Until recently, Botswana was hailed as Africa's greatest success story - and rightly so. Landlocked and prone to drought, it ranked among the continent's poorest at independence from Britain in 1966, with a per capita income of just P70 (R84/US$10,50).
But in the first three decades of independence Botswana became the world's fastest growing economy. Today its per capital income exceeds P40 000 (R48 0006 000) placing it among upper middle economies such as Brazil, Argentina and SA.
WHAT IT MEANS
 58% of GDP from mining and government
Diamond revenue to fall sharply by 2020
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The country is rated fourth in sub-Saharan Africa in the World Bank Doing Business Index after Mauritius, SA and Namibia. It boasts Africa's highest sovereign credit rating with forex reserves of P60bn, amounting to at least two years' import cover. The country has been consistently rated Africa's most competitive economy by the Wold Economic Forum.
Botswana's spectacular success was thanks to the early-1970s discovery of the world's largest diamond deposits coupled with political stability, good governance and fiscal discipline.
But cracks are beginning to appear, largely because gains have not been spread evenly and it remains reliant on diamond revenues expected to tail off sharply from 2020.
The UN's 2008 Human Development Index ranks Botswana 124th out of 177 countries because of high poverty, unemployment and HIV/Aids levels. Though the country has spent a considerable amount of resources in combating HIV/Aids, it is among the world's worst afflicted countries. Similarly, poverty levels are down from 47% in 1994 but are high at 30%.
The official unemployment rate is 18%, but unofficial estimates put it between 20% and 25%. The inflation rate, admittedly largely imported and driven by external factors such as food, fuel and energy price hikes, breached 11% this year - way above the Botswana Reserve Bank's target band of 4%-7%.
Little progress has been made in addressing structural flaws that could unlock latent potential in the economy. Though nonmining revenue increased by 7% in 2007, compared with 4% in 2006, mining and government still account for 58% of GDP. Diamonds alone contribute a third of GDP, half of government revenue and over two-thirds of export earnings. This makes Botswana's current account balance extremely vulnerable to price and demand fluctuations in the world diamond market.
Key reforms needed to speed up diversification include selling off public assets, upgrading infrastructure and implementing reforms to laws that regulate Botswana's financial system to stimulate the capital markets. But these initiatives appear to have stagnated.
A common complaint is that officials lack the will and capacity to implement sound policies. In his budget speech in February finance minister Baledzi Gaolathe reiterated that diversifying Botswana's heavily mining reliant economy was the key to sustainable job creation and more evenly spread wealth creation. But he warned efforts were being undermined by administrative bottlenecks and government underspending.
Economists have also raised concerns that new president Seretse Ian Khama - who took office in April 2008 - will be tempted to ramp up social spending ahead of next year's general elections. Some are urging the government to aggressively accumulate more reserves to cushion the economy from what's likely to be a painful transition. Currently government spending is capped at 40% of GDP, but many argue 25%-30% should be aimed for.
A key policy document to watch will be next year's National Development Plan (NDP), Botswana's medium-term expenditure blueprint. The 10th NDP runs until 2016. In terms of Botswana's Vision 2016, the country wants per capita income to treble from 1996 levels, which will require a 6,8% growth rate for the next decade. Economists say NDP10 will provide a clear indication of whether government will follow the prudent route of ensuring its spending grows slower than the economy. So far, both Khama and Gaolathe have gone out of their way to assure investors that Botswana's reputation for fiscal discipline is in safe hands. Also, Khama has injected a new sense of urgency into Botswana's civil service.
Business leaders in Gaborone say the effects are starting to be felt. A new urgency is evident in Botswana's privatisation process, which is likely to offer investment opportunities in telecoms, airways, financial services, construction and tourism. A recent indicator was the naming of Comair as preferred bidder for a three-year contract to manage Air Botswana and bring it back to profitability, paving the way for its sale. Further opportunities lie in the revival of Botswana's infrastructure spending plan. A long-awaited tender notice for phase two of the P3bn (R3,6bn450 000) north south water pipeline was finally issued in June.
Diamond beneficiation is also expanding rapidly since the launch in March 2008 of the Diamond Trading Company Botswana.
Mmamabula, a giant energy and coal supply project, is facing delays because of a global shortage of steam turbines. But resource analysts say global demand and regional power shortages suggest Botswana's unexploited coal reserves will be explored sooner rather than later.
Meanwhile Botswana is forging ahead to position itself as a regional financial services hub and major intermediary for international investors seeking exposure to the booming African resources commodities sector. A regulatory authority for financial institutions other than banks, on the cards for years, is finally being established.
Red tape is being slashed, corporate governance practices tightened, tax codes simplified, money laundering and auditing laws brought up to international standard and the stock exchange modernised. This year two major regional investment funds and a pan-African commodities and derivatives exchange are expected to set up shop.
Botswana is clearly keen to keep running a tight ship and exploit any competitive advantage to the full. Despite facing a painful transition, it may well be on the brink of a new era of prosperity.
