The Business Weekly & Review has established that the government is currently operating under ‘technical austerity’ and that, following the elections, the new administration will likely suspend most projects as part of efforts to significantly reduce spending.
The Government Investment Account (GIA), which once held over P30 billion, now contains only P1.9 billion, leaving the government struggling to finance both recurrent and development budgets.
Reliable sources have informed The Business Weekly & Review that earlier this year, some government economists and advisers, including the Bank of Botswana, strongly advised against the ‘stimulus budget,’ arguing that global diamond demand did not justify such spending.
The advice was reportedly disregarded in favor of political hype. Over the past few years, the government has initiated numerous groundbreaking ceremonies for multi-million Pula projects, which, according to sources, will now be impossible to finance.
Further allegations suggest that revising the stimulus budget to align with economic realities was avoided, as such a move would have risked unsettling the electorate. However, austerity measures are already being implemented. For instance, an internal memo from the Attorney General’s office instructed staff to tighten belts in light of the economic challenges stemming from subdued diamond market performance. As a result, in-service training has been suspended, and all external travel has been halted, except for critical and urgent trips sponsored by host organisations—though incidentals will not be covered.
Regarding the development budget, new projects are to be delayed until further notice, and ongoing projects must be completed within the allocated time and budget. Similar memos are reportedly circulating across the government enclave, with Debswana issuing a comparable directive last week.
In economic policy, austerity refers to a set of political-economic measures aimed at reducing budget deficits through spending cuts, tax increases, or a combination of both.
According to sources, the government is currently in a state of hibernation, but spending is expected to be significantly reduced after the elections due to challenges such as selling diamonds at prevailing market prices.
Other markets can sell their diamonds at prevailing prices because their stones are considered of lesser value compared to Botswana’s, which remains the largest diamond producer by value globally.
“Selling at current market prices will distort global diamond prices and have a greater impact on Botswana, as its high-value diamonds will be sold at significantly reduced prices,” a source warned.
Another challenge for the government is the transition to a new sales agreement with De Beers. The two parties currently operate under a “Heads of Agreement,” which is renewed frequently for short periods. Observers believe that signing a full, long-term agreement would boost market confidence, increase demand, and enable De Beers to secure higher market prices for Botswana’s diamonds.
The Botswana economy relies heavily on diamonds, which contribute approximately 80% of exports, one-third of fiscal revenues, and a quarter of the country’s GDP. As the world’s leading diamond producer by value, Botswana benefits significantly from the sector. However, with a relatively small economy—total GDP hovering around USD20 billion—the diamond industry has an outsized impact on both macroeconomic stability and fiscal health.
BOTSWANA’S DECLINING FINANCIAL POSITION
The austerity measures are warranted, as state coffers are rapidly depleting, with both the Government Investment Account (GIA) and foreign reserves now at historic lows. Since 1994, Botswana’s financial stability has rested on two interconnected funds: the Pula Fund, which holds accumulated balance of payments surpluses, and the Government Investment Account (GIA), which stores fiscal surpluses. These funds, though housed on opposite sides of the Bank of Botswana’s (BoB) balance sheet, typically move in tandem.
Government revenue, including Southern African Customs Union (SACU) receipts, dividends from state-owned enterprises, and royalties from mining companies such as Debswana, flows into a liquidity portfolio divided into long- and short-term tranches. This liquidity portfolio funds state operations. When a surplus arises, the excess is transferred to the Pula Fund—a long-term sovereign wealth fund.
The Pula Fund itself comprises three investment tranches, which are deployed in high-yield instruments globally. Dividends from these investments are funneled into the GIA, effectively serving as the state’s savings account.
For the GIA to receive credit, the Pula Fund must generate a healthy dividend. At the same time, for the Pula Fund to grow and maintain a stable balance, Botswana needs to sell more diamonds, receive substantial SACU receipts, see increases in BURS tax revenues, and obtain good dividends from SOEs.
In the absence of these factors, or in the event of a budget deficit, the government may resort to drawing down from the Pula Fund and the GIA, thereby weakening Botswana’s financial position.
The Pula Fund is, however, the most critical component of Botswana’s financial strategy. It is a long-term investment portfolio established in 1994 during the presidency of Sir Ketumile Masire. Its mandate is to preserve a portion of the income from diamond exports for future generations.
