Botswana�s rapid growth during the first decades after independence that lifted most Batswana out of poverty still left the country with high inequality and subpar human capital indicators compared with peers. This has been contained in the Botswana Country Private Sector Diagnostic (CPSD) sponsored by World Bank Group released in June 2022.

The diagnostic says in many ways Botswana is a development paradox. Botswana stands out among countries in Africa for its successful development policy, economic performance, and long track record of macroeconomic stability. Successive governments used the country�s considerable diamond and mineral wealth to drive significant investments in infrastructure, education, health, and social protection, which resulted in its graduation to Upper-Middle-Income Country (UMIC) in 2004.

�However, the rapid growth during the first decades after independence that lifted most Botswana out of poverty still left the country with high inequality and subpar human capital indicators compared with peers,� says the study titled A Diamond in the Rough: Toward a New Strategy for Diversification and Private Sector Growth. It says diamonds have been at the center of Botswana�s growth miracle for decades – but the urgency to diversify is stronger than ever.

�Although diamond demand has been recovering during 2021 and 2022, the prospects for the industry remain volatile, underscoring the need to move away from diamond dependency and putting a greater urgency on the diversification reform agenda.� It noted that the limitations of Botswana�s public investment and diamond-reliant growth model were made apparent during the COVID-19 crisis.

Despite strong fiscal buffers, the crisis brought to the front both the high risk of continuing to rely on public investment to drive growth in the context of future fiscal vulnerabilities as well as the vulnerability of growth to declining external balances, mainly owing to lack of export diversification. The pandemic amplified those challenges and caused a sharp GDP contraction among the strongest in Sub-Saharan Africa, a widening in the current account deficit, and the biggest jump in the unemployment rate over the past 35 years.

In addition, it says Botswana�s high vulnerability to climate change, which affects all major sectors of the economy, underscores the need to strengthen Botswana�s response to climate factors as a basis for renewed, sustainable growth. Botswana ranked 94th out of 181 countries in the 2020 Notre Dame Global Adaptation Initiative Index, which measures a country�s political, geographic, and social factors to assess vulnerability to climate change, as well as its readiness to improve resiliency.

Agriculture, which is mostly rainfed, is especially vulnerable to drought exposure. The higher frequency and intensity of extreme droughts and floods threaten crops and livestock and consequently food security, employment (one-fifth of which is concentrated in the agricultural sector), and poverty rates.

The water sector, which is already struggling to meet demand, is expected to see a decline in water quality and availability. Botswana�s successful low[1]volume, high-cost tourism model depends on water-based wildlife endowments, especially in the Okavango Delta, which is projected to have a decrease in stream flows.

At the same time, the energy sector will be transformed by climate-change mitigation requirements and related policies that call for a more sustainable and efficient energy mix while at the same time adapting to the impacts of emerging changes in climate and weather.

�The current context provides Botswana with an opportunity for a paradigm shift – to redirect the economy to a more resilient, green, and diversified growth model. The gradual sunset of diamonds, volatile global conditions due to the COVID-19 pandemic, and the impending effects of climate change have placed the Botswana economy at a crossroads.� This CPSD argues for a new strategy that puts the foundations for a greener and more sustainable growth model at its core, making diversification an outcome rather than a starting point.

This strategy would focus on leveraging and protecting Botswana�s natural resource endowments and driving new investment in high-potential sectors such as tourism to lay the groundwork for green competitiveness and growth. Meeting those goals would start with policies that tackle underlying and cross-cutting constraints, especially those that foster competition in sectors dominated by State Owned Enterprises (SOEs) and harness private sector participation to foster transitions to sustainability, efficiency, and affordability of key enabling sectors such as energy and water.

