Botswana is one of the world’s great development success stories. A small, landlocked country of 1.9 million people, Botswana was one of the poorest countries in Africa with a GDP per capita of about US$70 at independence from Britain in 1966. In the four decades following independence, Botswana has transformed itself, moving into the ranks of middle-income status to become one of the fastest growing economies in the world, with an average annual growth rate of about 9 percent.

Botswana takes pride in being a mature democracy. Free and fair elections are held regularly and the constitution provides for fundamental rights and freedoms. The political scene is remarkably stable. The Botswana Democratic Party (BDP) has been in power since the first elections were held on the eve of independence in 1965. In the latest general election held in October 2009, the BDP won 45 of the 57 parliamentary seats that were up for election. Former Vice-President and the son of Botswana’s first President Seretse Khama, Lieutenant- General Seretse Khama Ian Khama was inaugurated as Botswana’s fourth President in October 2009.

Botswana’s impressive track record of good governance and economic growth supported by prudent macroeconomic and fiscal management, stands in contrast to the country’s high levels of poverty and inequality and generally low human development indicators. While Botswana’s economic progress over the past 40 years has significantly raised living standards for many with poverty rates declining from over 50 percent at independence to under 30 percent today, significant and stubborn pockets of poverty remain especially in rural areas.  Education expenditure is high at 10 percent of GDP and significant educational achievements have been attained, including the provision of nearly universal and free education, but overall outcomes have not created the skilled  workforce Botswana needs. Unemployment has been persistently high at near 20 percent. As a consequence, income inequality in Botswana is one of the highest in the world. The HIV/AIDS pandemic has further exacerbated the situation: the country now suffers from the second highest HIV/AIDS adult prevalence rate in the world, and education and health outcomes are below those of countries in the same income group. 

In the past 20 years Botswana has made some progress in reducing its dependence on diamonds for sustained economic expansion and social spending. Whereas mineral revenues accounted for well over 55 percent of total government revenues in the late 1990s, today the figure is under 40 percent. Although the balance of payments is less dependent on diamond exports than it was in the early 1990s—non-diamond exports were able to cover nearly 60 percent of Botswana’s imports prior to the global finance crisis—the level of economic diversification needed to offset diminishing mineral revenues remains a somewhat elusive goal.

Today Botswana is emerging from the effects of the global economic crisis, which had a severe impact on the country’s economic growth and exports. Despite a 20 percent decline in diamond exports, the government was able to cushion the impact of the crisis with enough savings to limit contraction of GDP 1.4 percent between 2007 and 2009. Current estimates indicate economic growth of 7.5 percent for 2009 and 2010 and 6 percent for 2010 and 2011, the result of rebounding demand for diamonds.

While Botswana has found itself in a stronger position than many other mineral producing economies in the continent as a result of its past prudent fiscal policies, it faces the near-term challenge of ensuring a return to sustainable levels of public spending. Large fiscal deficits were accumulated during the crisis – estimated at 5.2 and 14.2 percent of GDP for 2008-2009 and 2009-2010, respectively.  These deficits are projected to remain high (12.2 and 7 percent of GDP for the coming two years) as major investment projects are completed.  Reduced SACU revenues and a secular decline in mineral revenues will add to the fiscal burden. With the fall in diamond exports, the 2008 current account balance is estimated to have stood at 3.5 percent of GDP, down from a 14.5 percent of GDP surplus in 2007. For 2009, the current account deficit is estimated to have been 4.8 percent of GDP; a reduction of the deficit to 2.5 percent of GDP is projected for 2010.  On the positive side, the non-mining private sector has proved to be resilient, growing at an estimated 5 percent during 2009 compared to a year earlier (but down from peak levels of 10 percent in 2007), despite the global crisis.

The key long-term challenge facing Botswana is how to grapple with the predicted decline in previously buoyant diamond revenues.  While projections of future diamond revenues are uncertain, it is clear that these have already entered a period of gradual decline, with a rapid fall projected within 10-15 years.  The public sector will have to shrink substantially, from about 40 percent of GDP today to a more typical middle income country share of 25 to 30 percent. Declining public revenues will have to address a long agenda of outstanding social and economic needs.  Botswana's public sector therefore faces two key challenges: ensuring fiscal sustainability and improving the effectiveness and efficiency of service delivery.  The transition to a new reality of significantly more constrained resources will require a fundamental review of Botswana’s highly successful economic model that is facing a new set of challenges in the 21st century.

