- Fiscal deficit will likely widen
- Diamond sector could adverse impact government’s spending
- Government might tap into the Investment Account
- BoB predicts downward revision of GDP forecast
The minerals and customs revenues – key sources of income for the government – may come under strain as the diamond industry appears to be far from recovery.
Demand for mined diamonds has sagged under pressure of high interest rates in the United States, home to half of global diamond consumption, China’s sluggish recovery from the pandemic and competition from lab-grown gems.
All these are feared to exert pressure on the country’s revenue sources.
This is because in the first quarter of the year, a period from January to March, the value of rough diamonds mined by Debswana and sold to De Beers Global Sightholder Sales (DBGSS) and Okavango Diamond Company (ODC) fell by almost 50 percent year-on-year.
Until last year, Debswana sold 75 percent of its production to DBGSS while 25 percent was sold to ODC, a government-owned rough diamond marketing company. ODC’s quota has been increased to 30 percent under the new agreement between De Beers and the government of Botswana.
Data released by the Bank of Botswana recently showed that in Q1 2024, Debswana diamond sales amounted to P7.6 billion compared to P14.1 billion in the same period last year.
Figures released by Statistics Botswana this week indicate that diamond production decreased by 27.3 percent in the first quarter of 2024.
The decline, according to Statistics Botswana, was primarily due to production configuration changes implemented in response to higher than average levels of inventory in the market.
Evenso, Corporate Director at Absa Bank Botswana, Tebogo Giddie expects marginal growth within the sector as it recovers from a challenging Q4 2023 performance.
“Prospects for economic growth in major economies remain uncertain, we expect that it may take some time for rough diamond demand to fully recover to pre-COVID-19 levels,” said Giddie.
He believes that the diamond market’s outlook for the rest of the year will depend on balancing consumer demand, economic conditions, industry trends, and geopolitical factors.
Giddie said growth depends on consistent and stable global economic growth.
Conversely, she stated that economic downturns or geopolitical tensions could dampen demand largely influencing market performance.
However, she strummed a positive chord when she observed that data shows that sales returned to relatively healthy levels, and the market began to absorb rough diamonds again.
“Polished sales have shown slight improvements, and prices have stabilised,” she said.
“Projections indicate that the global diamond market will grow from more than US$100 billion in 2023 to over US$140 billion by 2029, driven by a compound annual growth rate (CAGR) of 4.85 percent from 2024 to 2029.”
The fall in Debswana production spells some troubles for Botswana’s fiscal situation, which Giddie said already faces some challenges.
According to Giddie, the fiscal deficit will likely widen further in the 2024/25 financial year because of several factors.
These include expansionary fiscal policy, pressure on expenditure to cushion businesses and households from the drought, a slow pick-up in global demand for diamonds, which will affect mineral revenue, and a shallow recovery of the South African economy, resulting in lower SACU transfers.
Total revenues and grants for the 2024/2025 financial year were projected at P93.58 billion by the finance ministry. Peggy Serame said the largest contributor is customs and excise receipts which is estimated at P26.46 billion due to the increase in Botswana’s share of the Southern African Customs Union revenues.
The second largest contributor is mineral revenue P25.05 billion or 26.77 percent of total revenues. Non-mineral income tax and VAT are estimated at P22.0 billion or 23.5 percent and P15.24 billion or 16.28 percent of total revenues and grants, respectively. Economists have previously said these estimates we too ambitious on light of external shocks and with no tax increases locally.
Due to a favourable debt-to-GDP ratio, Giddie believes the government has different options to raise capital.
“We note the increase of the ceiling of the government bond issuance program from P30 billion to P55 billion and the market has responded positively to it thus far,” she said.
“The two auctions held so far in the current fiscal year have seen government raising the full amount they wanted, about P3.1 billion.”
“Government also has an option to borrow externally if the borrowing rates are better than raising locally.”
For the 2024/205 fiscal year, the Ministry of Finance has assigned Botswana Unified Revenue Service (BURS) to collect P70.7 billion, which makes approximately 70 percent of the government funding requirement.
An economist at FNBB, Gomolemo Basele, said diamond sales in the first quarter of this year were subdued, compared to the same period last year due to global economic activity continuing to face headwinds from heightened geopolitical tensions, slow disinflation and elevated interest rates.
Despite these challenges, he stated that normalisation in the global diamond market is progressing, albeit at a slower than ideal pace.
“The improvement in performance, compared to Q4 2023, is supported by a robust rebound in India’s polished diamonds import volume growth towards longer-term trends, following the country’s moratorium on imports in the fourth quarter of 2023,” said Basele.
“As a result, diamond sales ticked back up at the start of the year, following depressed sales towards the end of last year.”
However, he said the midstream segment of the global value chain continues to reflect pressure with excesses, which act as a drag on market prices despite buoyancy in Indian import volume growth.
“Activity indicators for natural diamond demand point toward a recovery, but the growth trend remains well below longer-term secular dynamics, contributing to market price volatility even as demand tracks higher,” he explained.
Basele also agrees that the performance of the diamond sector could have an adverse impact on the government’s spending.
“Given Botswana’s development needs, noted in the transitional national development plan, the government set out ambitious spending plans this year to achieve these initiatives,” he said.
“Beyond addressing historical implementation challenges, Botswana will also have to contend with the likelihood of its main revenue sources (mineral revenue and SACU receipts) facing pressure, given challenges around global growth prospects.”
But Basele believes the government has the capacity to raise debt from the local debt market, supported by the recently increased borrowing programme and the expected repatriation of pension funds through to 2027.
Additionally, he said the government can also tap into savings held in the Government Investment Account (GIA).
This is because balances in the GIA have remained above the lows observed during the COVID period, providing some capacity for drawdowns, albeit on a limited basis.
Another avenue that he said can be explored to fill potential funding gaps involves approaching development funding institutions for assistance.
“Given Botswana’s sovereign rating, there is an opportunity to attract funds at concessional interest rates,” Basele said.
Statistics Botswana figures indicate that the real Gross Domestic Product (GDP) declined by 5.3 percent during the first quarter of the year, contrasting with a 5.3 percent increase in the same quarter of 2023.
This downturn is reported to have been primarily influenced by a decrease in real value added of the Diamond Traders, Mining & Quarrying, Water & Electricity, and Manufacturing industries, by 46.8 percent, 24.8 percent, 10.7 percent, and 0.8 percent, respectively.
Conversely, all other industries experienced positive growth rates of 0.5 percent and above.
According to the Statistics Botswana report, the decrease in the real value added of Mining and Quarrying by 24.8 percent was mainly influenced by the decrease in the gold, diamond and coal real value added by 71.0, 26.2 and 19.5 percent respectively.
During Q1 2024, Diamond Traders recorded a negative growth of 46.8 percent as opposed to an increase of 3.7 percent recorded in the corresponding quarter of the previous year.
The non-mining GDP increased by 2.6 percent in the first quarter of 2024 compared to the 3.7 percent increase registered in the same quarter of the previous year.
As the mining sector remains under pressure, the Bank of Botswana has also cautioned that the 4.2 percent economic growth projected by the government is likely to see a downward revision.
“Though we expect the non-mining sector to improve, on the balance of probability, we are likely to see the 4.2 percent announced by the Ministry of Finance revised downward,” said Innocent Molalapata, BoB’s Director of Research and Financial Stability.
“But very importantly, because this projection was done last year, so now we take into consideration what has transpired.”
However, Molalapata would not provide a figure that economic growth is likely to be revised to but said all indications point to a downward revision.
