October 27, 2014 / 2:18 PM / 3 years ago

Botswana, Africa's diamond, risks losing its sparkle

GABORONE (Reuters) - When environmental scientist Bakang Bogopa graduated first in his class from the University of Botswana two years ago he did not expect that his first job would be moving furniture or that he would still be living off handouts from his mother.

A worker at the Botswana Diamond Valuing Company displays a rough diamond during the sorting process at the purpose-built center in the capital Gaborone, August 26, 2004. REUTERS/Juda Ngwenya

Bogopa, who studied on a government scholarship, is among thousands of unemployed graduates in Botswana who exemplify both the country’s swift economic progress in the five decades since independence from Britain, and the challenges it now faces.

One of the world’s poorest countries in the 1970s, Botswana transformed into one of its fastest-growing economies by harnessing around $3 billion a year in diamond sales, to become the world’s biggest producer, and gained middle-income status.

The landlocked country of just 2 million has also been heralded as a beacon for African democracy, avoiding the conflict and corruption that has ravaged resource-rich countries across the continent.

But dependence on its wealth from the diamond industry is catching up with the southern African country.

Diamond revenues have enabled it to build a much-admired education system, but also allowed the ruling Botswana Democratic Party (BDP), in power since independence in 1966, to secure economic growth without diversifying into newer industries or implementing reforms to develop the private sector.

As a result, the economy is not sophisticated enough to employ many of the country’s expanding stream of highly skilled graduates, such as Bogopa.

As diamond prices are now falling, economic growth has slowed to just 1.6 percent year-on-year in the second quarter and unemployment is stuck at around 20 percent, with youth joblessness believed to be much higher.

President Ian Khama, the son of Botswana’s first president, won a second five-year term in elections on Friday but with a reduced majority for his BDP party as many young and urban middle-class voted for change.

The IMF does expect the economy to grow by 5 percent annually until 2015, but that is down from last year’s 5.4 percent and well below growth rates of 8-10 percent in earlier decades.

Botswana’s budget moved back into the black last year, but the surplus of 0.7 percent of gross domestic product was down from 4.8 percent in 2008 before the global financial crisis hit.

“We are mindful of the fact we’ve had it good and we’re far better off than most places in Africa,” says Bogopa, 27, breaking off from discussing the economy with friends in a lively bar tucked away in a dusty suburb of Gaborone.

“But we’re being led by people stuck in the past, using outdated ideas, who can’t see our regression,” he said.

TOUGH CHOICES

The BDP still has a solid base of loyal supporters who appreciate the generous welfare benefits they receive, but economists say relying on gem revenues is unsustainable.

With almost $7 billion in foreign exchange reserves, a $5.5 billion public pension fund and the highest sovereign credit rating in Africa, there is room to drive more diverse growth.

“It can’t be good for the government to continue being so dominant in the economy, it’s just not logical to rely on handouts anymore,” said Martin Makgatlhe, head of Gabarone-based stockbroker Motswedi Securities.

“We got comfortable. Now we need to take the quantum leap from the successes of the past to the growth of the future.”

The government has talked about creating jobs and new revenue streams, by investing more in safari tourism, agriculture and improving poor water and electricity supply, but action has been less forthcoming.

Botswana’s sole power station shut down this month, forcing it to rely entirely on imported electricity from South Africa.

Economists say Khama is failing to provide incentives to attract foreign investment, relies too much on imports from neighboring South Africa and needs to make tough choices on cutting public spending. The public sector probably accounts for 40 percent of employment and wages were 21 percent higher than in the private sector as of 2011, according to the IMF.

Economists urge the government to free up funds to lend to small businesses and support areas of the economy outside the diamond industry, which accounts for around 40 percent of GDP.

Foreign investors complain about protectionist labor policies and uncompetitive taxes, but economists say if the government improved the ease of doing business, Gaborone could be a regional hub for areas like manufacturing and call centers.

The country also has growth potential in dairy farming, financial services and tourism beyond its current luxury market.

“Botswana has to work quite aggressively to be a successful open economy, sort of following the examples of Singapore or Mauritius,” said Keith Jefferis, managing director at advisory Econsult and Botswana’s former deputy central bank governor.

“I think the government knows what it needs to do but some of the reforms that are needed are quite painful. The longer you put them off, the harder it becomes.”

FADING IMAGE

Critics also say the country’s squeaky clean image is outdated, with accusations of increased government corruption and violence used against politicians and the press.

Opposition parties have proposed a freedom of information bill and regulations forcing politicians to declare their assets in recent years but they have been blocked by the BDP, which also faces accusations from opponents and analysts of dubious tendering of government projects.

“Abuse of state resources has become more blatant,” Amy Poteete, a Botswana expert and professor at Canada’s Concordia University said in a Washington Post editorial last week.

Khama, a former army general, has also been criticized for his perceived authoritarian style: notably for imposing a 50 percent tax on alcohol, given that he is teetotal, and evicting bushmen from their traditional hunting grounds in the Kalahari Desert.

The media has also complained of harassment. One journalist fled to South Africa last month saying his life was in danger after writing a critical article about Khama, while his editor was briefly held by the police and data was confiscated.

“Recent developments have revealed a significant gap between Botswana’s reputation and reality,” Poteete wrote.

Khama counters these claims by pointing to positive feedback from independent bodies.

Transparency International has ranked Botswana the least corrupt African country for 18 years in a row. It is also rated third on the Mo Ibrahim Index of African Governance, ahead of South Africa, the continent’s most developed economy, but behind the islands of Mauritius and Cape Verde.

“I think the positive indicators are a curse for Botswana in some ways,” a Western diplomat in Gaborone told Reuters.

“The signs are there that successes are taken for granted.”

Whether Botswana’s success story continues could have wider implications for investment confidence in the sustainability of growth policies across Africa.

“Botswana in many ways has been a victim of its own success, but for it to flip backwards would be disastrous both for the country and more widely for Africa,” said Jefferis.

“It’s crucial that its record is preserved.”

(1 US dollar = 9.1241 Botswana pula)

Editing by Pascal Fletcher and Susan Fenton

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