The Latvian remedy: A bitter economic pill

Mbongeni Mguni | Tuesday August 4, 2026 11:48

The World Bank and its Bretton Woods fellow, the International Monetary Fund (IMF) have a less than stellar history when it comes to giving governments in Africa advice about structural reforms in their economies.

In fact, many Africans, including those in the immediate regional neighbourhood, blame their persistent economic woes on structural adjustment programmes enforced by the IMF and supported by the World Bank in the 1980s and 1990s.

During that era and beyond, commodity crises, droughts and other factors including bad governance and corruption, forced many African countries into deficits, leading them to the Bretton Woods institutes for funding. As their levels of indebtedness rose, further support was tied to economic structural adjustment programmes of varying degrees of intensity.

The structural adjustment programmes required governments to enact painful and unpopular deep cuts in spending, as well as other forms of fiscal tightening, including weaning citizens off social support and increasing taxes.

For the decades since the 1970s minerals boom, Botswana has been insulated from such troubles, thanks to healthy fiscal buffers, as indicated by the 2000 to 2008 commodity super-cycle as well as rolling budget surpluses and steady growth rates.

However, in the past decade, pressure has steadily been growing on the fiscus, due primarily to lower mineral revenues, stubbornly high spending as well as system shocks such as COVID-19.

The downturn in diamonds seen since the third quarter of 2023 has only brought a decade-long situation to a boiling point, exposing the long-running need for structural reforms in the economy. Some of these reforms, such as diversification, have been known and proposed by policymakers since the early 1970s, while others, such as a private-sector led economy, have been called for in the last two decades.

While Botswana still has not taken an IMF loan, in 2021 government applied for and secured its first “policy-based loan” from the World bank, a $250 million facility. Fortunately for the country, the policy terms were not as ‘Faustian’ as other countries have experienced and only required government to tighten its subsidy programmes, boost SMME support and accelerate ‘green economy’ initiatives.

As clouds persist over the economy, the World Bank has weighed in with advice.

The economy endured a second year of contraction in 2025, the first twin recessions since Independence, and the deficit this financial year is due to rise to nine percent of GDP against a limit of four. Public debt, meanwhile, is expected to burst past the 40% of GDP limit, while credit ratings downgrades have already increased the country’s costs of borrowing.

The World Bank, in a recent groundbreaking report entitled “Seizing the Moment: How Botswana Can Turn Crisis into Opportunity” had some stark warnings about the trajectory of the local economy and the proposed steps to be taken towards stabilisation and growth.

The World Bank is recommending a three percent of GDP cut in the deficit expected this year, in order to avert a slide into the kind of unsustainable debt that has crippled many other economies.

“Only a decisive adjustment that reduces the primary deficit by at least three percent of GDP will stabilise debt near 50 percent of GDP, while a sustained primary surplus improvement of four percent of GDP places debt on a clear downward path,” researchers said. “With real interest rates around six percent and medium-term growth well below that level, borrowing cannot be a sustainable strategy for Botswana. “Even if additional debt were used to support growth, the cost of financing already exceeds the expected return, and would likely rise further as fiscal space narrows. “For debt to remain sustainable under these conditions, growth would have to increase to implausibly high levels, which is not credible given current constraints.”

The arguments are sound and backed by the numbers. Government, which participated in the production of the report, fundamentally agrees with many of the findings as well as the recommendations, which happen to be in line with fiscal authorities’ own planned actions.

The challenge is that it is a bitter pill to swallow, especially in a year or a period in which ordinary citizens are experiencing some of the most difficult economic conditions at personal level. Inflation remains at three and a half year highs, unemployment is raging, especially amongst the youth and tax rates are rising. On August 1, electricity tariffs are due to rise by nine percent, further squeezing consumers and raising frustrations, while fuel prices remain at elevated levels, even after the recent reduction.

The World Bank’s recommendations on the deficit amount to a reduction in the deficit for 2026-27 of about P8.16 billion. Achieving that for government means either generating a surprising boom in revenue or further cutting spending. Both options impact the ordinary household, as this could mean lower social support, absence of wage growth for civil servants or revenue increase measures such as higher levies.

The diamond recovery seen in the first half of the year, while hopeful, remains unstable as efforts continue towards strengthening the fightback by natural diamonds.

Unveiling the World Bank’s new report, Jacques Morisset, lead economist and Equity, Finance and Institutions programme leader, advised local policymakers to look to Latvia, a country that suffered a deep economic crisis after the 2008 recession.

The north European country saw its economy contract by 18% between 2008 and 2010, its deficit reach a negative 7% of GDP and public debt rise from nine percent to 48% over that same period.

According to Morisset, Latvia embraced decisive fiscal consolidation with spending cuts of up to 14% of GDP, while also enacting structural reforms to attract private investment and rolling out targetted social protections to the most vulnerable.

The country also initiated an “internal devaluation”. Instead of devaluing its currency, Latvia kept its exchange rate fixed, but reduced costs inside the economy through cutting public sector wages by as much as 20-30%, reducing government spending sharply, closing or merging government departments, reforming pensions and public services, as well as increasing some taxes while improving tax collection.

“In 2010 you faced a crisis and another diamond crisis in the mid-2010s as well,” Morisset told local policymakers recently. “Even in life, if you're good, healthy, young and rich, you can stand a crisis, but when you're sick, old and poor, it's much more difficult. “I'm not saying that Botswana is poor, sick, but you are not in as good shape as you were 10 years ago, or five years ago or six years ago. “You’re not the first country facing a crisis and you are not alone. “Inaction, however, is costly,” he said.

For the World Bank, the cost of inaction is key. Morisset gave the example of person who borrows to invest in a home. He said this arrangement only works if one’s income can rise in future and if not, the cost of borrowing could become higher than the income, resulting in bankruptcy.

“If your income grows by two percent and your cost of borrowing is above six percent, at one point, you will be facing a problem. “Imagine a 10% interest rate and your growth rate is 2% or 3%, or even lower. “The other constraint is liquidity where you borrow and because of the costs, you have to put 30% or 40% of your income to repay the debt. “At one point you cannot give food to your family, or send your kids to school.” He said a three percent of GDP cut in the deficit would be as painful as similar measures had been in Latvia, but there was room for government to lessen the impact through efficiency gains.

“It’s painful of course to cut by two or three percent, but there are things that can be done such as efficiency gains and spending better, not more, and these are discussions government can have, not just about firing workers. “At the World Bank, we are moving from talking to walking with the Government of Botswana on different projects especially on the fiscal pillar. “We are ready to be a partner and help you with whatever we can bring to the table,” he said.

For government, the World Bank’s findings and recommendations reinforce the path fiscal authorities are already taking. Besides fiscal stabilisation measures to pull back the deficit, the ten-year Botswana Economic Transformation Programme (BETP) represents the Parliament-approved homegrown economic ‘structural adjustment programme’.

Through the BETP, government is essentially asserting that rather than waiting for strait-jacket recommendations from financiers, including the Bretton Woods’ institutions, it has charted its own way out of the structural challenges that are stagnating growth.

The Ministry of Finance’s secretary for Macroeconomic and Financial Policy, Sayed Timuno, said the World Bank report confirmed government’s bearings rather than seeking to change them.

“The cost of delay involves tougher, tighter, rougher financing conditions and narrower fiscal space as well as a receding horizon for structural transformation that this country needs,” he said at the recent unveiling of the World Bank report. “Our true role as a government has not changed. “We still want to be a diversified, high-income economy underpinned by disciplined public finances and labour costs equipped for the work that diversification demands. “This report does not contradict that bearing. It confirms it.”