�The government should reduce the state�s presence and influence in sectors that are commercial, creating markets with competitive neutrality. This will create markets for entrepreneurs and Small and Medium Enterprises (SMEs) to address, private firms to grow, and foreign investors to participate in. These actions would be buttressed with policies to facilitate trade in environmental goods and services and reduce gaps in infrastructure, skills, and access to finance that hinder employment and productivity growth in firms.�

The government�s Economic Recovery and Transformation Plan, valued at approximately 7.8 percent of GDP, supports this transition with its climate agenda aimed at reducing Botswana�s dependence on carbon-intensive sectors, enhancing electricity generation capacity, and strengthening climate resilience.

The dominant role that the Government of Botswana still plays in large parts of the economy, particularly through its footprint as a shareholder in companies in the corporate sector, is a critical constraint that inhibits the entry and success of private sector participants, it is said. Gaps in infrastructure, access to finance, and skills are additional key constraints to employment and productivity growth. Despite relatively high public investment spending, Botswana�s quality of infrastructure has fallen, significantly lagging structural peers.

Trade barriers are another key cross-cutting constraint for the private sector, and a greener path for the economy could be unlocked by facilitating improved trade in environmental goods and services (EGS), the study says.

It says Botswana has relatively high costs for EGS despite its high potential for using EGS such as solar and other environmental technologies in energy production and in other industries such as tourism. Tariff and nontariff trade barriers undermine imports of EGS as well as preferential access agreements, which raises the costs of imported inputs for Botswana exports.

�For example, Sothern African Development Community rules of origin are relatively complicated to administer and to reach because they often follow a line-by-line approach with rules devised for a specific product or sector. Similarly, high tariffs on imported goods and import licenses raise the cost of manufacturing products dependent on imported inputs.

Beyond EGS, trade barriers affect all exporting sectors. For example, a 2016 United Nations Conference on Trade and Development (UNCTAD) report documents that Botswana systematically underperformed in all service exports in comparison with the rest of the world despite its high potential for trade in services.�

Restrictions placed on foreign investors by Botswana�s National Trade Policy, such as limits on foreign-owned capital, hinder the commercialization of some services. To improve trade in EGS and other sectors, the government should strengthen standards and certifications systems to raise the competitiveness of Botswana exporters.

It noted that Botswana faces water supply and sanitation issues. Botswana is already a water-stressed country and projected to become even more highly water stressed by 2040, with water supply shortages affecting all key sectors of the Botswana economy including mining, agriculture, manufacturing, and tourism. It suffers from chronic droughts that are becoming more severe due to climate change.

Local water supply is not enough to meet demand, and part of the water supply is imported from South Africa. Climate change, infrastructure deficiencies, and contamination of water sources threaten water supply reliability. Although the state-owned water and sanitation company, Water Utilities Corporation (WUC), performs well relative to many African utilities, it is facing serious headwinds to maintain and increase water supply.

WUC�s deteriorating infrastructure, inadequate collection rates, shortfall of revenue necessary to cover operating costs, challenges to access finance for water supply expansion, and low productivity of staff all hamper investment in water resilience. Because WUC’s revenue does not cover its operating costs, traditional lenders are hesitant to provide WUC with investment capital.

Introducing private sector participation in the water sector could help address weaknesses in the sector. This report identifies three main opportunities for private sector participation: (a) performance-based contracts for nonrevenue water reduction, collections, and energy efficiency; (b) concession for wastewater treatment and water recycling services; and (c) water savings performance contracts for large users.

Several actions can advance these opportunities for private sector participation. The WUC should be assisted to develop performance-based contracts to reduce nonrevenue water levels, improve energy efficiency, and improve customer collections. Public-Private Partnerships for wastewater treatment and recycling services should be implemented.

Large water users should be encouraged to implement water savings performance contracts. A legally or contractually bound regulatory mechanism should be created to define full-cost recovery tariff mechanisms for WUC and to mandate that WUC�s tariffs be set at that level.

�The government, working with WUC, should consider legally establishing a subsidy system to ensure affordability of low-income households while also providing a reliable source of revenue (that is, cross-subsidies or direct subsidies by the government).