Botswana for years was hailed as an economic success story, but a collapse in demand for the country’s diamonds has hit revenues hard and raised questions about an ambitious spending scheme.
Botswana produces 22 percent of the world’s diamonds, making it the top producer and accounting for half of government revenue. The country prides itself as a model of a successful African democracy.
However, last year, Botswana halved output and suspended much of its diamond activities as the global economic crisis hit its mines. High-end tourism, Botswana’s other economic mainstay, also took a hit as arrivals fell sharply during the recession.
Highlighting the nation’s difficulties, Standard and Poor’s rating agency last Monday downgraded Botswana’s sovereign credit ratings from A to A-, citing concerns over the country’s spending plans at a time of falling revenues.
“We expect this deterioration of public finances to translate into higher debt accumulation than we previously expected, and the gradual dissipation of the country’s asset buffers,” S&P credit analyst Veronique Paillat-Chayrigues said. “We believe that Botswana needs these buffers more than many similarly-rated peers to offset its economic and fiscal dependence on commodity exports, in particular diamonds, combined with its substantial development needs.”
For two years, the government has presented budget deficits due to limited funds and growing public expenditure, with this year’s deficit the largest yet.
Botswanan Finance Minister Kenneth Mathambo said in this year’s budget that the country will run a 12 billion pula (US$1.7 billion) deficit, representing 12.2 percent of GDP.
The shortfall will be financed by drawing on the government’s cash reserves, accumulated in surplus years, and by borrowing largely on the domestic capital market, he said in the budget.
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