Botswana f'casts sharply lower deficit, cites diamonds

Botswana, the world's biggest diamond producer, on Monday forecast a sharply lower deficit of 6.3 percent of GDP this financial year due to a strong recovery in sales of the gemstones.

In his annual budget speech to parliament, Finance Minister Kenneth Matambo forecast a 2011/12 deficit of 6.93 billion pula, a sharp reduction from the previous year when the government had a shortfall of 10.1 percent of GDP.

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

The deficit in neighbouring South Africa is 6.7 percent of GDP at the moment.

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

"The economic recovery seems to be underway and the prospects for our public finances have improved," he said. However, risks to the outlook still remain."

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

On the positive side for Botswana, an arid, landlocked nation of 1.5 million people, inflation would be likely to fall within a 3-6 percent central bank target range in the second quarter of this year, Matambo said.

The central bank cut its key lending rate by 50 basis points to 9.5 percent in December, citing a positive inflation outlook and subdued domestic demand. The reduction brought total cuts since December 2008 to 550 basis points.

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 are worked out.

The shock spurred the government into diversifying the economy away from mining, although a sharp recovery in the industry, as has been the case, may dampen the reform drive. Diamonds account 40 percent of the country's output.

Dealing a blow to hopes of a debut Eurobond this year, Matambo said the deficit would be financed through domestic borrowing since total external debt, now at 19 percent of GDP, was almost at a 20 percent ceiling set in the constitution.

Much of that foreign debt is a $1.5 billion bailout from the African Development Bank in 2009 in the depths of the crisis.

GABORONE (Reuters)