Botswana for years was hailed as an economic success story, but the collapse in demand for the country’s diamonds has hit revenues hard and raised questions about an ambitious spending scheme.
Botswana produces 22% of the world’s diamonds, making it the top producer and accounting for half of government revenue. The country prides itself as a model of a successful African democracy.
But in 2009, Botswana halved output and suspended much of its diamond activities as the global economic crisis hit its mines.
High-end tourism, Botswana’s other economic mainstay, also took a hit as arrivals fell sharply during the recession.
Buffers
Highlighting the nation’s difficulties, Standard and Poor’s rating agency on Monday downgraded Botswana’s sovereign credit ratings from A to A-, citing concerns over the country’s spending plans at a time of falling revenues.
“We expect this deterioration of public finances to translate into higher debt accumulation than we previously expected, and the gradual dissipation of the country’s asset buffers,” said S&P credit analyst Veronique Paillat-Chayrigues.
“We believe that Botswana needs these buffers more than many similarly-rated peers to offset its economic and fiscal dependence on commodity exports, in particular diamonds, combined with its
substantial development needs.”
For two consecutive years, the government has presented budget deficits due to limited funds and growing public expenditure, with this year’s deficit the largest yet.
Finance Minister Kenneth Mathambo said in this year’s budget that Botswana will run a 12-billion pula ($1,7-billion) deficit, representing 12,2% of gross domestic product.
The shortfall will be financed by drawing on the government’s cash reserves, accumulated in surplus years, and by borrowing largely on the domestic capital market, he said in the budget.
Value added tax will also rise from 10 to 12%, while public servants’ salaries were frozen for a second year in a row.
Independent economist Keith Jefferis, based in Gaborone, said the downgrade was no surprise, based on the growing deficit projections.
“The original credit ratings from S&P and Moody’s were based upon government’s large savings and the strength of the public-sector balance sheet,” he said.
“This position has been weakened as a result of the global recession, reduced revenues, continued very high levels of public spending and large deficits,” he said.
Government expenditure normally is largely on education, health, and poverty alleviation, in a nation where unemployment stands at 20%.
This year nearly one third of the government’s 39-billion pula budget is for infrastructure projects to expand electricity and water supplies, which the authorities believe are needed to serve the growing private sector.
The infrastructure spending is equivalent to the size of the entire deficit, but government insists that it’s money that needs to be spent to help encourage new industries and diversify the country’s economy away from diamonds.
Botswana is trying to foster an offshore financial services sector in a bid to become an investment hub in the region and facilitate trade.
Balancing act
The country has also offered incentives for manufacturing firms to set up shop, but is struggling to emerge from the shadow of regional economic giant South Africa.
Government spokesperson Jeff Ramsay said Botswana is in the process of cutting back severely on its spending while looking for new sources of revenue.
“We have no choice but to carefully engage in a balancing act to ensure stability. In this respect we appreciate S&P’s perspectives, both positive and cautionary,” he said. – AFP