Hope, uncertainty as economy enters second half

Mbongeni Mguni | Tuesday July 7, 2026 14:31

The economy expanded by 3.5 percent in the first quarter, with most sectors recording growth of 0.3 percent or higher, except for agriculture and construction which declined.

The numbers compare to a contraction in the first quarter of 2025 of 0.3 percent and for the Finance Ministry, represent a welcome sign of a possible rebound in the economy this year.

Technocrats expect the economy to rebound to 3.1 percent growth this year, an eagerly desired expansion following contractions in 2024 and 2025.

The numbers

Figures released by Statistics Botswana this week indicate that the growth in the first quarter was anchored by diamond trading as well as the water and electricity sector, with the former rising 60.5 percent compared to a decrease of 35.4 percent in the corresponding quarter last year.

The key mining and quarrying sector recorded 3.4 percent growth, compared to a contraction of 7.7 percent in the corresponding quarter of 2025. For technocrats, the rebound in mining is particularly pleasing because the growth was achieved across the different minerals.

“This increase was largely attributable to growth in soda ash, diamonds, coal and copper real value added by 72.8, 3.1, 2.7 percent and 0.5 percent, respectively. “Diamond production in carats increased by 4.8 percent in the first quarter of 2026. “Diamond carat production increased primarily due to higher processing volumes at the Orapa and Jwaneng mines, supported by an increase in recovered grade. “Furthermore, the plants at Botash Mine were fully functional hence the increase in the production of soda ash,” Statistics Botswana researchers said.

The first quarter performance is backed by observations by the Bank of Botswana (BoB) of an improvement in the diamond sector, while the positive annual outlook is anchored by Debswana’s plans to increase production by 20 percent this year.

Other numbers add to the optimism for the year. In the first quarter, non-mining sectors of the economy grew by 2.7 percent, compared to the 2.3 percent over the same period last year, helped by resilient performances in manufacturing, accommodation and food services, wholesale and retail trade, education and others.

Construction, a key sector and bellwether for future value addition in the economy, contracted during the first quarter, possibly in line with a slow-down in government spending on public works.

Analysts say the efforts being made by the Office of the President and the Ministry of Minerals and Energy and allied partners to resuscitate demand for diamonds and the traction being made in NDP 12 and the critical Botswana Economic Transformation Programme (BETP), bode well for the economy pointing in the right trajectory.

However, as the second half of the year begins, several troubling risks are in store for both policymakers and citizens alike in the economy.

Pain points

The central bank, in its statutory role as government’s advisor, has raised several red flags going into the second half of the year and beyond.

One major issue is the upcoming credit ratings reviews and decisions by S&P as well as Moody’s, which could knock the country further down and, for one of the agencies, send it into junk status for the first time.

In March, S&P downgraded Botswana to just one notch above junk status, the threshold at which sovereign debt is considered speculative by international investors.

With government funding much of its budget deficit from local and external debt, any further downgrade, particularly into junk status, would significantly increase borrowing costs at a time when the fiscus is still searching for a firm grip in its recovery.

“There is a high possibility of the ratings being downgraded again should corrective measures that the stakeholders, mainly government, did agree with the credit rating agencies that they will implement to try and sustain or even improve the ratings,” the BoB’s acting Director of Research and Financial Stability Department, Matlhodi Serero, told a briefing last week. “So when they come in the third quarter of this year and those things are not done, then there is that risk.”

One of the major “things” that credit ratings agencies want to see traction on is fiscal consolidation, which has been elusive for government as the diamond downturn and stubborn spending patterns have widened deficits and piled on debt in the last decade.

“The rating agencies are concerned about the ballooning sustainable fiscal deficits which come from what they deem as insufficient attempts at fiscal consolidation,” Serero said. “The persistent high public sector wage bill and also the issue of delayed economic diversification is an issue that has been of concern over an extended period of time. “This is a very uncomfortable situation for Botswana because historically the country's ratings were very high investment-grade.”

Related to this, is another risk brought on by the precarious fiscal situation government has been operating in. The central bank has warned that the rate at which government’s indebtedness to the local commercial banking sector has grown, has become a risk in itself, in terms of the significant exposure banks now carry to government’s credit worthiness.

Known technically as the “sovereign-bank nexus” the risk was identified as one of the top three threats to the local economy by the Financial Stability Council in its last update, released recently.

“This growing reliance on domestic financing has tightened the sovereign–bank nexus across the region, as banks expand their holdings of government securities and concentrate exposures on their balance sheets,” the Council said. “While this provides near-term support for sovereign financing needs, it simultaneously crowds out private sector credit and weakens monetary policy transmission. “More importantly, it creates a direct risk transmission channel, whereby further deterioration in sovereign creditworthiness can quickly weaken bank balance sheets and elevate the risk of financial sector stress.”

BoB deputy director, Research and Financial Stability department, Leonard Setshegetso, told Mmegi that the extent of the public sector’s exposure to commercial banks had grown from five percent in 2013-2014, to 19 percent as at December.

The latter figure is excluding about P15 billion in Pula and hard currency loans concluded by government with local banks recently.

“What tends to happen is that these linkages present channels through which weaknesses in the public sector can easily be transmitted to the commercial banks,” he said. “While it is not avoidable in a developing economy where we have to rely on several sources of funding, we then have to look at what measures are put in place to avoid that, or mitigate the effects that may arise due to these linkages.”

The central bank emphatically notes that its assessment of the sovereign-bank nexus risk is not a suggestion that government could soon fail to repayment its obligations. Rather the assessment is part of efforts to identify all risks to the financial sector and the broader economy.

For government, the warming conditions in the first quarter could not have come at a better time, as the fiscus struggles for breathing room. Increasingly, the central bank’s monthly forays into the local capital market on behalf of government, have largely raised funds for “roll-overs” or the refinancing of short-term debt, rather than longer term “free” funds for government.

More recovery in diamonds and mining in general, as well as an acceleration of NDP and BETP initiatives, coupled with spending reforms, will provide greater fiscal consolidation and allow the country to escape adverse ratings decisions in the third quarter.