Botswana loses economic shine

For years Botswana was hailed as an economic success story, but the collapse in demand for the country's diamonds has hit revenues hard and raised questions about an ambitious spending scheme.

Botswana produces 22 per cent of the world's diamonds, making it the top producer and accounting for half of government revenue. The country prides itself as a model of a successful African democracy. But in 2009, Botswana halved output and suspended much of its diamond activities as the global economic crisis hit its mines. High-end tourism, the other economic mainstay, also took a hit as arrivals fell sharply during the recession.

Highlighting the nation's difficulties, Standard and Poor's rating agency on February 15 downgraded Botswana's sovereign credit ratings from A to A-, citing concerns over the country's spending plans at a time of falling revenues.

"We expect this deterioration of public finances to translate into higher debt accumulation than we previously expected, and the gradual dissipation of the asset buffers," said S&P credit analyst Veronique Paillat-Chayrigues. "We believe that Botswana needs these buffers more than many similarly-rated peers to offset its economic and fiscal dependence on commodity exports, in particular diamonds, combined with its substantial development needs."

For two consecutive years, the government has presented budget deficits due to limited funds and growing public expenditure, with this year's deficit the largest yet.

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