African Development Bank’s Country Strategy Paper (CSP) 2015-2019 says Botswana is at a critical juncture in its development. CSP indicated that this has led to a rethinking of the country’s development strategy, saying that Botswana needs to accelerate economic transformation from the primary sector to advanced manufacturing and services in order to reduce its vulnerability to shock in the diamond trade.  

The global financial crisis of 2009 exposed the country’s vulnerability to external shocks due to its reliance on one commodity. Real Gross Domestic Product contracted by 7.8 percent from an annual average growth of 10 percent experienced over the previous four decades. In addition, Botswana’s economy will face a difficult challenge in the medium term with the depletion of its diamond resources.

 ‘’The country needs to revive the growth of private sector investments and increase the productivity of economic investments. To achieve this, the government needs to invest in high impact infrastructure to improve competitiveness, provide a sound regulatory environment that is friendly to business, and further enhance skills development,’’ reads CSP.

Further, it noted that Botswana has made huge strides socioeconomic development over the past four decades, transforming itself from an underdeveloped country into a middle-income economy. However, a striking feature of the Botswana economy is the rather limited economic transformation.

“The structure of production has changed very little since the 1990s, minerals still dominate the economy, while labor-intensive manufacturing, which normally absorbs unskilled laborers who exit traditional agriculture, has not developed. As a result, the economy has high levels of unemployment and inequality. The 2009 global economic downturn exposed the country’s vulnerability to external shocks due to reliance in one commodity. At the same time, growth in the non-mining sector softened.”

To reduce unemployment and inequality, CSP notes that the country will need to accelerate growth of private sector investments and increase the productivity of economic investments. The CSP, which is anchored on the Bank’s ten-year strategy responds to the need to transform the Botswana economy in accordance with its national development agenda, outlined in the government’s 10th National Development Plan NDP10 covering the period 2009-2016.

The CSP is aligned with the priorities of the NDP10 that intersect with those of the ten-year strategy and focuses on the Bank’s core areas of competence. It is organized around two strategic and complementary pillars, infrastructure development to increase productivity and private sector development. The CSP calls for increased productivity and achieving high, inclusive and sustainable growth in Botswana, which is the shared goal of the ten-year strategy and the NDP10.

CSP continued to note that the structure of production of the Botswana economy has changed very little since the 1990s. The Strategy paper says the economic base remains narrow and the economy is still dominated by mining and government. The mining sector constitutes between 30 and 35 percent of the gross domestic product and government contributes around 16 percent of the GDP. These percentages have not changed significantly over the last decade.

The fastest growing sector has been services and its overall contribution to GDP has increased mainly due to the slowdown in mining as a result of the global economic slowdown. Within the sector, the fastest growing subsectors such as government services, banking, insurance and construction are al linked to revenue from the mining sector.

It also stated that agriculture, especially cattle farming is the dominant source of livelihood, saying more than half of Botswana’s population live in rural areas and are dependent on subsistence farming. However, domestic agriculture production meets only a small proportion of the nation’s food needs. The contribution of the agriculture sector to the GDP has continued to decline and is now under2.5 percent from a peak of 3.4 percent in the 1990s. The limited contribution of agriculture to GDP is mainly due to the severe water shortage and inadequate rain.

The share of the manufacturing sector in GDP has remained limited in the range of 5 to 6 percent since the 1990s. Unlike in many MICs, non-mining manufacturing has not been a dynamic absorber of labor. Rather, its share in GDP has been declining. Some attempts were made in the past to boost the textile industry and take advantage of access to the US market under the African Growth and Opportunity AGOA, but this has now become difficult due to strong competition from other developing countries.

Furthermore, CSP highlighted that Botswana continues to rank low with regard to important determinants of private investment. It says non-price competitiveness indicators suggest that Botswana has been moving steadily downwards in global rankings. Between 2008 and 2013, the country slipped 18 positions from 56 to 74 in the Global Competitiveness Index and 21 positions from 38th to 59th in the World Bank’s Ding Business ranking. The decline is explained largely by the absence of improvements rather than worsening policies.

