The International Monetary Fund (IMF) recently concluded its Article 4 visit to Botswana. It forecast growth in the southern nation to slow to 1 per cent this year due a contraction in the diamond market but forecast a rebound in the following year. CNBC Africa is joined by Ian Stuart, Senior Economist for Botswana, IMF.
We do have Ian Stuart, the Senior Economist for Botswana at the IMF for more. Ian, thanks so much for your time. So not such a great year for Botswana this year as you are forecasting in terms of growth, some of the lowest growth numbers that we are expecting to see out of that southern African nation in the past three years essentially. But you are suggesting that a rebound could be in the offing for next year. And so as you take us through your assessment of your recent visit, can one interpret that you are saying that the worst for the diamond market could be penciled in for 2024 and that 2025 we could expect to see the shine return there? Well, thank you very much, Fifi. It's a pleasure to be here again and thank you for the opportunity. Yes, I think you've got it spot on. So we are projecting 1 per cent economic growth for the current year, which is quite a slowdown from 2023 when the economy grew at 2.7 per cent. And yes, as you've already stated, the big story here is the contraction in the international diamond market, particularly big countries like China. And then, of course, there's uncertainty in the market brought about by an increase in the supply of lab-grown diamonds, which are diamonds produced industrially rather than recovered through mining. Now, we do anticipate that this is a cyclical downturn. In other words, we think that both the diamond market and Botswana's economy will recover in 2025. And certainly there is uncertainty in the market, as you've already pointed out. But we also see lots of opportunities, including expanding middle class, for example, in India and China. And we do think that there's still a lot in terms of the profitability of large diamonds, which are still mined and not created in a lab. And of course, there was the very large find last month in Botswana of around 2,500 carats for one stone. So yes, we think it's a cyclical downturn and we see an improvement over the medium term. It is quite an interesting debate as to whether it is cyclical or something that's more structural. I've heard arguments supporting both and notwithstanding what you have said as well, I suppose time will be the deciding or the jury as to who got it right. In this environment, then, of the slowdown, what do you make of how the government of Botswana is managing perhaps much lower revenues than it has been accustomed to, particularly from the diamond market? And what are recommendations from the IMF as to perhaps how it can do it a little bit better? Yes, well, of course, Botswana, as you know, is the largest producer of diamonds by value in the world and over 80% of its exports are accounted for through diamond exports. So, of course, any slowdown in the diamond sector does immediately hit the growth rate of the whole economy and, of course, the revenues that accrue to government. And we've seen that the budget deficit is likely to widen this year to around 6% of GDP. A large part of that is the decline in mineral revenues and a part of it is an increase in infrastructure spending. And our view is that, yes, there are good grounds for allowing a widening of the deficit during an economic downturn. So we do support that. But we've recommended that the government perhaps slow down some of its infrastructure spend and focus on value for money. And certainly over the medium term, the government will have to close the deficit and move towards a budget surplus in order to reduce its borrowing and start rebuilding cash balances. Sure. I see that you are also making recommendations around the modernisation of certain state-owned enterprises over in Botswana and recommendations regarding other areas of infrastructure spend there. Perhaps you can talk to us about where you are seeing opportunity to make SOEs more fit for purpose right now and what that essentially will entail. Yes. So we last year undertook a detailed assessment of state-owned companies. We looked at the balance sheets of all of the major state-owned companies and made a series of assessments on those grounds. In our view, a lot of these state-owned companies have been running at a loss and there could be opportunities for changing the management structures, bringing in more professional, say, boards or management oversight and even potential for bringing in other equity partners. Now, each state-owned company on its own will have to be considered, but in our view, there's certainly opportunity there. And this is not just our view. I think the government of Botswana has been looking at options for bringing in the private sector, expanding the role of the private sector in this part of the economy. It's been a long time coming and we hope to see some progress on this in the coming years. Sure. I mean, this is the, I think, the playbook of most sovereigns right now, particularly on the continent of pushing forward with growth with the private sector in hand. So can I just talk to you about maybe your assessment of the approach of the government of Botswana right now and whether you reckon any other recommendations or perhaps even incentives can be thrown on the table to encourage the private sector to look further south in that direction? Yes, well, the first thing to note is that we have looked in detail at the structure of the economy. And in our view, one of the reasons why Botswana can't diversify is the size of the public sector relative to the private sector. And of course, a lot of the state-owned entities also