 

A Country Partnership Strategy (CPS) for Botswana was presented to the Bank’s Board of Executive Directors in May 2009. The strategy presents the World Bank’s indicative program for Botswana for the period of FY09 to FY13. This first-ever Bank strategy for Botswana comes in response to increased interest from the Government of Botswana for a scaled up WBG program.   The strategy has been developed in consultation with the Government of Botswana and is linked to the national development priorities as set forth in Botswana’s long term development strategy “Vision 2016”, and the National Development Plans (NDPs). 

The WBG’s Botswana program will focus on four elements of the Government’s short and long term development agendas, as reflected below.

• Enhancing Public Sector Effectiveness
• Fighting HIV/AIDS and Improving Education Outcomes
• Increased Competitiveness – Infrastructure and the Climate for Investment and Growth
• The Environment

As of April 2010, the Bank’s portfolio had four active projects: (i) HIV/AIDS Prevention Support (US$50 million); (ii) Integrated Transport (US$186 million); (iii) Morupule B Electricity Generation and Transmission (US$379 million financing package); and (iv) Human-Wildlife Conflict Prevention (US$5.5m grant from the Global Environment Facility). In addition to the lending program, the Bank is undertaking analytical work to fill a number of gaps in order to better understand the apparent contradiction between the strong track record in governance, macro-fiscal management and growth vis-a-vis high levels of poverty, inequality and human development indicators, and to continue identifying key bottlenecks to economic diversification.

Botswana joined the International Finance Corporation (IFC) in 1979 and the Multilateral Investment Guarantee Agency (MIGA) in 1990.  The IFC supports the competitiveness agenda through selective strategic interventions; IFC Advisory Services has been appointed as transaction advisor to the Government on a public-private partnership for the new Botswana University of Science and Technology (BIUST) and the privatization of the Botswana Telecommunications Corporation (BTC). The Corporation is also exploring options for providing finance to mining beneficiation and advisory services in the health sector.

MIGA will also support the country’s competitiveness agenda through the provision of political risk insurance, if and when needed by foreign investors active in the country.  To date few investors have sought such support from MIGA, primarily due to the market’s perception of low political risk. However, this may change with the impact of the financial crisis, especially as commercial lenders to projects review their risk appetite. Specifically, MIGA’s insurance can be used as a credit enhancement tool (to improve lending terms and conditions of private projects) in middle income countries like Botswana.  In this regard, MIGA will continue to work closely with the Bank and IFC, especially in respect of projects in the infrastructure and extractive sectors, given their significant impact on growth. 

 

The Bank arranged a partial credit guarantee under the Morupule B project to extend the maturity of an US$825 million commercial loan to Botswana from 15 years to 20 years, which will reduce consumer tariffs by up to 0.5 US cents per kilowatt hour. Also, the Bank supports accelerated development of low carbon energy alternatives such as coal bed methane and renewable energy including concentrated solar power.

The Bank has started contributing to the increased efficiency of the national HIV/AIDS program by bringing global and regional experience to bear and enabling a transition from an “emergency” response to a broader, more strategic, and more sustainable approach. The Bank has also been able to leverage a contribution of about US$20 million from the European Commission using an innovative, performance-based “buy-down” structure to improve the performance of the National AIDS Coordinating Agency, among other goals. This instrument relies on donor resources to lower the cost of an IBRD loan targeted at priority health activities. The release of the donor funds is dependent on project performance, as measured against jointly agreed indicators, within a specified time frame. Given that its upper middle-income status excludes Botswana from the World Bank’s no-interest or low-interest-rate IDA resources, the government requested that the proposed operation be financed utilizing the IBRD “buy-down” facility.

 

Given Botswana’s strong economic performance, the number of active donors is limited and donor coordination has been loose. In September 2007, the Ministry of Finance and Development launch a Development Partners Forum, a welcome initiative to improve coordination. Through the “buy-down” arrangement of the HIV/AIDS project, the European Commission has emerged as the Bank’s main partner being one of the few donors with a more substantial portfolio. The Bank is also collaborating with OFID that is providing US$30 million in co-financing for the Integrated Transport project.