GABORONE, Feb 8 (Reuters) - Botswana's economy should return to growth in the financial year to June 2011, helping to ease pressure on a budget deficit that has swelled to over 15 percent of GDP, Finance Minister Kenneth Matambo said on Monday.
The world's biggest diamond producer has been hard hit by a slump in international demand for the precious stone, hitting government revenue and cutting jobs after some mines were forced to temporarily close.
This has caused the government to cut back on development plans for the next six years and freeze public sector pay increases.
Matambo said in a budget speech to parliament the government was committed to keep its budget gap in check, forecasting a narrowing to 12.2 percent of GDP in the 2010/11 financial year from an estimated 15.1 percent this year.
'The commitment to restoring sustainability in our public finances over the medium-term is critical if government is to maintain its credibility with those who will be asked to finance the deficit, namely domestic and international lenders,' he said.
Botswana kept spending relatively high in the current financial year to help weather the global downturn and lower diamond demand.
Matambo said a gradual recovery in world diamond sales would help support the economy but warned mining output would remain subdued for another two years.
'The partial recovery of the minerals sector in the second and third quarters of 2009 reflect developments in the world economy and the consequent positive impact of these on the mining sector, particularly the diamond sector,' he said.
'However, due to uncertainties in the global economic prospects it is expected that output for this industry will remain below the long term trend potential for another year or two.'
CREDIBILITY
Botswana built up a reputation of fiscal prudence over the past three decades but remains reliant on diamonds, which accounts for about 40 percent of revenue.
Big fiscal deficits could damage credibility and put investment-grade sovereign ratings at risk.
Matambo said the economy was predicted to expand by 5 percent in 2010/11 after zero growth this year -- better than some previous forecasts of a sharp decline. It contracted 4.6 percent in the four quarters to September last year.
'We are projecting a gradual recovery of the world diamond market, the dollar value of world diamond sales is expected to gradually return to the level achieved in the financial year 2007/08 by 2012/13,' he said.
'In the meantime the rest of the economy will continue with modest real growth in part because we have avoided a sharp reduction of government spending.'
Matambo said bond issues and remaining funds from a $1.5 billion African Development Bank loan from last year would be used to finance the deficit, while value added tax would rise to 12 percent from 10 percent.
Public sector salaries would be frozen to try ease pressure on the state's coffers unless there was a marked improvement in economic conditions.
The current two-tier corporate tax rate would be scrapped, leaving a single company rate of 25 percent, he said.
(Editing by Ron Askew and Patrick Graham) Keywords: BOTSWANA BUDGET/
(gordon.bell@thomsonreuters.com; +27 11 775 3151; Reuters Messaging: gordon.bell.reuters.com@reuters.net)
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