Diamond slump halves economic growth forecast

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The prevailing headwinds in the diamond market have pushed finance ministry officials to cut the 2015 economic growth target by half while an envisaged P3 billion fall in custom revenues is seen pulling the 2015-2016 budget into a deficit.

The projected budget deficit is further exacerbated by an increase in government expenditure for the year due to public sector salary adjustments as well as cost associated with drought relief measures.

A 2016-2017 Budget Strategy Paper (BSP) released by the finance ministry this week, estimates the economy to grow by 2.6 percent while the budget balance is now seen posting a deficit of P4.03 billion or 2.6 percent of GDP. In February, finance minister Kenneth Matambo announced a growth target of 4.9 percent for 2015 while the budget was seen posting a surplus of P1.23 billion or 0.8 percent of GDP.

“The domestic economy is forecast to grow by 2.6 percent in 2015, underpinned by expected decrease in demand for diamonds in the global market.  A higher growth rate of 4.9 percent is projected for 2016. However, the downside to these projections continues to be the country’s high dependence on diamonds, whose demand and prices are subject to global fluctuations,” read the strategy paper. A sustained weakness of the diamond market throughout the year has seen diamond prices softening while annual production targets have also been trimmed.


Sluggish sentiment in the market has seen sales for both of Debswana’s clients, De Beers and the Okavango Diamond Company (ODC), falling by over 20 percent in the first half of the year. Government gets 80 thebe from every pula worth of diamonds that Debswana sells to De Beers and ODC. While Debswana says it is still conducting an internal review to determine the extent to which they must curtail 2015 production, parent company De Beers recently announced that it would produce 30 million to 32 million carats this year compared with an earlier target of as much as 34 million carats. “Total revenues and grants for the revised 2015-2016 budget are estimated at P51.69 billion, a downward revision of 6.7 percent from P55.38 billion in the original budget. Total expenditure and net lending is estimated at P55.72 against the original budget of P54.15 billion.

“The increase in expenditure emanates from additional amounts required to cover public salary adjustment and drought relief measures. As a result, the revised budget is now estimated to record a deficit of P4.03 billion or minus 2.61 percent of GDP,” read the document.

Although the ministry did not provide details of what contributed to the fall in revenues, a back of the envelope calculation by BusinessWeek shows that customs and excise’s contribution to the fiscus is now expected to fall by over P3 billion in 2015-2016. Calculations show that customs revenue will this year drop from the original estimate of P16.34 billion (29.5 percent of GDP) to P13.75 (26.6 percent of GDP).

Custom revenues for Botswana are earned through revenue sharing formulae among the SACU states.  For Botswana, the diamond market slump has come at a time when SACU revenues, the second largest contributor to the fiscus, are likely to decrease 30 percent again next year.

A 2015-2016 budget review statement tabled in the South African Parliament by finance minister, Nhlanhla Nene early this year revealed that payments to the other four members into union are estimated to drop by 30 percent from R51.7 billion in 2015-2016 to R36.5bn in 2016-2017 due to falling trade and the lower collection of custom duties.

Apart from a consecutive three-year period of deficits upto 2012 sparked by the 2008 financial crisis, Botswana has consistently posted budget surpluses adding credence to the country’s achievement of the best credit rating in Africa.

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