# **Botswana:  Diamonds and Medium-term Fiscal Sustainability**

# Naoko C. Kojo<sup>1</sup>

# **Table of Contents**

|1. Introduction .............................................................................................................................................. 3|
|---|
|2. Botswana and Diamonds .......................................................................................................................... 3|
|2.1<br>Diamonds and Botswana Economy .............................................................................................. 4|
|2.2<br>Diamonds and Botswana’s Fiscal Policy ...................................................................................... 5|
|2.2.1<br>Revenue ................................................................................................................................. 5|
|2.2.2<br>Fiscal Rules ........................................................................................................................... 8|
|2.3<br>Diamonds and Future Challenges ............................................................................................... 11|
|3. Fiscal Sustainability Analysis ................................................................................................................ 12|
|3.1<br>Operational Definition of Fiscal Sustainability ........................................................................... 12|
|3.2<br>Fiscal Sustainability Analysis for Botswana ............................................................................... 12|
|3.2.1<br>Medium-term Fiscal Projections: Baseline Scenario ......................................................... 13|
|3.2.2<br>Sensitivity Analyses ............................................................................................................ 19|
|4.<br>Alternative Fiscal Strategy for Botswana ........................................................................................... 21|
|4.1<br>Revenue Enhancing Scenario ...................................................................................................... 21|
|4.2<br>Revenue Enhancing & Effective Spending Scenario .................................................................. 23|
|5.<br>Policy Discussions.............................................................................................................................. 25|
|5.1<br>Botswana’s Policy Priorities ....................................................................................................... 25|
|5.2<br>Botswana’s Fiscal Rules ............................................................................................................. 26|
|6.<br>Conclusion .......................................................................................................................................... 27|
|Annex 1. Summary of Baseline Assumptions ........................................................................................... 28|
|Annex 2. Sensitivity Analysis .................................................................................................................... 30|
|References ................................................................................................................................................... 39|

> 1 This paper was originally prepared as a background paper for the Botswana Public Expenditure Review.  I am grateful for the useful comments received from Willem Buiter, Keith Jefferis, Eduardo Ley, Alvaro Manoel, Zeinab Partow, Jay Salkin, Peter Siegenthaler, Michael Stevens, IMF Botswana team, as well as the participants of the seminar held on November 17, 2009 in Gaborone.  All remaining errors are mine.

2