Rising diamonds export narrows deficit

The sharp rise in diamond exports in the first few months of the year is expected to influence narrowing of the current account deficit from last year’s estimated deficit of 10.1 percent of GDP, analysts at Absa have said.

“We expect rising exports and comparatively softer import growth to lead to the current account deficit narrowing to 4.7 percent of GDP in 2021 and further in 2022”, said Absa researchers, Ridle Markus and Samantha Singh.

The forecast comes as economic recovery is underway with an improving outlook for diamond demand buoying medium - to longer- term prospects. Absa has previously noted that the government investment account was drawn down sharply in FY2020/ 21 to bolster revenues, while deficit financing will need to come from domestic and external borrowing. “We have also argued that achieving the deficit target for FY2021/ 22 depends on a strong pickup in diamond and non- mining revenues and no significant spending overruns”. Last month two of the world’s biggest diamonds were discovered in Botswana. Debswana found a 1,098- carat diamond at the beginning of June at its Jwaneng mine and weeks later, a 1,174- carat diamond was discovered at the Lucara Karowe mine.

The analyst at Absa further highlighted that the country’s diamond export revenues are continuing to increase, with available data showing an 89 percent year on year jump in export earnings in the first four months of the year, which underpinned the 109 percent increase in total exports.

“Over the same period, imports rose 55 percent, driven by diamond re- imports”.

Although Absa has applauded the improving demand for diamonds as indicated by the stronger demand in key markets, such as the US and China, and signs of a recovery in India, the bank has warned that the local economy is not yet out of the woods. “However, the economy continues to face risks and uncertainties as a result of the pandemic”. The bank further cited that economic growth projection is well below the government’s 8.8 percent growth target for 2021.

“We remain cautious about the impact of weak diamond production in the first half of 2021 and the ongoing impact of COVID- 19”.

Meanwhile, Absa says it does not expect much change in foreign currency policy in the near term given the uncertain external environment.

“The pula could see increased strength in line with the ZAR, and we do not expect too much divergence between the currencies against the USD.

“Authorities maintain the pula peg to a basket of currencies, comprising the ZAR ( 45.0 percent of the basket) and the IMF’s Special Drawing Rights ( 55.0 percent). “Our SA strategy team puts USD/ ZAR at 13.75 by year end and we expect USD/ BWP at 10.78”, the bank said.