Economy Stuck on Confidence Deficit

Botswana’s economic recovery has yet to reach households and businesses, with consumer spending and private investment continuing to decline despite the economy returning to growth in the first quarter of 2026.

Gross Domestic Product expanded by 3.5 percent in the first quarter, rebounding from a 5.4 percent contraction in the fourth quarter of 2025. However, private consumption fell by 3.0 percent and gross fixed capital formation — a key measure of business investment — declined by 10.5 percent, suggesting the rebound has yet to translate into stronger domestic demand.

Absa Bank Botswana economist Tshepiso Gaetsewe cautioned that while the return to positive growth is encouraging following the difficult economic conditions of 2024 and 2025, the quality of the recovery matters as much as the headline GDP figure.

First-quarter growth was largely driven by mining, which expanded by 14.4 percent, and public administration, which grew by 16.9 percent year-on-year, supported by higher government consumption and a rebound in diamond production, she said. The growth was not broad-based across the economy.

“Mining generates significant export earnings and government revenue, while public administration often provides stability during economic downturns. However, neither sector alone can provide the broad-based growth needed to create sufficient jobs or drive long-term economic diversification,” Gaetsewe said.

A sustainable recovery would require stronger contributions from job-creating sectors such as tourism, manufacturing, logistics, agriculture, financial services and the broader business services sector, she said. Until there is more meaningful growth from these industries, Botswana’s economy will remain exposed to developments in the global diamond market and domestic fiscal conditions.

“A high-quality recovery would normally be accompanied by stronger household spending, rising private investment, increased employment and improved activity across sectors such as manufacturing, trade, tourism and financial services,” she said.

While the economy has moved in the right direction, Gaetsewe said the coming quarters will determine whether growth broadens beyond a handful of sectors into the wider economy.

That broader recovery is not yet evident in the underlying economic data. Private consumption contracted by 3.0 percent and gross fixed capital formation declined by 10.5 percent, suggesting households and businesses remain cautious despite the return to growth.

Private consumption is widely viewed as a measure of household confidence and spending power, Gaetsewe said. A decline suggests many households continue to face financial pressures from slower income growth, elevated debt levels or cautious spending. Gross fixed capital formation measures investment in productive assets such as buildings, machinery and equipment — investment that lays the foundation for future growth, productivity and employment.

“The economy has started growing again, but many households and businesses are not yet fully participating in that recovery,” Gaetsewe said.

In his second-quarter 2026 economic report, economist Dr Keith Jefferis highlighted improving liquidity conditions in Botswana's banking sector over recent months.

"Bank liquidity improved between January 2026 and April 2026. Excess liquidity rose from 6 percent of total assets in January to 8 percent in April," Jefferis said. While he noted that banks have sufficient liquidity to support credit expansion, he said high interest rates and elevated credit risk continue to constrain borrowing.

The observations echo comments made previously by Absa Bank Botswana Managing Director Keabetswe Pheko-Moshagane. Although liquidity has improved, she said businesses remain reluctant to borrow because confidence in the economy remains weak.

Speaking at the launch of the World Bank's Botswana Economic Update, Pheko-Moshagane said improving liquidity conditions had yet to translate into stronger credit demand because business confidence remained subdued.

"We've got excess liquidity, but customers are not borrowing because their confidence is still low," she said.

In his report, Jefferis said "credit growth has dropped to almost zero, largely due to high interest rates that make the cost of borrowing prohibitive."

"As we have previously commented, government borrowing to finance large budget deficits is crowding out the private sector from the credit market," he said.

He added that lending to both households and businesses had contracted on a year-on-year basis to April.

"Only lending to parastatals is increasing, where presumably the banks can earn high rates of interest on the back of government guarantees," Jefferis said.

He further noted that the "negative annual growth in lending to households is unusual, and indeed has never happened previously at any point over the past 30 years."

According to Jefferis, annual bank credit growth slowed from 2.5 percent in January 2026 to 1 percent in April 2026. Credit to businesses contracted by 0.6 percent year-on-year in April, compared with growth of 4.4 percent in January.

Gaetsewe warned policymakers to pay close attention to continued weakness in private investment, as investment decisions are inherently forward-looking. Businesses typically invest when they are confident about future demand, profitability and policy stability. A prolonged decline signals that many firms remain uncertain about the economic outlook.

Weak investment carries longer-term consequences. Lower investment today can translate into slower job creation, weaker productivity growth and reduced economic diversification in the years ahead.

“While it is understandable that businesses have adopted a cautious approach given recent economic conditions , restoring confidence should be a policy priority because private investment will ultimately determine the strength and sustainability of Botswana's long-term growth trajectory,” she said.

Although there is no single solution, Gaetsewe said several policy measures could encourage firms to begin investing again. Maintaining a stable macroeconomic environment is essential, as businesses are more willing to invest when inflation, interest rates and government finances remain predictable. Reducing regulatory delays, improving the ease of doing business and expanding access to finance, particularly for small and medium-sized enterprises, could also help unlock new investment.

At the same time, she said continued efforts to expand sectors beyond mining would create new sources of growth while reducing Botswana’s long-standing dependence on diamonds.

“Businesses gain confidence not only from good policies, but from seeing those policies implemented consistently and effectively,” she said.

Looking ahead, Gaetsewe said the recovery’s success should not be judged by GDP growth alone. Economists will be watching for stronger employment growth, a rebound in household spending, higher levels of private-sector credit and business investment, stronger performance from non-mining sectors such as tourism, manufacturing, trade and financial services, as well as improvements in diamond sales and export earnings.

“We need to see households becoming more confident and willing to spend again, private sector credit growth and business investment, as these provide insight into future economic activity and confidence,” she said.

“I am cautiously optimistic. The economy appears to have moved beyond the weakest phase of the downturn, and the recovery in mining production provides an important foundation for growth,” she said.

However, she cautioned that inflationary pressures will continue to weigh on households and businesses, and the recovery remains fragile rather than firmly established.

“The continued weakness in private consumption and investment suggests that significant parts of the economy have yet to regain momentum, and the benefits of the recovery are not yet being felt broadly across households and businesses,” she said.

Jefferis expects a strong rebound in economic growth in 2026, driven largely by a projected increase in diamond production from Debswana.

Depending on the scale of the increase in output, he forecasts GDP growth of between 2.5 percent and 4.5 percent this year, marking a significant turnaround after two years of recession. However, he cautioned that the recovery would not be broad-based.

"Growth in the non-mining sector will, however, be held back by high interest rates and low investment until government cuts its spending and reduces its borrowing needs," Jefferis said.