Botswana’s Economic Odyssey in 2024

Diamonds in the rough Mining sector takes center stage With the performance of the diamond industry expected to remain under pressure in 2024, economists forecast a subdued year ahead similar to the previous year. The diamond industry, which has been under strain since last year is feared to remain subdued at least until the end of the first half of this year. Economists predict that the mining sector - a major source of foreign direct investment - will experience solid growth as the government intensifies efforts to diversify away from the diamond sector. “We note a growing focus on coal and copper projects,” said Naledi Madala, an economist at Absa Bank Botswana. “[ihc-hide-content ihc_mb_type="show" ihc_mb_who="2,1,3,4" ihc_mb_template="3" ] Construction growth will continue to be driven by some large-scale energy infrastructure projects that are planned or underway.” Likewise, an economist at First National Bank Botswana (FNBB), Gomolemo Basele, said it is expected that the Kalahari Copper Belt will support Botswana’s emerging copper production capacity. “On diamond mining, both Jwaneng and Karowe mines are expected to transition from open cast to underground mining, extending the life of both mines,” said Basele. “Debswana’s Cut 9 and Cut 3 projects are expected to gain pace given the 25-year mining license extension (through to 2054) and 10-year sales agreement (expiring in 2033) between the government and De Beers.” The success of these two projects, Basele explained, will see operations at the Jwaneng and Orapa mines being extended to 2035 and 2050, respectively. However, he cautioned that despite these efforts, global diamond demand is expected to continue to remain under pressure in the first half of 2024 and so will act as a drag on Botswana’s growth this year. “However, as global growth improves from 2H2024 onwards, so is diamond demand and, by extension, Botswana’s growth prospects,” said Basele. “The recovery of global economic growth from the pandemic continues, but it has been divergent and risks remain abundant.” According to Basele, stress is unwinding, yet global growth is still on track for a slowdown. FNBB anticipates GDP growth to remain weaker than in 2022 for most economies, particularly in developed markets. This is because most major central banks have committed to maintaining high interest rates for as long as necessary to bring inflation back to desired target ranges. However, Basele said it seems probable that the economic slowdown will be mild. He asserted that if central banks can control inflation then less restrictive monetary policy in 2024 should stimulate economic activity towards the end of 2024 and into 2025. “Given the significant volatility in the market, we anticipate a more enduring improvement in risk appetite in the second half of 2024,” he said. “We believe we will see lower US Treasury (UST) yields and a slowly weakening USD.” Moreover, Basele has warned that geopolitical tensions that are likely to remain in focus in 2024 include the Russia-Ukraine and Israel-Gaza conflicts. “Relations between China and the US remain tense but have potentially eased in recent months as Presidents Joe Biden and Xi Jinping seek to strengthen relations,” said the FNBB economist. “Botswana’s GDP growth slowed from over 2023, primarily driven by a slowdown in the utilities sector and diamond trading activity.” Basele elaborated that the utilities sector suffered from electricity generation challenges owing to the ongoing maintenance works at Morupule B power station, while diamond trading activity suffered from declining sales as global demand decreased. At Absa, Madala has raised concerns about the domestic economy’s vulnerability to external shocks, particularly the performance of the diamond industry which is currently under some strain. She outlined that the weaker diamond sector outlook is on the back of global growth uncertainties and weaker demand in key markets including the USA and China. Indeed, it was a challenging period for the diamond industry in 2023. Statistics Botswana 2023 Q3 figures show that the real value added of mining and quarrying declined by 9.2 percent during the quarter. The decline is said to have been mainly influenced by the decrease in the diamond real value added by 9.8 percent. Diamond production in carats decreased by 12.2 percent during the same quarter. Similarly, Diamond Traders recorded a negative growth of 20.4 percent as opposed to 7.6 percent recorded in the corresponding quarter of the previous year. Madala, nonetheless, appreciates the government's ambitious plans for improving energy efficiency, noting that the market is open to a variety of renewable technologies. Notwithstanding the past year’s events, Madala believes the economy has shown some resilience. “Our projections point to real GDP of 3.8 percent in 2023 and 3.7 percent in 2024,” Madala said in an interview. “In 2024, we expect that growth will be supported by an increase in fixed investment following the finalisation of the deal between the government and De Beers Group.” According to Madala, the low inflation environment and the 25-basis point cut in the monetary policy rate to 2.40 percent in December 2023 will support household spending and credit demand. Absa expects the central bank to maintain the policy rate at 2.40 percent throughout the year. “We forecast that inflation will pick up over the coming months driven by the dissipation of favorable base effects,” said