have a lot of market pricing power or regulatory power in specific markets. And that is particularly why we focused on this as an area of reform, because in our view, the future that will require a larger role for the private sector and a relatively smaller role for the state. Having said that, I think the authorities are well aware of this. They've been talking about diversification for many years. And we have seen some, I think, very important and interesting projects, including efforts to expand IT infrastructure, not just in the big cities, but across the whole country. We are seeing efforts to try to upgrade large infrastructure for the movement of goods and people, which we think is a very important next step. And in general, we think there may also be opportunities for using new technologies to improve the quality of education, which has also come up in surveys, for example, as one of the options for reform and one of the things that are holding back the private sector at the moment. All right. I mean, looking at other macro fundamentals that you assessed, inflation being in the target band of the central bank now enjoying that comfort for some time. You do regard the stance of monetary policy as appropriate in its current form. But I want to circle back to the diamond market, Ian, because you would be aware of the major transaction of De Beers' parent company, Anglo American, and how the sale of De Beers is on the cards. What impact, if any, do you reckon this could have for the fortunes of Botswana? Yes, well, that's, of course, a difficult question. A very important question. At this stage, as you well know, about 85% of De Beers is owned by the parent company, Anglo American, which is in the UK, and 15% owned by the government of Botswana. And an announcement has been made by Anglo American that they want to sell De Beers. Now, this is big news and also something we're watching closely, although we'll have to see exactly how it plays out. Having said that, I don't think one can say quite yet what the impact will be. It could be a very positive step, depending on the steps taken by the new management, for example, to improve the efficiency of the company, for example. We've already seen the current management, by way of example, looking at options for allowing retailers to more easily determine whether a diamond is lab grown or natural. And these kinds of interventions could play an important role in ensuring that diamonds in Botswana have a bright future. All right.
Theme: Botswana's Economy Faces Diamond Downturn, IMF Forecasts Rebound in 2025
Botswana's economic growth is expected to slow to 1 per cent this year, marking one of the lowest growth rates in the past three years, according to the International Monetary Fund (IMF). The primary reason for this slowdown is the contraction in the diamond market, particularly affecting major diamond-consuming countries like China. Additionally, the abundance of lab-grown diamonds, created artificially rather than mined, has introduced further uncertainty into the market. However, Ian Stuart, Senior Economist for Botswana at the IMF, believes that this downturn is cyclical and anticipates a recovery in 2025. Despite the current challenges, opportunities for growth still exist, such as the expanding middle class in India and China, as well as the profitability of natural large diamonds. The recent discovery of a 2,500-carat diamond in Botswana further demonstrates the potential for a rebound in the diamond industry. While the debate continues on whether the downturn is cyclical or structural, Stuart remains optimistic about the country's economic prospects in the medium term. Botswana's government, heavily reliant on diamond exports for revenue, is facing a widening budget deficit due to the decline in mineral revenues. The IMF recommends a cautious approach to managing lower revenues and advises the government to focus on value for money in infrastructure spending. Stuart also highlights the importance of modernizing state-owned enterprises (SOEs) in Botswana to enhance their efficiency and financial performance. The IMF suggests introducing professional management structures and potentially involving private equity partners to improve the viability of SOEs. Encouraging private sector growth is seen as crucial for Botswana's economic diversification, with the IMF emphasizing the need for a larger role for the private sector relative to the state. Efforts to enhance IT infrastructure, upgrade transportation networks, and leverage new technologies in education are seen as key steps to support the growth of the private sector. Despite challenges in the diamond market, Botswana has maintained inflation within the target band set by the central bank, and the IMF views the current monetary policy stance as appropriate. The potential sale of De Beers, owned predominantly by parent company Anglo American, poses a significant development for Botswana's diamond industry. While the impact of this sale remains uncertain, Stuart suggests that strategic management decisions by the new owners could positively influence the future of diamonds in Botswana, potentially leading to improved efficiency and market transparency. As Botswana navigates through the current economic challenges, the IMF is optimistic about the country's ability to bounce back in the coming years, with a projected rebound in the diamond market and overall economic growth by 2025.
"We do anticipate that this is a cyclical downturn. In other words, we think that both the diamond market and Botswana's economy will recover in 2025."
['Botswana economy', 'diamond market', 'IMF forecast', 'economic growth', 'state-owned enterprises', 'private sector growth', 'budget deficit', 'monetary policy', 'De Beers sale']