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Botswana: Economy Bounces Back

Botswana: Economy Bounces Back

The Botswanan economy is finally beginning to recover from the fallout of the global economic crisis. The diamond industry, which forms the bedrock of the national economy, was badly hit by falling demand for industrial and particularly decorative diamonds, and so the government introduced a production holiday in 2009 that caused annual output to fall by 45%. Production and revenues are now recovering but Gaborone has been given a great deal of food for thought regarding its plans for economic diversification.

Despite some progress at opening up other areas of the economy, diamond exports currently account for about a third of GDP and 51% of export revenues. As always, the centrepiece of the industry in what is the world’s biggest diamond producer is Debswana, the joint venture between the government of Botswana and diamond giant De Beers based in neighbouring South Africa.

Gaborone forecasts that national production will recover from 22.97m carats in 2009 to 30.83m carats a year by 2014, largely because of a steady increase in Debswana’s investment to $555m a year by 2014. The IMF largely agrees with this prediction, estimating that diamond exports in 2014 will reach the equivalent of 80% of pre-crisis levels.

The recent Production and Investment Forecasts in the Botswana Mining Industry report by Frost & Sullivan stated: “A steady rise in consumer demand from China and India, and a modest improvement in demand from North America and Europe, are chief among the factors expected to contribute to the recovery of Botswana’s diamond mining sector … This anticipated growth in global diamond demand could restore investor confidence and reinject the needed capital for the successful implementation of planned expansion projects.”

As might be expected, recovering global demand for diamonds has been accompanied by a parallel improvement in Botswana’s economic fortunes. A balance of payments deficit of $534m in the last quarter of 2010 was converted into a $427m surplus in the first three months of this year as diamond export volumes and prices picked up.

The financial crisis appears to have reignited the government’s enthusiasm for widening the country’s economic base. Progress has been made in encouraging the emergence of other sectors, including banking and agriculture, while the government has placed economic diversification at the heart of its latest six-year National Development Plan, named Vision 2016.

However, some of the most attractive forms of diversification still lie within the mining sector. Dorcas Makgato-Malesu, the Botswana Minister of Trade and Industry, said: “Overall, we are looking at product diversification, active exploration on coal and coal bed methane, especially in the centre of the country, and active exploration for other minerals such as uranium, copper, nickel and rare earth metals. With the huge appetite that exists for the other resources, it makes sense for us to do so beyond just diamonds.”

It is the coal sector that could provide most benefit in terms of revenues and also with regard to encouraging the development of national infrastructure.

Although the country currently relies on the involvement of South African mining companies, the government is keen to secure investment from a wide range of sources, including Australia and China. Makgato-Malesu commented: “Investment is investment. As long as you have parameters that you have set up that are applicable to all, it then becomes irrelevant whether it’s Asian or whatever else. If the Chinese come into any investment destination and play upward into the rules, well and good.”

Botswana is also believed to contain large reserves of coal bed methane (CBM), or coal seam gas (CSG) as it is otherwise known. The government estimates CBM reserves in the Kalahari Karoo Basin alone at about 60 trillion cubic feet plus about 136 trillion cubic feet of shale gas. Although of course not all of this would be economically or even technically recoverable, these are huge figures.

While the development of alternative mining industries would be welcomed with open arms, the government is also keen to encourage the emergence of associated processing, industrial and manufacturing enterprises. Makgato-Malesu said: “A lot of the time, we look at Africa as a provider of resources … you also have to look at us as a consumer of the very resources that we produce.”

In particular, the government is keen to encourage diamonds to be cut domestically, although past initiatives to encourage diamond beneficiation within the country have not always secured the expected benefits. Nevertheless, more than a dozen cutting, polishing and jewellery production companies are now active in the country.

Beyond mining

Mining activity aside, there is no doubt that Botswana’s greatest potential is in the tourist sector. With stunning scenery, including the unique Okavango Delta, gradually improving infrastructure and a relatively safe travelling environment, it is well placed to attract tourists from South Africa and also the northern hemisphere.

According to a recent report on the country by the World Travel & Tourism Council (WTTC), tourism was the only significant sector not affected by the global economic crisis. A record 2.5m tourists are expected to visit the country this year, spending around P6.5bn ($919m) between them, up from 1.8m visitors and P2.9bn ($410m) in 2009.

Regional attempts are also being made to encourage tourism across Southern Africa as a whole, by easing the cross-border movement of foreign visitors and conserving the region’s outstanding flora and fauna. The world’s largest conservation area, the Kavango Zambezi Transfrontier Conservation Area, was officially opened in August. The huge, 444,000 square kilometre zone spreads over the boundaries of Angola, Botswana, Namibia, Zambia and Zimbabwe. It aims to link established conservation areas, such as Botswana’s Chobe National Park, with each other across inhabited and farmed areas.

Encouraging far greater visitor numbers to the Kavango Zambezi Transfrontier Conservation Area and elsewhere in Botswana could help to boost economic activity in rural areas.

The government is also looking to agriculture to sustain rural economies, both in order to generate more employment and to improve food security. The country is presently heavily reliant on imports from neighbouring states but Gaborone hopes that increased investment, including in irrigation, could boost the production of fruit and vegetables, plus possibly also enable the creation of a horticulture sector.

Botswana farmers already enjoy preferential export rights into the EU but have made little use of them because of the lack of domestic production. However, Ugandan farmers have shown that they can compete with Kenya in the horticulture sector, so there seems no reason why Botswanan flowers could not be flown to retail outlets across Western Europe and North America.

As our Southern African regional banking analysis reveals, Botswana banks fare relatively well in a region dominated by the big financial powerhouses of South Africa. The Botswana International Financial Services Centre (IFSC), which was set up by the government to encourage diversification, is attempting to establish the country as a financial hub for the wider region.

Companies accredited by the IFSC are entitled to a reduced corporate tax rate of 15% and enjoy tax holidays on dividends, interest, management fees and royalties if they are paid to a non-Botswanan resident, plus exemption from capital gains tax and value added tax.

The IFSC is seeking to: reduce the national dependence on mineral revenues, particularly diamonds; create sustainable employment opportunities for suitably qualified citizens; enhance the skills base of the Botswana workforce; foster innovation and sophistication in the financial and business services; and enhance Botswana’s reputation in the international financial and business community.

Outlook

Despite government plans for diversification into non-mining sectors, the export of commodities is likely to remain the mainstay of the Botswanan economy for a long time to come. Copper, nickel, coal, uranium and soda ash could all complement diamond revenues and boost GDP.

This will translate into an ever greater dependence on the mining industry but should also provide the government with increased financial muscle to fund other projects and encourage processing, service and agricultural sector investment.

It makes sense for the government to encourage the development of its natural resources by foreign, private sector companies, but it is also up to Gaborone to spend its income wisely for the benefit of the Botswanan people now and in the future. The diamond mines will eventually be exhausted and so Botswana, as with all African states, should have as wide an economic base as possible.

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Written by African Business Magazine

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