Botswana’s recovery seen slow as diamond demand rises


Botswana’s diamond-based economy should return to growth this year but the recovery from a sharp slump may be slow as demand for the precious stones gradually picks up, a Reuters poll showed.

Botswana’s economy was battered by a collapse in world demand for diamonds its main product that has knocked economic activity and slashed government revenue.

Finance Minister Kenneth Matambo said last week the budget deficit was forecast to have swelled to 12.2% of GDP in 2010/11 due to lower diamond sales and that the economy may record zero growth in the financial year to June.

It was seen expanding 5% in 2010/11.

A Reuters poll of 9 economists predicted growth in the world’s biggest diamond producer to rebound to 4.9% in calendar 2010 and to maintain that growth next year.

Forecasts ranged from 3.5 to 7.5% for 2010 and between 3.2 and 9.6% for next year.
“Tentative indications that the worst of the global economic slowdown is over bring enormous respite for the diamond-dependent economy,” said Janine Botha, senior economist at NKC Independent Economists, which tracks African countries.
“That said, diamond production will take time to recover to levels seen prior to the sharp fall early last year. Albeit back in positive territory, economic growth is likely to remain below pre-crisis levels in 2010/11.”

Matambo said in his budget speech that mining output was likely to take up to two years to recover, holding back growth, although loose fiscal policy should support the economy until the full recovery in diamond demand.

The economy contracted by 4.6% over the four quarters to September the latest data available.

Analysts warned that the government’s large budget shortfall diamonds account for 40% of state revenue put the economy at risk should the global recovery falter.
“Headline growth in 2010 will benefit from a low base, following a significant economic contraction in 2009, particularly for exports,” Business Monitor sub-Saharan Africa analyst Matthew Searle said.
“The economy remains susceptible to a renewed slowdown in the global economy, the ramifications of which would be severe for Botswana given its bloated fiscal deficit.”

The poll showed inflation stabilising just outside the central bank’s 3 to 6% target range for the next two years averaging 6.5% this year and 6.3% in 2011.

Inflation has been on a downward trend since peaking at 15.1% in August 2008 and the Bank of Botswana expects it to settle inside its 3 to 6% target range in the medium term.

Easing inflation allowed for the bank to cut its main lending rate by 100 basis points to 10% in December, bringing total cuts in the cycle to 5% points.

Pic: Diamonds