poor’s to downgrade Botswana’s rating to A- from A, while Moody’s left the rating unchanged but revised the outlook from stable to negative highlighting downside risks.
This was a sad reality that gave a hint of the tough times to come when the diamond mines run dry.
The clarion call then was for Botswana to diversify its economy away from diamonds.
Problems far from over
Although the diamond industry recovered towards the end of 2009 through to 2010, the miners and consumers maintained a cautious approach.
The first half of 2011 also saw diamond prices surging high before it tapered off in July.
Rising sovereign debt and falling consumer confidence in some developed countries contributed to the weak demand for diamonds.
Botswana’s Finance minister Kenneth Matambo was aware of this as he recently slashed the country’s overall economic growth forecast for 2012 to 4.4 percent from an initial projection of 7.1 percent.
He said the revised economic growth figures were as a result of the continued uncertainty in diamond sales, which fell (by 70 percent) from $594.3 million to $160.3 million between June and December 2011.
Matombo said there was no guarantee that this trend would be reversed in the near future unless the situation improves in the USA and the Euro area.
“Current projections indicated that the volume of diamond sales in 2012 would be almost equal to those for 2011,” he said.
“Should this forecast come true, we will be forced to reprioritise our planned expenditure options both at national and individual household levels in light of a constrained budget and economic outlook.”
More strikes
Matombo said that all government ministries would be subjected to a 5 percent cut in their wage bill for the next three years, adding that new hires had also been frozen.
Analysts say this would set President Ian Khama's government on a potential war-path with public sector unions that staged a two-month strike last year demanding steep pay rises.
Khama fended off the pressure saying that the country could not afford the increases, but will he contain the unions this time around, as more strikes were inevitable?
It is quite axiomatic that Botswana’s economy is heavily reliant on diamonds; hence whenever the market catches a cold its economy sneezes.
Eggs in one basket
The country might be fighting to promote down-stream (diamond) industries as evidenced by a deal it reached with De Beers last year; however the truth is that Botswana needs to cast its economic net wide.
Non-diamond mining activities such as coal, nickel, and silver have a great potential to contribute to the country’s economic growth.
The same applies to tourism and agriculture (beef), which currently accounts for 12 percent and 2.8 percent of the GDP respectively.
Energy should be expended on finding ways to boost these sectors than wait for fundamentals of the diamond industry – the country does not control - to change before its economic fortunes convalesce.
Yes, the country is regarded as the best leading diamond producer by value, yes the country will register a marginal economic growth this year, but this does not count when it continues to rely (dangerously) on gems for economic growth.
Botswana should learn from fellow leading diamond producing countries such as Russia that you don’t put all your eggs in one basket.
Mathew Nyaungwa, Editor in Chief of the African Bureau, Rough&Polished
