Johannesburg - Botswana's economy should expand by 8.4% this year due to higher diamond demand but the country will need to trim its public workforce and promote private industry to maintain high growth rates, the International Monetary Fund said.
Diamond mining is the mainstay of the southern African country's economy. Botswana's gross domestic product (GDP) contracted by 3.7% last year after the global financial crisis slashed demand for the precious stones.
"The economy will likely see some rebalancing this year and next as mining continues its gradual recovery while the non-mining sector decelerates as fiscal stimulus is withdrawn," the IMF said in a statement posted on its website.
Botswana's central bank slashed interest rates by 500 basis points between December 2008 and December 2009, while the government boosted spending to counter the recession.
The IMF said Botswana's plans to balance its budget by 2012/13 and then register modest surpluses are ambitious.
"The medium-term outlook is favourable provided the authorities proceed with planned fiscal consolidation. (IMF) staff projects that real GDP growth will average about 6% over the medium term," it said.
To sustain high growth rates, Botswana would need "an ambitious set of policies and reforms to create a leaner and more effective public sector and promote private sector-led growth".
Current investments in power generation would address a bottleneck to growth.
Botswana imports 80% of its 550 MW power demand, with the majority coming from South Africa, which has scaled down supplies to its neighbours and will stop them completely by 2012 due to fast rising domestic demand.
Botswana is constructing a 600 MW coal-fired plant with the first of the four Morupule units expected to come into commission in January 2012.
The IMF said inflation, which slowed to 7.0% year-on-year in July, had not yet been brought down sustainably within the target range of 3-6%.
"It will be important therefore to err on the side of caution before proceeding with further reductions in interest rates and to proceed with fiscal consolidation as envisaged."
The central bank expects inflation to fall within the target band in the second quarter of 2011.