Diamonds help Botswana reduce deficit

Gabarone - Botswana, the world's biggest diamond producer, on Monday slashed its budget deficit to 6.3% of gross domestic product (GDP) due to a strong recovery in sales of the gemstones that account for nearly 40% of output.

In his annual budget speech to parliament, Finance Minister Kenneth Matambo forecast a budget deficit of 6.93 billion pula, a sharp reduction from the previous year when the government had a shortfall of 10.1%  of GDP.

However, that was much lower than the 12% originally forecast and represented a minor triumph for the country, which was hit hard by the global financial crisis of late 2008 that hammered world diamond prices and caused the deficit to balloon to 15% of output.

If mining continues to register percentage growth in the mid-teens, the economy would grow 6.8% this year and 7.1% next year, when the recovery could be considered complete, Matambo said.

Completing a virtuous economic circle, inflation would be likely to fall within a 3% to 6% central bank target range in the second quarter of this year, Matambo said.

The International Monetary Fund is more conservative in its predictions for 2011, forecasting growth of 4.8%.

The budget deficit in South Africa is currently 6.7% of GDP.

The 2008/09 slump in gem prices forced some of Botswana's diamond mines to close for the first time and gave a glimpse of the harsh reality that awaits when the mines run dry.

The shock spurred the government into diversifying its economy away from mining, although analysts say a sharp recovery in the industry, as has been the case, may dampen the reform drive.