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Botswana’s economic growth is expected to slow to 1 per cent in 2024, primarily because of a diamond market contraction. The International Monetary Fund (IMF) noted that inflation in Botswana has declined sharply since the peak of mid-2022 and returned to the central bank’s objective range of 3 – 6 percent, where it is expected to remain in the medium term. The monetary policy stance is currently considered appropriate.
The fund said some fiscal relaxation is warranted this year given the fall in mineral revenues, but the execution of the ambitious capital budget should be slowed down to contain the deterioration of the deficit and prioritize projects with the highest returns. Botswana’s economic growth decelerated from 5.5 percent in 2022 to 2.7 percent in 2023, below the long-run potential growth of 4 percent.
A sharp decline in diamond trading and mining activities was the main contributor to the slowdown, as global demand for rough diamonds decreased. Despite the weak diamond market, the external position improved last year because of strong customs union revenues.
Inflation has remained below the ceiling of the Bank of Botswana’s (BoB) objective range since spring 2023. After peaking at 14.6 percent in August 2022, inflation declined rapidly, mainly as a result of falling oil prices. The BoB has cut its policy rate twice by a cumulative 50 basis points since December 2023, following the 151 basis points increase that took place in 2022.
On the budget side, there was significant fiscal relaxation in FY2023, mostly due to a decline in mineral revenues and higher capital spending. The fiscal position was loosened from a budget balance in FY2022 to an estimated 4.7 percent of GDP deficit in FY2023. Public debt remains low, but government deposits at the central bank have been significantly depleted. Looking ahead, the economy is expected to decelerate further this year, with growth projected at 1 percent. The continued slowdown is mainly due to a fall in diamond production, partly offset by construction projects financed by the fiscal expansion.
In the medium term, growth is expected to converge towards 4 percent, as diamond mining recovers. The current account deficit is projected to widen in 2024 given weak diamond exports, followed by a rebound next year. The rebound is predicated on a recovery in the diamond market and continued elevated customs union transfers. Inflation should remain within the BoB’s 3 – 6 percent objective range over the medium term. Inflationary pressures are expected to remain low, as international oil and food prices continue easing. The fiscal deficit is projected to widen further to 6 percent of GDP in FY2024, reflecting a further decline in mineral revenues and higher capital expenditure.
Medium-term consolidation, in line with the authorities’ plan to achieve a fiscal surplus by FY2026, is critical to stop the depletion of financial buffers, build resilience against shocks, and preserve fiscal sustainability. The financial sector remains sound and stable despite the economic downturn. Faster implementation of 2023 Financial Sector Assessment Program recommendations and operationalization of new regulations and laws will further reduce financial sector risks.
Read Also:
https://trendsnafrica.com/botswana-the-worlds-top-diamond-producer/
https://trendsnafrica.com/botswanas-successful-administration-of-diamond-industry/
Accelerating growth and job creation requires a fundamental shift towards greater private sector participation, a more diversified export base, and a more efficient public sector. Policy priorities include reform of state-owned enterprises, improved infrastructure for doing business (internet, energy, logistics), and trade facilitation measures.
