Botswana is taking steps to reduce spending in response to a prolonged downturn in the diamond market, which has led the government to raise its budget deficit forecast to post-Covid levels, according to the country’s Finance Minister and Vice President, Ndaba Gaolathe.
In an interview in Washington, Gaolathe emphasized the urgency of the situation, stating, “Something drastic” needs to be done. He added, “The first thing we need to do is live within our means. That means cutting spending, which involves eliminating what we believe is excess expenditure.”
As the world’s largest diamond producer by value, Botswana heavily relies on diamonds for most of its exports and around a third of its fiscal revenue.
However, a slump in demand for diamonds since the second half of 2023 has severely impacted the economy.
The decline in diamond sales has drained Botswana’s savings, forcing the government to revise its budget deficit forecast to 9% of Gross Domestic Product (GDP) for the year ending in March 2025. Additionally, the economy is expected to contract by 3% in 2024.
To mitigate the financial strain, Botswana is considering several measures, including reducing its government vehicle fleet and limiting public officials’ travel.
Authorities are also focusing on increasing tax revenue by improving compliance, plugging financial leaks, and introducing new levies, such as a tax on digital transactions, which is set to begin in September 2024.
Despite the challenges, Botswana, one of the few African countries with an investment-grade credit rating, is reluctant to tap into international capital markets to address the revenue shortfall.
If the government does seek debt, it is likely to pursue concessional lending rather than issuing international bonds. Gaolathe stated, “Let’s borrow where it’s cheapest.”
While Botswana’s fiscal authorities had initially expected a recovery in diamond demand by July 2024, the imposition of high U.S. tariffs on diamonds has raised concerns. The Bank of Botswana recently warned that it expects only a “muted recovery” this year.
Gaolathe cautioned that high tariffs on Botswana’s diamonds could have a detrimental effect on the country’s economy, given its heavy reliance on diamond exports.
