Diamond crisis spirals into debt scramble
Mbongeni Mguni - Lewanika Timothy | Thursday June 12, 2025 12:37
“Our focus will be more on foreign borrowing because that’s where we have a little bit of room to manoeuvre,” Finance Ministry permanent secretary, Tshokologo Kganetsano told a parliamentary committee on Monday.
Under its own statutory rules, government is required to limit its debt to 20% of GDP for domestic funding and 20% of GDP for external funding.
Government, through the Bank of Botswana, has been on a flurry of debt raising activities in recent months, as the prolonged diamond downturn has eaten into public revenues and national savings, whilst commitments such as salaries and outstanding invoices have pressured the public purse.
Current domestic debt levels stand at 18.7% of GDP or P42.16 billion, a figure which according to Mmegi estimates, leaves government with about P3 billion before hitting the 20% of GDP ceiling.
Externally government’s debt levels are at 9.33% of GDP, leaving a healthy 11% to go.
“In terms of debt management, we are very close to the debt limit for local borrowings,” Kganetsano said. “We are mindful of the problems other countries have encountered where they thought they could borrow their way out of trouble.”
It is understood Finance Minister, Ndaba Gaolathe, has already initiated discussions towards loans with the OPEC Fund and the World Bank, with a view to sealing funding deals soon. Recently, government secured a US$304 million (P4 billion) loan from the African Development Bank.
Other facilities for P3 billion from the Botswana Public Officers Pension Fund as well as the monthly debt auction conducted through the Bank of Botswana, have helped push the government closer to the ceiling for local funding.
The monthly auctions since July last year have failed to raise the amount government is targeting, but much of the funding has gone to simply “roll over” the debt, meaning raising debt to pay debt already owed to local lenders.
Cash crisis
The rising debt is the result of the prolonged downturn in diamond demand globally, which has depleted the national savings and resulted in a cash-flow crisis in which government is now borrowing to fund its day-to-day operations.
Speaking under oath before the Parliamentary committee on Monday, Kganetsano revealed that between January and May, government contracted two short terms loans and also received about P12 billion in quarterly inflows from the Southern African Customs Union. Mmegi estimates show that the total inflows are more than P15 billion.
“Those total funds are gone,” the PS said. “Our borrowing profile is worrisome. “We borrow to fund current consumption and you wonder if this is sustainable. “When I was at the BoB, we could see that when the SACU funds hit the government account, they could stay for a month or so before they became depleted. “Today, the situation has changed and on January 6, just over P6 billion hit the account on a Monday and by close of business on Thursday the same week, more than 90% of that was gone, but invoices were still outstanding.”
For the 2025-26 financial year, the Finance Ministry in February forecast a deficit of about P22 billion, but this is expected to be revised upwards significantly when the mid-term budget is finalised after September.
The national savings, as housed in the Government Investment Account, fell to a record low of P251 million before recovering to about P3 billion in recent months. However, Kganetsano said the GIA had again fallen to about P700 million this week as the result of the repayment of a short-term advance from the Bank of Botswana.
The GIA was designed to provide a cushion for the budget in times of diamond distress. The fund was measured at about P20 billion during the 2008 recession and was also at similar levels during the COVID-19 pandemic.
Kganetsano revealed that other revenue sources such as tax were dependent on the performance of the economy, which contracted by three percent last year and was due to rebound by 3.3% this year.
“Someone would say maybe the BURS is not doing enough to collect. “Maybe on some elements and we are working with them on that to strengthen collections. “But tax revenues are a function of economic activity – there’s no inverse relationship. “If economic activity slows down, companies lay off workers, profits fall etc, then obviously tax revenue declines,” the PS said.
The latest estimates indicate that the economy will either have zero growth this year or contract, due to the likely absence of a diamond recovery, as the planned tariffs by the Trump administration hit the global economy.
Trump tariffs
The long-awaited recovery in diamonds has been stalled by the Trump administration’s imposition of tariffs against nearly every country on Earth. Although paused for 90 days from the initial announcement, Trump’s tariffs are due to kick into gear early next month, at 37% for Botswana and similar high levels for other important centres where local diamonds gain value and eventually go on sale as jewellery.
Kganetsano said local officials had tried and failed to secure an audience with Trump administration officials during the IMF Spring Meetings held in Washington DC in April.
“When we were in Washington recently, through our Embassy, they tried to arrange meetings with the Secretary of Commerce. “Twice the dates were agreed and twice the meetings flopped. “First meeting as we were disembarking from the street to walk into Secretary’s office, they said he had an important engagement and he cannot talk to us. “The Embassy tried another date within the same week and they agreed but on the eve of that meeting, they said ‘no go and prepare a position paper.” “There was that reluctance to meet with us bilaterally,” Kganetsano said.
Local officials are hoping efforts being made at SACU level will be more successful. SACU’s Council of Ministers is due to meet next month, with the US tariffs on the agenda.
Cost cutting
Besides working on a diamond recovery, the cash-flow crisis means immediate cost cutting is required to avoid the risks associated with a sudden escalation in hard currency debt, analysts have said.
The Finance Ministry is understood to have engaged to engaged the accounting officers of other ministries to restrain spending, while also developing a “first round” cost cutting plan for Cabinet.
“We recently prepared a Cabinet Memo proposing what we considered a first round of cost-cutting measures,” Kganetsano said. “We were sent back to go and do a thorough analysis so that our recommendations could be based on evidence gathered through that analysis.”
The Finance Ministry reportedly plans to move to second round recommendations, which include “intense consultations” and will include measures to trim the wage bill. The World Bank has reportedly offered to dispatch a technical assistance team that can help government review the size and cost of the civil service, a key recommendation by the Bretton Woods institutions over the years.
Red flags
The cost-cutting measures are seen as a key to minimising the amount of hard-currency debt government takes on in its desperation to keep the fiscus ticking over. Traditionally Botswana has avoided hard currency debt because the economy’s dependence on a single export commodity would open the country up to a debt trap from foreign currency repayment fluctuations.
Healthy reserves over the decades enabled the country to minimise its foreign currency debt, but the current situation means authorities will increase their uptake.
“Borrowing is not the way to go when you are faced with a situation like this. “You can borrow to help alleviate the problems, but you cannot borrow with the view that once you have borrowed then you are out of trouble,” said Kganetsano.
Prominent economist and former Bank of Botswana deputy governor, Keith Jefferis, said the external debt could help the local capital market in the short term.
“The short term effect will be that it will ease pressure on the local capital market but the underlying structural challenges will still be there,” he said this week.
Botswana’s financial crunch is familiar to many African countries where fiscal deficits are covered by external borrowing from the Bretton Woods institutions. In extreme cases, countries such as Ghana, Nigeria and Kenya have reached debt distress levels countless number of times in the past due to the failure to repay dollar loans that keep growing as their currencies keep weakening.