Although Botswana's macro economic environment looks good, the possibility of a recession in the US, regional power cuts and the 'fiscal surge' promised in the 2008 budget speech remain major challenges for the country's export-dependent economy, observers say.

The US, apart from its AGOA II which allows duty-free treatment of mainly textiles exports from Botswana and other African countries, is the world's single largest diamond market, leading economic pundits to warn that a US recession - expected in the first quarter of 2008 - would have an impact on Botswana's exports.

"Any slowdown there (in the US) would undoubtedly lead to lower sales, or reduced prices, or both, resulting in reduced diamond earnings and possible stockpiling if production levels are maintained," argues Dr Keith Jefferis, Managing Director of Econsult in his reaction to the 2008/09 budget speech.

Speaking yesterday during an after-budget breakfast meeting hosted by First National Bank (FNB) at the GICC, the former Bank of Botswana (BoB) Deputy Governor reasoned that while there are other markets for diamonds, especially in Asia, those markets are also dependent on their own exports to the US, "hence a generalised slowdown in demand is almost certain."

Key global diamond markets other than the US are Europe, Japan, India and China. The US, which accounts for over 45 percent of the world's diamond market, is currently on the verge of a recession as a result of an industry-specific crunch in housing and credit sectors following sub-prime write-downs.

But Jefferis was also quick to point out that a slowdown in export earnings would have little direct impact on Botswana, given the country's high levels of foreign exchange reserves, which are accumulated to deal with such eventualities, thus giving time for international demand to recover.

As at November 2007, Botswana was sitting on US$10.2 billion in foreign exchange reserves, which represent a 28-month import cover bill. Jefferies says the problem of having to cut back on imports or borrow to finance current account deficits that would confront many countries in the event of an export slowdown does not apply to Botswana.

But the current power crisis is a challenge to the economy in that companies will be forced to buy generators at a time when diesel prices are rising.

Botswana is currently experiencing repeated power outages because Eskom, the South Africa's power utility corporation, which supplies up to 75 percent of Botswana's energy needs, is under pressure to meet growing domestic demand.

In the short to medium term, these power cuts are expected to affect businesses as targets will be missed, while looking for alternative sources of power will lead to more costs to companies.

"The current situation of unplanned and unannounced power outages is highly disruptive and will have inevitable costs in terms of reduced output and growth and additional costs as businesses are forced to invest in expensive diesel-powered generators," Jefferis points out.

With Morupule B expected to be operational only by 2011, electricity consumption is also expected to grow in the absence of a new power station.

Alone, when at full capacity, the Tati Nickel Activox Refinery will increase Botswana's total electricity consumption by some 15-20 percent.

"As it stands, the Budget is somewhat complacent about the power situation, and to my mind underplays the potential negative effects on growth and macroeconomic balance."

On the fiscal surge, Jefferis points out that it is unrealistic that spending will increase by 53 percent.

In the budget speech for 2008/09, development spending is projected to move from P4.1 billion from last year to P8.5 billion next year.

The worry is that although there is an increase in government spending, most of it did not happen during the current financial year because of poor government project implementation.

"Developments such as this perpetuate the stop-go cycle in government spending, which in turn leads to economic volatility, contributes to uncertainty in the private sector and makes planning difficult, and - during the 'up' phase - contributes to inflationary pressures. Such volatility in spending is unlikely to reflect good controls or a rational allocation of resources."

Latest AGOA Trade Data currently available on AGOA.info


Click here to view a sector profile of Botswana bilateral trade with the United States, disaggregated by total exports and imports, AGOA exports and GSP exports.

Other regularly updated trade statistics on AGOA.info include: (click each link to view)