According to the 2014/15 Global Competitiveness Index, Botswana’s primary weaknesses continue to include technological readiness, small market size and efficiency, as well as inadequate basic health and education. The country is rated highly in macroeconomic environment, reliable and legitimate institutions, and a well-developed financial market. In the World Bank’s Doing Business indicators, Botswana ranks poorly in trading across borders, dealing with construction permits and starting business.

Protection of intellectual property rights has improved and the legal system is sufficient to ensure commercial dealings. While access to credit has not emerged as a major concern, available evidence points to the need to improve access to credit by small and medium enterprises as they play a critical role towards the actualization of economic diversification.

The domestic banking system has remained profitable, liquid and well capitalized, although recently there have been increases in nonperforming loans to households. CSP indicated that the robustness of the financial sector is demonstrated by a number of prudential indicators pertaining to asset composition and portfolio quality.

Access to financial services remains low and it is estimated that about 33 percent of adults do not have access to such services. Non-Bank Financial Institutions have been growing rapidly in recent years, resulting in closer linkages with commercial banks. This has increased the probability of contagion with implications to the financial system and the economy. However, there has been a notable progress on supervision of the non-banking financial sector, including the establishment of a Non-Bank Financial Institutions Authority NBFIRA. NBFIRA has benefited from efforts to enhance its capacity and to develop a legal and regulatory infrastructure.

Greater challenges are coming from the high concentration of bank loans to households and the rapid growth of unsecured lending. The growth of household indebtedness has the potential of creating stress in the financial sector, and is a liability to the macroeconomic environment. Striking an appropriate balance between financial inclusion and stability is therefore emerging as a policy challenge for Botswana.

Meanwhile, the country’s capital markets have developed over the past two decades, but both the stock and bond markets are characterized by low liquidity which undermines their ability to provide price signals to the market. Capital market operations are largely conducted through Botswana Stock Exchange which operates and regulates equities and fixed interest securities market. While market capitalization is reasonably high at about 28 percent of GDP, there is a dearth of long tenured assets.

The government is the main issuer, however, the issuance is limited to only twice a year and currently the longest issuance has a 17-year tenor. To address the shortcomings in the financial sector, the government has launched a financial sector development strategy aimed at maintaining a robust framework for financial access for the underserved, and deepening financial markets and supporting intermediation of long-term financing, mainly by strengthening key institutions such as Botswana Stock Exchange and the Botswana Development Corporation.

HIGH LEVELS OF INEQUALITY

Inequality in Botswana is among the highest in the world despite the sharp decline in poverty, CSP added. It said income inequality as measured by the Gini coefficient is in excess of 0.55. This reflects the disparities in the quality of economic opportunities and services and underlines the need to ensure a more inclusive development.

The persistent high inequality level mainly emanates from the limited economic diversification and the dominance of minerals extraction in the country’s GDP and exports. Because mining absorbs only a small proportion of the workforce, long-term policies for poverty reduction have not been complemented by effective absorption of the poor into the productive economy.

Inequality also stems from the fact that Botswana’s vast size and thinly spread and small population make the provision of economic infrastructure and social services extremely expensive and present daunting challenges for the government. As a result, public support programmes have not generated significant growth in employment, and hence poverty reduction.

In conclusion, the CSP noted that the Kalahari Desert occupies 77 percent of Botswana’s land mass, leaving the country with limited supplies of arable land and fresh water. Erratic rain and drought are the country’s most frequent natural disasters. The country is also faced with land degradation due to overgrazing and diversification. Climate change is expected to adversely impact agricultural production and water resources.

The government has put in place a national environmental policy framework that covers all the relevant sectors. Conservation and sustainable management of natural resources are fully integrated in the development planning process. Over a third of the country’s total land area is under some form of conservation, with 17 percent designated as national parks and game reserves, 20 percent as wildlife management areas and 1 percent as forest reserves. Participation of communities in natural resource conservation is ensured through a community-based natural resources management programme.