Diamond surge turns 2021 budget deficit into surplus

Mbongeni Mguni | Monday June 13, 2022 06:00

The 2021–2022 final budget outcome is due in August and should it be achieved, the surplus would be the first in the country’s books since the 2016–2017 financial year. In her February budget speech, (Finance) Minister Peggy Serame had projected the deficit for 2021–2022 at P10.2 billion or 5.09 percent of Gross Domestic Product (GDP), following on from another whopping P16.4 billion shortfall in 2020–2021, equivalent to 9.4 percent of that year’s GDP.

The finance ministry's permanent secretary, Wilfred Mandlebe, this week told a parliamentary committee that at the last count, the deficit for 2021–2022 was P185 million, putting the budget on track for a small surplus when the numbers are finalised in the next two months.

“The reasons behind the improvement in the deficit we had projected include improved revenue from mining towards the end of last year, particularly associated with the picking up of the diamond sector where we managed to collect more revenue than we had budgetted,” he said. “In addition, we have noted higher incomes from the Bank of Botswana in terms of our reserves where there was an increase there on valuation gains that we realised. “The improved deficit is also because of underspending of the development budget, which is unfortunate.”

Debswana, which is 50% owned by government, sold P38.1 billion worth of diamonds in 2021, the highest since 2016, as global demand surged following the COVID-19 restrictions of 2020. State-owned diamond trader, Okavango Diamond Company also reported sales of $963 million P11.5 billion) in 2021, an all-time high for the 10-year-old company. Debswana sells 25% of its production to ODC and the balance through the De Beers sales platform.

Mandlebe said while the outlook for fiscal stability had improved, there were still risks, particularly around diamond receipts in light of the Ukraine conflict.

“As much as we may gain in the short term as a diamond producer, we believe that in the long term there may be a problem,” he said.

Economists have warned that a prolonged conflict in Ukraine could upset the global economy’s recovery which would, in turn, affect demand for diamonds, a luxury product that is usually among the first to be jettisoned by consumers in turbulent times. Diamond industry analysts have also said the fact that sanctions against Russia’s diamonds have not stopped its stones from entering major markets could either turn ethical consumers away from natural diamonds or drive them to alternatives such as synthetics.

In addition, as other natural producers such as Botswana struggle to increase their output to cover the Russian gap, synthetic diamonds could find more space in the market, a situation that could entrench the lab-grown stones’ presence in the industry going into the future.

The anticipated deficit for 2021–2022 marks an important milestone in fiscal authorities’ fight to steer the budget back to stability following years of deficits. A finance ministry paper made available in February indicated that a surplus was only anticipated in the 2023–2024 financial year, amounting to about P5.5 billion or 2.3 percent of GDP.

The rolling deficits since the 2016–2017 financial year, compounded by the erosion of government reserves due to COVID-19, have seen fiscal authorities increasingly borrow both locally and externally to support the budgets.

In the 2021–2022 financial year, government, through the Bank of Botswana, sought P18.6 billion in debt and raised P12.1 billion, through monthly auctions of treasury bills and bonds. In the three auctions held so far this financial year, the central bank has sought P4.5 billion for government and raised P3.5 billion.

A capital markets expert who spoke to BusinessWeek on condition of professional anonymity this week said the improved budget performance for 2021–2022 was unlikely to ease government’s borrowings in the local market.

“While mineral revenues have surprised on the upside and by extension, the government's overall budget position has improved, it is likely that government will still have to ramp up spending,” the expert said. “Russia's invasion of Ukraine has set in motion a number of developments which couldn't have been foreseen at the time the budget was conceived. “In particular, rising food and energy prices are creating significant demand destruction within the economy, which, in turn, has the overall impact of restricting the pace and scale of real GDP growth.”

He added: “More immediately, it is reasonable to expect the government to step in and pick up this slack, by among others, providing relief such as salary increases, subsidies, etc to relevant stakeholders such as workers and firms. “Given the unique mix of circumstances we find ourselves in, I would expect the government's financing requirements to remain unchanged at the very least as the revenue windfall is used to mitigate demand destruction in the economy.”