percent as the economy has diversified somewhat. Although from a very low base, output of other minerals, such as copper/nickel, soda ash and gold, has grown considerably over the past 5 years, but their contribution to total exports vary significantly year by year (10-20 percent), owning to the swings in international commodity prices.

Despite the government’s efforts to diversify the economy away from diamonds, development of nonmining sectors, in particular, agriculture, construction and manufacturing, has not been very encouraging, constrained by, among other factors, high labor costs, a shortage of skills and the small domestic market. However, the service sector, especially banking and insurance, has shown relatively robust growth for some time.<sup>5</sup> Unemployment remains persistently high.

While diamond mining has immensely contributed to Botswana’s economic growth, the large revenue stream from the mining sector has also allowed a rapid expansion of the government. Today the government sector accounts for 15 percent of GDP (over 25 percent of non-mining GDP) and hires 40 percent of the formally employed labor force in Botswana. The economy is directly and indirectly dependent on government spending; fiscal operation has a significant bearing on Botswana’s domestic demand.<sup>6</sup>

# **2.2 Diamonds and Botswana’s Fiscal Policy**

# **2.2.1 Revenue**

Revenue from the mining sector makes up about 45-50 percent of total government revenue (Figure 2). The agreement governing the revenue sharing between Debswana and the government is confidential. Using diamond exports data as a rough approximation of Debswana’s profit, one can find that diamond revenue accruing to the government’s coffer has been about 6065 percent of diamond exports since 2000. Revenue collection from other minerals is negligible, with nearly 99 percent of mineral revenue coming from the diamond sector. As such, throughout the paper mineral revenue refers to the government’s share of diamond profits.

In addition, the government receives transfers from the Bank of Botswana

**Figure 2.  Government Revenue Excluding Grants** (in percent of GDP)

<!-- Start of picture text --> 70<br>60<br>50<br>40<br>Non-mineral, non-SACU<br>30 revenue<br>BoB SACU revenue<br>20 Revenue<br>Mineral tax<br>10 Mineral revenue royalties & Mineral revenue<br>by government definition dividends by IMF definition<br>0<br>Source: Ministry of Finance and Development Planning.<br><!-- End of picture text --> (BoB, the central bank), which derive from the investment return on the government’s savings (past fiscal surpluses) that are held in the BoB and invested in long-term assets, as well as dividends from the BoB.<sup>7</sup>

> 5 Agriculture, construction and manufacturing have declined even in percent of non-mining GDP.

> 6 Note, however, the government sector’s contribution to national income needs to be interpreted carefully.  As directed by the UN System of National Accounts (SNA), a government’s output is valued at cost.  Therefore, expanding the cost of government activities, and in particular, the cost of its employment will show up uncritically as increased output in the national accounts, regardless of whether this output is of any real value.

> 7 According to the Bank of Botswana Annual Report (1996), the BoB transfer to the government is calculated on the basis of the expected returns from the government’s portion of the Pula Fund (i.e., Government Investment Account, see Box 1), estimated in SDR terms over a five- to seven-year period.  The actual payment to the government is made on every quarter during the fiscal

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