Can Botswana overcome its diamond market slump?

Botswana is currently experiencing a significant economic downturn, largely due to an unexpected decline in the diamond market. The country’s economy has slowed to a mere 1% growth rate in 2024, a stark contrast to previous years. In 2022, Botswana enjoyed an impressive growth of 5.5%, which decreased to 2.7% in 2023.

However, reports from the International Monetary Fund (IMF) suggest a promising recovery is on the horizon, with GDP anticipated to surge to 5.2% by 2025 and 4.8% by 2026.

The IMF report states that while the economic outlook remains perilous due to various influencing factors—such as the rising popularity of affordable lab-grown diamonds and the recently announced sale of De Beers by its parent company in the UK—a substantial recovery is projected to be driven by rebounds in diamond production and trade. In 2024, diamond production is expected to be approximately 21.1 million carats, gradually increasing to 23.3 million carats in 2025 and 25 million carats in 2026.

Presently, the slow growth of 1% in 2024 is significantly below the country’s potential of 4%, indicating the adverse effects of declining diamond production on the economy. According to the IMF report, the slowdown can be attributed primarily to reduced diamond production, which is being somewhat compensated by ongoing construction projects supported by fiscal expansions.

Despite these challenges, inflation rates have remained stable within the central bank’s medium-term objective range since July 2023 and are expected to remain low. The financial sector is reported to be sound, stable, and resilient; however, a widening fiscal deficit projected at 6% of GDP reflects a diminishing mineral revenue alongside increasing government expenditure.

Furthermore, the IMF has acknowledged the government’s plan to implement considerable fiscal adjustments over the next two years, aiming for a return to fiscal surplus. There are concerns regarding foreign reserves, which are predicted to diminish, covering only five months of imports due to stagnant customs revenue growth and heightened foreign debt repayments. The report suggests that a reduction in diamond revenue could be managed through a mixture of a higher fiscal deficit and a reevaluation of capital expenditures, ensuring that projects undertaken deliver maximum value.

In order to build resilience against economic shocks and sustain fiscal health, the IMF has recommended a focus not only on expenditure reduction but also on increasing revenues. The report also endorses the government’s monetary policy direction, which has seen inflation stabilizing since August 2022.

The path to revitalising growth and generating employment will require a fundamental transformation towards enhanced participation from the private sector, diversification of the export base, and improvements in public sector efficiency. The IMF has urged the government to prioritise the modernisation of state-owned enterprises and to enhance the business environment through better infrastructure, including the provision of internet, energy, and logistics.

While Botswana navigates through this current economic slump triggered by a downturn in the diamond market, the forecasts from the IMF inspire optimism for a future recovery. It is imperative that strategies are enacted to fortify Botswana’s economic stability and sustainability, with an unwavering focus on enhancing the broader fiscal framework and retaining investor confidence.