- Botswana advised to follow Rwanda by opening borders to foreign businesses
- ‘Focus should be on finding new economic drivers’
While Botswana has avoided the resource curse that has plagued many African nations due to poor governance and corruption, it has historically managed its diamond-driven economy with relative success.
In just three decades, Botswana transformed from one of the world’s poorest nations into a model of rapid economic growth, achieving the fastest growth rate globally between 1965 and 1995.
“From 1975 to 2000, in those 25 years, Botswana had a well-managed economy compared to other countries with similar resources, and Botswana has been viewed as a success story in this regard,” said leading economist Keith Jefferis in a recent podcast conversation hosted by Oabona Kgengwenyane of InnoLead Consulting.
However, Jefferies noted that the country has faced significant challenges since 2000 in shifting from a diamond-centric growth model to a more diversified, robust private sector-led economy. This difficulty has been its undoing.
“We did part one very well, but in the second part, we did not do well,” he remarked.
The once-celebrated “African Miracle” and model of good governance now faces a starkly different reality.
In 2024, the International Monetary Fund (IMF) forecasts a significant slowdown, predicting just one percent growth. The diamond-rich economy is no longer riding the wave of prosperity it once enjoyed, as shifting dynamics in the diamond sector raise concerns about whether the country’s economic future is on a downward trajectory.
While 2023 was a challenging year for diamonds, exacerbated by changes in global consumer preferences, Jefferis argued that the country is not in free fall but rather in a “slow patch.”
He stressed that diamonds, like other primary commodities, are subject to cyclical booms and busts. This slowdown is not a sudden occurrence but part of a broader trend resulting from the country’s reliance on diamonds.
“Botswana has never had a smooth growth trajectory, mainly because diamonds have always dominated its economy,” Jefferies noted, adding that diamonds have historically influenced the economy’s cycles of boom and bust.
Jefferis observed that global demand for diamonds sharply declined in 2023, significantly impacting Botswana’s revenue streams. This decline is part of a larger pattern where the industry experiences cycles of deep recession followed by recovery.
Jefferis also pointed out that this economic downturn is more pressing than previous ones due to the erosion of the country’s financial buffers. Historically, Botswana could weather economic storms with substantial foreign exchange reserves and the Government Investment Account (GIA), which served as the country’s savings at the central bank. However, these buffers have been depleted, leaving the country vulnerable to external shocks.
With dwindling reserves, the government may face mounting budget deficits. Jefferis estimates a potential deficit of eight percent, a significant figure likely to force the government to borrow more heavily than anticipated. This situation is comparable to countries like the US, known for unsustainable budgets and rapidly rising debt levels.
“The problem now is not just debt, but the trajectory,” Jefferis said. Without spending cutbacks or increased revenue, he warned that the country’s debt levels could rise rapidly.
Jefferis made it clear that there is no quick or easy replacement for the diamond sector. While industries like copper mining or tourism offer potential, they cannot match the profitability and high tax contributions of diamonds. Diversification is necessary but inevitable as the country looks beyond its traditional reliance on natural resources.
“Even if the economy had a booming copper industry, it could never bring in the same tax revenues as diamonds,” he said, adding that the country needs to prepare for lower revenue, even if economic diversification succeeds.
“We are not going to have as much money to spend in the future as we had in the past,” he said.
Jefferis noted that the slow pace of diversification is partly due to recent economic growth being inward-looking, driven by sectors serving mostly the government and domestic population rather than generating significant export revenue.
“There has virtually been no diversification of exports. Diamonds still dominate,” Jefferies said.
Manufacturing and services, particularly digital services, offer potential avenues for future growth, but they will require significant changes in government policies.
While small, the manufacturing sector in Botswana, particularly export manufacturing, has seen some success through firms like Nortex and Flotek. According to Jefferis, these companies, led by visionary entrepreneurs, demonstrate the potential for a more diversified, export-oriented economy.
“If we can get a good number of more of these firms, then jobs can be created. The country has to identify value chain niches with promising futures and growth potential,” he said.
Jefferis suggested that Botswana should follow the example of countries like Rwanda, which have opened their borders to foreign businesses and talent by simplifying visa processes and immigration policies to attract skilled foreign workers.
He also stressed the need for improved connectivity, noting that internet access in Botswana is expensive and underdeveloped.
“The government should subsidise connectivity instead of less productive sectors like agriculture,” Jefferis argued, suggesting that affordable and fast internet could lay the foundation for a thriving digital economy and attract foreign innovators and investors.
He highlighted that the focus now should be on finding new economic drivers and creating a more dynamic, labor-intensive economy to maintain growth and create jobs, even if tax revenues will never match those from diamonds.
