Reliance on diamonds haunts Botswana

Gaborone – Over reliance on diamonds for the last 60 years is back to haunt Botswana’s economic growth to the extent that the country is seriously considering securitizing its economic diversification strategy, a move that both government and the World Bank say presents a bag of mixed fortunes going forward.

In a Systematic Country Diagnostic (SCD) report released recently, the

World Bank warned that consumer spending has replaced diamonds as the key driver of economic growth, a trajectory that is unsustainable owing to Botswana’s weak private sector and high household indebtedness.

The report whose objective is to address the factors hampering inclusive growth in Botswana noted that while the reduction in

reliance on diamonds, as the anchor to economic output is welcome, growth that is largely dependent on consumer spending is not sustainable in the medium to long term.

“Weak capacity by the private sector to create jobs, low wage growth, and increasing household debt pose the highest risk to Botswana’s new growth and diversification trajectory, which is driven by the services

sectors such as retail and vehicle trade,” stated the report.

The warning by the World Bank comes at a time when a considerable number of companies in the mining industry have closed shop or retrenched staff since the end of last year and the beginning of 2015.

Recently, Minister of Minerals, Energy and Water Resources Energy Resources, Kitso Mokaila said government intends to bring relief to profit-squeezed mining companies by allowing them to defer payment of mineral royalties.

While addressing the 13th Botswana Resource Sector on June 13, 2015 in Gaborone, Mokaila said the short term relief would assist the mining industry on a case by case basis for mutual benefit.

He said the government was applying this short-term relief and would continue to assist the mining industry on a case-by-case basis.

Early this year two of Botswana’s diamond cutting and polishing factories closed and have had to retrench and downsize.

Former Bank of Botswana Deputy Governor and renowned economist at Econsult Dr Keith Jefferis is quoted as saying that the days of mineral-led economic growth in the country were over with mining actually subtracting from Botswana’s economic growth in recent years.

Also during the Resource Sector Conference, Jefferis is quoted as saying that undiversified exports, fiscal dependency on minerals and high unemployment were challenging the Botswana economy.

He outlined how diamond mining’s output has shrunk by a quarter to a third and that the new drivers of growth were services, finance, retail, hotels and tourism sectors, but that the downside of the services growth was that it did not add very much to exports.

Mining weekly publication recently observed that while Botswana had diversified its sources of growth, exports had not become diversified and the structure of exports was still dominated by diamonds.

Rough diamonds mined in Botswana remained the biggest share of exports with aggregated rough diamonds, imported from Namibia, South Africa and Canada, making the second-biggest export contribution.

Reports indicate that polished diamonds contributed about 10 percent, copper and nickel 5 percent, while gold and soda ash 0,5 percent each.

The remainder, Jefferis said, was made up by a range of other manufactured products, including textiles, with the contribution from services, mainly tourism, actually bigger than that of other manufacturers.

Aggregated diamonds, which are all imported, were causing balance of trade issues and for the first time in seven years, Botswana last year ran a balance of trade surplus.

Mineral revenues had risen marginally with Botswana’s fiscal weaknesses stemming from not generating enough revenue from domestic sources.

Growth was not adding meaningfully to the 340 000 formal sector jobs with formal employment growth of 1 percent too low to provide jobs for the country’s 15 000 to 20 000 yearly school leavers.

The official unemployment rate was 20 percent but the percentage of youths coming out of education without jobs was much higher.

Employment is heavily government dominated at 40 percent and with capital-intensive Botswana mining only contributing 4 percent of the formal employment opportunities.

The government expenditure of mining revenue over the last 40 years of US$50-billion has been overwhelmingly invested in infrastructure and human capital.

Education always receives the largest chunk of the budget, about 20 to 25 percent, while infrastructure including roads, dams and schools are also a priority.

The permanent secretary in the Ministry of Finance and Development Planning, Solomon Sekwakwa has also warned that Botswana is a fragile economy by being reliant on diamonds whose prices are unstable.

Addressing the Public Accounts Committee, Sekwakwa said power cuts and water shortages were a major challenge in the country even for domestic investment to grow.

He said there was a lot of money to be injected into the two sectors to revive the infrastructure, which would come at a high cost for the economy.

On a related matter, Sekwakwa said youth unemployment pre-occupied the ministry because it was a challenge not just in Botswana but worldwide.

He said government had good intentions when introducing the graduate internship programmes to absorb them into the main economic stream to acquire skills.

Sekwakwa, however, said the business community which also benefited from graduate internships had made the programme look negative because they no longer employed, but depended on cheap labour from interns to maximize profits.

He stated that it is imperative for government to come up with sustainable programmes that would help address youth unemployment.

July 2015
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