Economy survives first half: Nervy H2 beckons
Lewanika Timothy | Wednesday July 23, 2025 15:44
The prolonged downturn in the diamond market remains the main drag on growth, weighing heavily on the overall economy. The muted growth in the first two quarters spells a steeper downturn for the second half.
Botswana’s single commodity economy has always been a mirror reflection of the state of the diamond market, with turbulences in this market leading to problems for the government purse.
Throughout the first half, government continued to sustain the economy on dwindling revenues, with the lower spending power ultimately weighing down on broader growth.
Gross Domestic Product
Calculated as the monetary value of goods and services produced in the country plus foreign earnings, the Gross Domestic Product (GDP) decreased by 0.3% in the first quarter of the year. The decline was mainly attributed a decline in mining production.
Statistics Botswana’s Quarter One report showed that Mining and Quarrying registered a 7.7 percent decline in real value added, mainly driven by significant reductions in soda ash and diamond production, which fell by 56.7 percent and 7.5 percent, respectively.
Diamond production in carats declined by 8.1 percent in the first quarter of 2025, largely reflecting a continued production response to prolonged weak demand. This is expected to tank growth if the diamond industry does not recover from its slump.
Overall production in the economy has further been slowed by weak purchasing power of the economy’s biggest spender, government. The Minister of Finance recently told parliament that government had halted the automatic generation of Government Purchase Orders (GPOs) which may slow down the private sector into the second half of the year.
Despite the drop in real GDP, the non-mining GDP increased by 2.2 percent in the first quarter of 2025 compared to the 2.7 percent increase registered in the same quarter of the previous year.
Inflation
Botswana’s annual inflation rate was 1.9 percent in May 2025, a decline of 0.4 of a percentage point from the 2.3 percent recorded in April 2025.
Risks to inflation have however picked in the recent weeks as government’s decisions on the foreign exchange framework mean the Pula will shed value quicker in the next six months. From a rate equal to 1.51% in the first six months of the year, the “rate of crawl” has been adjusted to 2.76% for the remainder of the year, meaning small daily cuts that equal 2.76% over six months.
The decision has spooked local producers and retailers with many of them announcing decisions to hike their prices this week. Businesses with cross-border footprints and those who trade in foreign currency, have also signalled increases in prices, a move that will prove inflationary in the balance of the year.
The central bank has frequently noted that high inflation expectations are themselves inflationary, meaning that as firms raise their prices, workers raise their wage demands to keep up, while others in the value chain equally raise their rates.
This week, Standard Chartered Bank Botswana said that it expects the monetary policy rate to remain unchanged with no room for any cuts as risks to inflation remain elevated.
The Bank of Botswana had said it expects inflation to average 2.7 percent this year, from a previous estimate of 3.9 percent due to potentially lower fuel prices and the appreciation of the pula against the South African rand.
Inflation hit record highs in August 2022 hovering close to 16% as fuel prices went on the rise spiking inflation.
PUBLIC FINANCES
Budgetary deficits are still projected to roll beyond P22 billion as diamond revenue recovery remains protracted, threatening to worsen the fiscal position of the country.
By December, government had drawn down its savings housed in the Government Investment Account (GIA) to a meagre P250 million, as widening deficits forced it to dig deep into its pockets to finance budgetary shortfalls — a crisis which has driven capital markets into a crunch.
The kitty is expected to take a further strain this year if the diamond recovery continues to lag worsened by the effect of expansionary welfare programmes such as the increase in old age pension and increase in allowances for technical vocational institutions.
Government has been on an unsustainable path of borrowing for consumption in the first half of the year, with government securing loans from the central bank, the Botswana Public Officers Pension Fund (BPOPF) and the OPEC Fund, receiving more than P8 billion. All these loans were exhausted within a short while of their drawing, showing the huge burn rate government has.
The total public outstanding debt at the end of the 2024-25 fiscal year, including sovereign guarantees amounted to P77.3 billion or 28 percent of GDP. The Financial Stability Council expects public debt to reach 40% by the end of the current financial year, at which stage the country would have touched its statutory debt ceiling.
Already, a senior finance ministry official has said the domestic limit of 20% of GDP is close to being reached, with domestic debt measured at P42.6 billion or about 18.7 percent of GDP a few months ago.
Under its own statutory rules, government constrains its debt to 20% of GDP for domestic funding and 20% of GDP for external funding.
Pension funds
The value of the country’s pension fund assets rose to P148.7 billion in April, following a drop to P145.9 billion in March, preliminary figures from the Bank of Botswana indicate.
The jump to P148.7 billion in April was driven by offshore equities and local cash holdings, the latter usually a sign of insufficient opportunities for investments. The value of pension fund assets held in local equities rose to P22.5 billion in April from P22 billion in March, hinting at rising asset prices in the local market.
As at April, the pension funds were holding 44.3% of their assets domestically, ahead of the 44% target mandated by NBFIRA to be reached by December 2025.The regulator requires pension funds to reach 47% domestic investment by December 2026 and achieve full compliance of a minimum of 50% by December 2027.
Risks to the stable growth of pension funds going forward remain elevated as tariffs from the United States of America are expected to kick in the second half. Broad instability in the global economy may jeopardise returns for pension funds, the bulk of which are still invested abroad.
Fiscal buffers
The limited export earnings due to the diamond downturn have eaten away at the foreign exchange reserves, which amounted to P46.3 billion in March 2025, a decrease of 28.4 percent from P64.7 billion in March 2024.
At this level, the foreign exchange reserves were equivalent to 5.9 months of import cover of goods and services, a historical low level. Thus, deliberate and concerted fiscal consolidation efforts are required to help restore buffers, hence anchor external sector, macroeconomic and financial stability.
For the Finance Ministry bean counters, the continuing merchandise trade deficits mean the country is using more foreign currency than it is receiving. The Bank of Botswana, which manages the official foreign exchange reserves, has initiated several interventions to protect the slide in the key assets.
Outlook
The fundamentals of the economy remain resolute and strong with the country maintaining positive ratings from Moody’s and S&P global rating agencies. Government still has room to borrow externally to improve its fiscal position and continues to have critical investments such as the one in De Beers which have the ability to generate strong revenue to improve government’s short term fiscal position.
In the second half of the year, many eyes will be on the National Transformation Programme, which replaces the traditional National Development Plan. The upcoming Programme will be informed by the Botswana Economic Transformation Programme (BETP), which was launched this week as a “delivery-first” model of planning.
Batswana have been given four weeks to submit their ideas for projects to be included in the BETP, which will allow diagnostics, including costings and value-testing, to be done before possible inclusion in the Plan. Government has also announced plans to launch a Presidential dash board where projects can be mega-national projects will be monitored. This is expected to improve project evaluation and monitoring into the second half of the year and beyond.