Foreign exchange reserves that exceed medium-term needs are transferred from the liquidity portfolio to the Pula Fund for investment. Since its establishment in 1994, the Pula Fund has increased substantially in value, both in domestic and foreign currency terms, and in real terms. According to the Bank of Botswana, this growth reflected a sustained period of significant balance of payments surpluses and the success of the investment strategy.
However, there have been notable instances of substantial outflows. One significant period was following the establishment of the Botswana Public Officers Pension Fund, which led to a considerable transfer of assets from the government. Additionally, from late 2008, the turbulence caused by the worsening global economic slowdown resulted in some erosion of the Pula Fund due to adverse market conditions and outflows necessary to maintain the liquidity portfolio at required levels. Major drawdowns effectively began in 2008.
Drawdowns during Khama and Masisi’s presidencies
Perhaps because of the recession, former President Ian Khama frequently dipped into the foreign reserves to mitigate its effects. He assumed the presidency in April 2008, at the onset of the recession, which several observers argue justified the drawdowns. When Khama took office, the Pula Fund stood at P30.5 billion. A year later, it had declined by around P8 billion, bringing the total to P22 billion. The drawdowns continued, and by 2010, the Pula Fund further decreased to P13.3 billion, shedding a significant P8.5 billion.
Despite the drawdowns, Botswana’s economy rebounded strongly from the 2009 economic downturn, aided by improved global demand for diamonds—the country’s major export commodity. The economy grew by 7.2 percent in 2010, recovering from a negative growth of 4.9 percent in 2009. At that time, GDP was approximately US$12.9 billion, while unemployment among the adult population stood at 17.8 percent.
Due to this economic rebound and increased demand for diamonds, more funds were channeled into the Pula Fund in 2011, resulting in a balance of P22.3 billion. However, in 2012, the Pula Fund experienced another decline of P4 billion, bringing the total balance down to P18.3 billion. This decline occurred amidst a deteriorating global economic recovery, characterized by uncertainty in the Eurozone and the USA. Growth was further constrained by fiscal consolidation measures and various global economic headwinds, leading to moderate growth in Botswana and other emerging markets.
In 2013, the Pula Fund recorded significant growth, increasing by P8.1 billion to reach a balance of P26.4 billion. During former President Khama’s first term, which ended in 2013, over P20.5 billion was drawn down from the fund. When Khama handed over the presidency to Masisi in December 2018, the Pula Fund had a balance of P24.6 billion.
President Masisi’s first term began in April 2018, when he was sworn in. Real GDP increased by 4.5 percent in 2018, compared to a 2.9 percent increase in 2017. GDP at current prices stood at P189.8 billion in 2018, compared to P180.1 billion in 2017, reflecting a growth of 5.4 percent. At that time, 19.8 percent of the adult population was unemployed.
However, a year later, the Pula Fund declined by P6.1 billion, reducing its balance to P18.3 billion. Unfortunately, Masisi’s first term was adversely affected by the COVID-19 pandemic, although the effects were not immediately felt. In 2019, real GDP increased by 3.0 percent, compared to a 4.5 percent increase in 2018.
In 2020, the Pula Fund further declined by a staggering P15 billion, crumbling to an all-time low of P3.3 billion. Reports indicated that funds were withdrawn to combat COVID-19, leading to controversy and allegations of misuse. An audit was conducted but was never made public.
In 2021, growth was recorded, leaving the Pula Fund at P6.1 billion, driven by favorable diamond sales. By 2022, the Pula Fund balance stood at P8 billion, while the GIA was at P14.8 billion. However, it further declined to P8.5 billion by December 2023.
Between December 2018 and December 2024, Masisi’s administration drew down over P21.1 billion. As of August 2024, Bank of Botswana data shows that the GIA had a meager P1.9 billion.
Currently, Botswana faces a fiscal cliff, with its primary source of revenue—diamonds—experiencing a decline in demand and sales, coupled with falling prices. SACU receipts are also decreasing, while efforts at diversification remain elusive. The GIA, which includes the Pula Fund meant to serve future generations, has dwindled from over P30 billion to a mere P1.9 billion. Observers are concerned that, given the prevailing economic conditions, Botswana will need to triple its efforts to restore its former financial position.
