Balancing The Budget

The government of Botswana is determined to rein in expenditure in the face of wide fluctuations in international demand for diamonds. Mining, principally of diamonds, accounts for 40% of GDP and it would be unthinkable for Gaborone not to make the most of this natural resource. Yet it must expand the range of economic activity in the country if it is to increase employment and reduce its vulnerability to swings in the global economy. Nevertheless, new power projects and vast reserves of coal and gas promise sustained growth over the medium term.

Botswana is well known for its economic caution but the government was forced to run a budget deficit for three years after the 2008 global economic crisis, peaking at a massive 15% of GDP, because of the country’s dependence on diamond income.

However, the Ministry of Finance now forecasts that the 2012 budget will result in a surplus of about 0.9% of GDP because expenditure has been reduced by three percentage points to 33% of GDP. Finance minister Kenneth Matambo said: “Government had promised a balanced budget for the coming financial year. Instead, a modest surplus is projected, demonstrating that Botswana is indeed committed to maintaining fiscal sustainability.” Total income for the 2012–13 financial year is forecast at P42.91bn ($5.9bn), with expenditure of P41.76bn.

Total government wage costs will be reduced by 5% a year over the next three years. Inflation stood at 9.2% in December and is expected to remain high during 2012, while unemployment in December stood at 17.8%.

The government’s strategy will result in real term wage cuts for state employees and a fall in the proportion of the population employed by the state. In 2011, the IMF had warned the government that wage costs were consuming too great a proportion of GDP. Gaborone will continue to fund poverty reduction schemes but will only invest in new infrastructural projects where they are likely to generate increased income relatively quickly. Instead, the onus for continued economic growth will fall on the private sector. Real progress has been made on boosting the living standards over the past decade and the proportion of those living below the poverty line has fallen from 30.6% in 2002–03 to 20.7% in 2009–10, one of the fastest improvement rates anywhere in the world.

However, Finance Minister Matambo also cut his growth forecast for this year from 7.1% to 4.4%, below even the 5.3% prediction made by the IMF and the 6.2% forecast by the World Bank.

The World Bank’s Global Economic Prospects report made the optimistic prediction, but warned: “Major industrial commodity exporters like Chile, Botswana and Central African Republic are likely to suffer large price and earnings swings and therefore be exposed to large swings in current account balances, government deficits and currency swings. Indeed, these secondary effects could be long lasting if reduced export earning caused countries to delay the import of productivity and growth enhancing capital goods.”

Financial commentators were largely complimentary about the budget. Vijay Kalyanaraman, the president of the Botswana Institute of Chartered Accountants, said: “It could be argued that the balancing of budget comes through reduced spending and not through diversified revenue base; however, a surplus budget brings in a positive feel to the economy. Government is giving a clear signal that they want the private sector to step up and partner with government on their pursuit towards improving efficiency, creating employment opportunities and fostering private sector growth.”
Mixed fortunes

The government’s tough stance on spending triggered a two-month strike by state employees last year but President Ian Khama and his cabinet seem determined to maintain strict fiscal discipline. It remains to be seen whether the trades unions have the stomach for further conflict. Andrew Motsamai, the secretary general of the Botswana Federation of Public Service Unions, said: “The government had created the impression of doom and gloom all along and it turns out that we have a surplus budget as opposed to a balanced budget. It, however, does not address a number of issues unsettling the unions. The problem is that there is an inability to stem corruption.” It seems unlikely that industrial action on the same scale will be attempted this year: the government’s policy of cutting wages and freezing recruitment may be regarded as preferable to redundancies.

The government’s caution stems from mixed fortunes in the diamond sector. The value of diamond exports reached a record $4.34bn in 2011, a 51.9% rise on the previous year. However, sales fell during the second half of the year, suggesting that global demand was again falling. Matambo said: “There is no guarantee that this trend will be reversed in the near future unless the situation improves in the United States and the Euro Area. Current projections indicate that the volume of diamond sales in 2012 will be almost equal to those for 2011.”

He added: “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.”

The long-term forecast for diamond sales also looks bright. A report suggested that rising demand for diamonds in Asia would boost global demand by an average of more than 6% a year over the next decade, not necessarily “investment funds, that invest on behalf of investors into diamonds – that model seems to have been less than successful – but individuals buying into investment diamonds in places like China, India and the Middle East.”

Trade with Africa critical

As in the rest of the continent, Botswana’s long-term economic fortunes depend on its ability to greatly increase trade with neighbouring states and the rest of the world.

Botswana traders are already making use of improved road transport links with Walvis Bay. Namibia’s state-owned port operator Namport and other stakeholders are seeking to promote use of the port of Walvis Bay to other countries under the banner of the Walvis Bay Corridor Group (WBCG). Many haulage firms continue to use much busier and more distant South African ports, despite the fact that sailing from Walvis Bay to Western Europe and the North American eastern seaboard is quicker from Namibia than, for example, Durban. However, real improvements have now been made to road links between Namibia and Botswana.

In January, a spokesperson for WBCG announced that 24,000 tonnes of freight was transported along the Trans-Kalahari Route last year. He added: “We have also experienced that more than 70% of the road transporters previously using the traditional trade route via the south of Namibia to Johannesburg have now opted for the Trans Kalahari Corridor, which is 400km shorter via Botswana from Walvis Bay.”

The Trans Kalahari route is also much faster for road transportation, saving five to seven days in transit for Botswana imports and exports compared to some other ports. The government has acquired a 50-year lease on an area at Walvis Bay for the development and use of Botswanan traders. Such road links should also boost the country’s tourism sector. The Okavango Delta is known around the world but access to the area and other sites of natural beauty can be difficult. The government is seeking to balance improved transport infrastructure with the development of sustainable tourism.

The centrepiece of Botswana’s economic policy has been prudent management of its diamond resources, while using its diamond windfall to finance economic diversification. As the world’s second-biggest diamond producer by volume and first in value, the industry accounts for 75% of export revenues, but economic diversification has emerged in another mining product: coal.