Middle East unrest weighs on deficit, inflation
Mbongeni Mguni | Monday June 15, 2026 06:00
In a recent research report, Emmanuel Kwapong, Economist Africa at Standard Chartered, said the Middle East conflict was likely to worsen the country’s existing macroeconomic challenges, which largely emanate from the prolonged weakness in diamonds.
“We now expect a more subdued recovery in the diamond sector, Botswana’s key growth driver, as the conflict weighs on global growth and discretionary spending in key diamond end-markets,' he said.
“Higher energy prices are also feeding into domestic inflation, lowering real incomes,” he added.
In February, the Finance ministry forecast that the local economy would grow by 3.1 percent this year, breaking two successive annual contractions. The Bank of Botswana (BoB), in its last update, said it expects inflation to average 8.7 percent this year, from a prior projection of 4.5 percent.
Standard Chartered has revised its growth forecasts for Botswana to three percent in 2026, from 4.5 percent, whilst inflation is now expected to average ten percent for 2026, from 5.3 percent.
“Limited policy space – reflecting eroded fiscal buffers – constrains the authorities’ ability to offset the external shock,” Kwapong said. “As a result, a larger share of the shock is likely to hit the real economy, prompting us to lower our growth forecasts. “We raise our average inflation forecast driven primarily by fuel price pass-through. “With imported tradeables accounting for about 42% of its CPI basket, Botswana is particularly vulnerable to a price shock.”
The inflation outlook is expected to worsen due to planned tax increases. Besides adjustments to personal and corporate taxes, the Botswana Unified Revenue Service introduced Value Added Tax on digital services from June 1. The move means the 14% Value Added Tax will be applied to local consumers of digital services such as Netflix, Google, and Amazon, as well as other remote services.
Kwapong said the new taxes, while helpful, would likely not stop the projected budget deficit for this financial year from widening. The Finance Ministry expects the deficit to come in at 8.9 percent of Gross Domestic Product or P26.4 billion.
Standard Chartered expects that the deficit will reach as much as 10.3% of GDP.
“Our wider deficit forecast than the government’s 8.9 percent target largely reflects a more conservative view on revenue mobilisation,” Kwapong said. “Whilst new tax measures – including a three percentage point increase in corporate income tax, higher income tax for top earners and fewer zero-rated VAT items – are due to be implemented this fiscal year, weaker domestic economic activity is likely to limit the yield of these measures.
“In addition, a muted recovery in the diamond sector is likely to weigh on mineral revenues, which averaged about 26% of total revenue over the past five years.”
The Finance ministry is expected to update its projections for the budget and macroeconomic indicators, such as inflation, when the midterm budget review statement is published later this year.