The World Bank has warned the government that it may have to cut the size of its public sector by at least 25% to balance the economy due to a fall in diamond sales receipts. The forecast has been made in light of falling mineral revenues – the country is the world’s largest diamond producer and generates a staggering 22% of the world’s diamonds.
The region usually maintains budget surpluses with relative ease; however the global economic recession has had a diminishing effect on world demand for diamonds (weakening their profitability by as much as 50% over the past two years) thereby leading to a significant reduction in economic activity and government revenue.
‘A more constrained fiscal environment, coupled with tough economic and social challenges makes a focus on ensuring efficiency and effectiveness in public expenditures critical. Fewer resources will have to go further,’ said Ruth Kagia, a World Bank regional director.
Up until now, government shortfalls have been financed through cash reserves accumulated when there were budget surpluses. Departments have also been borrowing on the domestic capital market.
The country’s economy is subsequently reaching a turning point. Analysts have often warned that the country’s economic and fiscal dependence on commodity exports (accounting for 33% of state revenue) would be at serious risk if demand for the precious gems ever fell. Many have added that this element of risk would only be heightened if progress in the global recovery wavers.
In accordance with this forecast, the government has been encouraging a new programme of diversification to reduce the country’s over-reliance on diamonds.