Since independence, Botswana has had the highest average economic growth rate in the world, averaging about 9% per year from 1966 to 1999. The government has consistently maintained budget surpluses and has extensive foreign exchange reserves, and growth in private sector employment has averaged about 10% per annum over the first 30 years of independence.
Despite the many accolades that the country has received for good governance and prudent fiscal management, the country has not been immune to effects of global economic crises in the early 2000’s and the recent global recession in the period 2007 to 2012. This has largely been as a result of the structure of the Botswana economy, which is too small to thrive on its own, and its high dependence on external markets for its mineral produce, which form the mainstay of the country’s gross domestic product.
Structure of Botswana
Botswana’s impressive economic performance over the past three decades is mainly due to the success of the export sector. This sector is dominated by diamond mining, which during the 1990s contributed on average 35 percent to GDP, accounted for 82 percent of export earnings, and made up 53 percent of government revenue.
As at the end of 2012, mining as a whole contributed 20 percent to GDP, and mineral revenues and mineral income taxes were 57% of total Government revenues.
Government policy aims to reduce the vulnerability from this dependence on diamonds by diversifying the export base, and promoting growth and development of non-mining sectors. The government aims to position Botswana to compete effectively in global markets by adjusting its economic structure and institutional framework to take advantage of opportunities offered by globalization. Various programmes, policies and strategies are being implemented to drive the economy, including provision of requisite infrastructure, maintaining a conducive macro-economic policy regime for private sector initiatives, and increasing labour productivity through human resources development.
Effects of the most recent recession on Botswana
The global economic crisis in 2007 drove the demand for luxury goods down, and for the diamond dependent Botswana economy, resulted in a domino effect on the economy as a whole and a number of sectors. Government cut spending on new projects, and for a government-led economy such as Botswana, a lot of other industries suffered. This resulted in a rise in unemployment, and a reversal in the history of surpluses on the balance of payments. Government however, as part of measures to stimulate the economy, took the decision to proceed with all major projects that were underway at the time the crises set in. This policy stance, coupled with the declining Government revenues meant that Botswana was now importing more than it was exporting, leading to a trade deficit balance and a decline in foreign exchange reserves. Rising food and fuel prices also impacted significantly on the government import bill and the welfare of the general populace.
Botswana diamond giant, Debswana temporarily shut down its mine in April 2009 in a bid to conserve cash. In addition, real exports of goods and services decreased at a rate of 67% during the first quarter of 2009 compared with the first quarter of 2008. Figures released by the Central Statistics Office (CSO) showed that at constant prices, GDP decreased by 20.3% from P6.17 billion in the first quarter of 2008 to P4.91 billion in the first quarter of 2009. Mining and quarrying industry contributed most to the decline with a 68% fall. The data indicated that real GDP slipped from P6.723 billion in the third quarter of 2008 to P6.299 billion in the fourth quarter before further decreasing to P4.914 billion in the first quarter of 2009.
The recovery in the global markets has been at the very least volatile. Whilst the Southern Africa region was relatively stable in 2010, probably because of activity around infrastructure development plans and the soccer world cup in South Africa, the first signs of recovery in the global markets were seen in 2011. The rebound was however short-lived as gains were reversed in 2012. This emanated from slower than expected growth in China, concerns over Europe and Spain in particular, and not so encouraging job data in the United Stated. In 2013, there were concerns still in the first half of the year on the global economy emanating from a possible Euro crisis, and now from anxieties over the possibility of a US debt crisis and the short term solution that saw Congress suspend the debt ceiling again until February 2014. For Botswana, the volatility is aptly shown in the trade statistics for diamonds.
Trade in dollar terms declined from 2007 and only exceeded pre-2007 levels in 2011, after which it slumped back below the US$ 3.3billion registered in 2006.
Most non-mining sectors recorded real growth rates, with construction growing by 19.7%, utilities by 11.2% and social and personal services by 10% in 2012. The IMF predicts the Botswana economy will grow by 3.9% in 2013 and peak at 4.4% in 2015, after which it will stabilize at around 4%. The growth in the near term will be supported by the base effect of electricity production and some recovery in the mining sector. This is because power shortages that would have affected growth in production and industry as a whole would be eliminated as Morupule B comes on stream. GDP increased by 7.9% between April and June in 2013, doubling the growth registered in the previous quarter. This was driven largely by a recovery in the mining sector. As reflected in the diamond trade statistics, the mining sector, which had contracted by 3.6% in the first quarter of 2013, expanded significantly in the second quarter by 15.6%.
The Government ran deficits from 2008/9 to 2011/12 and took the decision to balance the budget in the 2012/13 financial year. It is expected that from this year on, surpluses will be generated to build up reserves and pay off debts.
Botswana has been lauded by international institutions for a number of things, including;
- Being a model for democracy and political and economic stability
- Crackdown on corruption and economic crime
- Control over HIV/AIDS through a free drug programme
- Prudent fiscal and monetary policies and management
By one estimate, it has the fourth highest gross national income at purchasing power parity in Africa, giving it a standard of living around that of Mexico and Turkey.
It has also been reported that World Bank researchers have ranked Botswana as Africa’s leader in terms of potential investment destinations, according to the Global Investment Promotion Benchmarking (GIPB) 2009 report. This is supported by a “no exchange controls” policy, very low tax rates (as low as 15% for International Financial Services Centre registered companies), and the number of tax treaties in place with a number of countries.
As with the global economic cycle, it is very difficult to map out where Botswana sits today because of the volatile global market and her dependence on diamond mining and its export markets. We do know however that Government has come out of the red and positioned Botswana for further growth, with a lot more focus on the non-mining sector. Whilst Botswana’s historic stellar performance is now overshadowed by strengthening oil output in Angola, new gas finds off the coast of Mozambique, and new developments around oil in South Sudan, the country remains a prospect for further growth and investment, all within a stable environment.
For more information or a detailed discussion, please contact Boipelo Koketso (Consultant in Corporate Finance) firstname.lastname@example.org and Mosimanegape Mogegeh (Senior Manager in Corporate Finance) email@example.com.