Tuesday, April 8, 2008

Botswana: For how long can it spark on diamonds?

The IMF Working Paper series has published a new report that looks at the sustainability of rising Botswanian expenditure financed by diamond mining, which contributes on average 38.5 percent to GDP. Since the past three decades Botswana economy has grown at a rate of 7 percent, usually due to diamond mining and good investment climate. For more on the role of good investment climate check out a paper by AJR on Botswana: An African Success Story. They argue that Botswana has been able to grow and attract investment because of the strong institutions of private property.
This new report from the IMF African Department is titled "Are Diamonds Forever? Using the Permanent Income Hypothesis to Analyze Botswana’s Reliance on Diamond Revenue". Obviously, the conclusion is that Botswana will not be able to sustain the current level of high expenditure just from the diamond mining and trade. Recommendation: it needs to save (to the tune of 1.2 points of GDP each year) to ensure a policy of no debt because diamond reserve could deplete by 2029, leading to sharp shortfall in fiscal revenue (by almost two-thirds). Here is the summary:

This study assesses the sustainability of Botswana's diamond-related fiscal revenue. Diamond reserves are not adequate to generate enough permanent revenue to sustain a high level of expenditure. Under the current fiscal rule that no debt may be accumulated, Botswana will have to save more to avoid an abrupt adjustment in the medium term.
Also, check out IMF's Finance and Development magazine, March 2008. The title for the issue is Commodity Boom: How Long Will It Last?