Madala. “However, price growth will remain within the BoB’s 3 – 6 percent target range.” Absa projects an average inflation of 5.1 percent in 2024. “A key upside risk to the inflation outlook is the Israel-Hamas war. Its escalation would likely prompt a surge in global oil prices,” explained Madala. After GDP growth of 5.8 percent in 2022, FNBB, meanwhile, expects the local economy to have expanded by approximately 3.9 percent in 2023 and to average approximately 4.5 percent through to 2026. “The potential for growth to exceed our expectations lies in the successful implementation of projects, and initiatives, under the Transitional National Development Plan, and the impending National Development Plan 12,” explained Basele. “These include the continued construction of key infrastructure (road, ICT, water and electricity) across the country, which, if completed timeously, would improve the general operating environment in Botswana and support business growth.” Basele believes the revision of agricultural policies, such as the new Temo-Letlotlo initiative, has the potential to support agricultural growth, but will come under increasing pressure given the dry weather conditions Botswana is currently experiencing. When it comes to inflation this year, Basele said sporadic rainfall, excessive heat, and low agricultural yields are likely to exert pressures on food inflation through reduced supply and a higher import requirement. “Given the recent developments that will affect food and transport prices, we expect inflation to have averaged approximately 5.3 percent in 2023,” he said. “Moving forward, local price growth will continue to be driven by developments that affect the transport index – any upward pressure on global oil prices will drive up local fuel prices.” Basele believes the recently announced drought, coupled with food import bans on certain fresh produce, is likely to keep local food prices elevated through to 2024. Just like Absa, FNBB anticipates the central bank to maintain an accommodative stance by keeping the MoPR unchanged at 2.40 percent through to 2026 as inflation averages 5.3 percent in 2023, 4.3 percent in 2024, and 3.9 percent in 2025. “Despite risks on overall inflation being tilted to the upside, we expect the demand-side pressures to be muted over our forecast horizon,” he said. “This will likely prompt the Bank of Botswana to continue with its relatively accommodative monetary policy stance.” 2024/2025 Budget Minister of Finance, Peggy Serame, is expected to deliver the 2024/2025 Budget Speech next month. Madala said the 2024/25 budget strategy paper shows the government’s commitment to mobilise resources towards infrastructure development including road improvement, water infrastructure, and electricity infrastructure aimed at accommodating renewable energy and electricity export. Basele said according to the draft FY24/25 budget, Key developments in the document include the ministry’s expectation of a narrower budget deficit (2.0 percent of GDP compared to the initial 2.8 percent projection), driven primarily by a lift in tax revenue receipts from mineral as well as non-mineral sales. “In contrast, total expenditure and net lending are expected to remain unchanged, with revenue growth budgeted to outstrip expenditure growth over the forecast horizon,” said Basele. “This outlook is also motivated by an uplift in SACU receipts, as the repayment owing to the FY20/21 overcalculation falls away — SACU receipts are expected to account for approximately 25 percent of total revenues.” The ministry expects the fiscal balance to continue improving, ending FY26/27 at a surplus of 0.7 percent of GDP and that the deficit (-1.6 percent of GDP) in the 2024 fiscal year, which covers the remainder of the transitional national development plan period. Basele said this will be financed through the issuance of government notes (P5.9 billion or US$440.3 million), financing from multilateral and bilateral lenders (P3.5bn or US$261.2 million), and drawdowns from the government investment account (P1.6 billion or US$119.4 million). “These measures should cover the expected cumulative deficit of BWP10.8bn (US$805.9 million) over the two years,” he said. “The ministry expects Botswana’s debt-to-GDP ratio to reduce to about 18.0 percent in FY26/27 from its estimate of 21.1 percent in FY23/24.” He explained that the primary reason for this is the expectation of improved global economic performance beyond 2023 which will support diamond and copper sales, leading to an uplift in mineral revenues and reducing the country’s borrowing requirement. “We anticipate the budget deficit to be slightly wider (2.8 percent of GDP) than the government’s estimate (2.0 percent of GDP) in FY23/24 given the increased financial support to the agricultural sector, and the vulnerable portion of the population, necessitated by the drought,” said Basele. “In FY24/25, we expect the deficit to narrow to 1.7 percent of GDP due to the likelihood of further salary increases for civil servants.” From a ministerial allocation standpoint, FNBB does not expect major changes over the FY23/24 budget allocation given that the national priorities remain largely unchanged. It, however, expects NDP 12 initiatives and future government spending initiatives to continue to be guided by the Vision 2036 pillars. [/ihc-hide-content]

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Botswana’s Economic Odyssey in 2024

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