Botswana is edging into a dangerous economic phase where falling growth collides with rising costs, a combination that history shows is difficult to reverse and often socially destabilising, raising urgent questions about policy direction and structural reform.

By Douglas Rasbash

Stagflation is a term coined in the 1970s that encapsulates, economic stagnation with increases in prices. It was started by war in the Middle East which sounds rather familiar. It caused oil prices to soar, which pushed up inflation, recession and increased unemployment.

Australia experienced stagflation in the 1970s, with inflation peaking above 17%, unemployment rising from ~2% to over 5%, and GDP growth slowing to near 0–1%. Driven by oil shocks and wage pressures, it strained policy responses and forced a shift toward tighter monetary policy and economic reform.

RECESSION DEEPENS

The probability of stagflation in Botswana is now very high. Botswana is no longer facing a temporary economic slowdown. The evidence now points to a deepening recession accompanied by rising and potentially persistent inflation and significant unemployment. This combination is not only concerning, it is structurally difficult to reverse, particularly given the country’s narrow export base and high dependence on imports. The recession is already underway. The sharp contraction in GDP in late 2025 reflects more than cyclical weakness; it signals a loss of momentum in the economy’s primary growth engine. With diamond production and exports under pressure, there is limited capacity for a rapid rebound. As this shock transmits through construction, trade, and services, the downturn is likely to broaden and persist into 2026. The probability of a prolonged recession, lasting multiple quarters, potentially extending over two years, is now high. At the same time, inflation is moving in the opposite direction. Rising fuel prices, exchange rate pressures, and increasing administered costs are pushing prices upward across the economy. These are structural, cost-driven forces, not temporary demand spikes. As a result, inflation is likely to increase even as economic activity weakens, eroding real incomes and tightening financial conditions. This divergence, falling output and rising prices, places Botswana firmly into a stagflationary space as shown in the figure. The top line depicts rising then falling inflation, the bottom curve represents falling then rising growth. The stagflationary space is shaded red.

POLICY TRAP

Stagflation is a condition that constrains policy options and amplifies economic stress. Efforts to stimulate growth risk fuelling inflation further, while attempts to control inflation risk deepening the recession. The structural features of the economy intensify this risk. Botswana remains import-dependent, meaning that currency depreciation feeds directly into domestic prices. At the same time, the economy is not sufficiently diversified to offset the decline in mining with growth in other sectors. This creates a reinforcing loop: weaker exports reduce foreign exchange earnings, which pressures the currency, which raises import costs, which increases inflation. In such an environment, recovery is rarely quick. Stagflation tends to be prolonged, with slow and uneven growth accompanied by persistently elevated inflation. Without decisive structural reform and investment in new growth sectors, Botswana risks entering a period of low growth, high costs, and rising fiscal pressure lasting several years.
The warning is therefore clear and grounded in emerging evidence: Botswana is not only entering recession, it is doing so alongside rising inflation, with a high likelihood that both will persist longer than anticipated.

SOCIAL RISKS

Government should also be aware that periods of stagflation are historically socially unstable. Stagflation has repeatedly proven to be more than an economic anomaly, it is a deeply destabilising social force. The experience of the 1970s in the United Kingdom remains one of the clearest illustrations. As inflation surged above 20% and growth stagnated, real incomes collapsed. The result was the “Winter of Discontent,” marked by widespread strikes, failing public services, and a palpable sense that the state had lost control. Social cohesion frayed, and frustration translated directly into political upheaval. A similar pattern unfolded in the United States. Following the oil shocks, high inflation combined with stagnant wages eroded the middle class. Fuel shortages became symbolic of a system under strain, with long queues and visible scarcity. Urban centres experienced rising crime and decay, while trust in government declined sharply. The economic malaise fed a broader sense of national pessimism and disillusionment. In Argentina, the consequences were even more severe. Persistent inflation and stagnation evolved into full-blown crisis. Real incomes collapsed, poverty surged, and food riots became common. The social contract effectively broke down, contributing to cycles of political instability and authoritarian intervention. In South Africa, stagflation interacted with structural inequality. Economic stagnation and rising unemployment intensified existing grievances under apartheid. Labour unrest, protests, and youth mobilisation increased, reinforcing a broader movement of resistance and accelerating political change. Finally, Egypt’s 1977 bread riots demonstrate how quickly stagflation can ignite unrest when basic necessities are affected. Inflation, coupled with subsidy cuts, triggered mass protests that forced an immediate policy reversal. Across these cases, the pattern is unmistakable: stagflation erodes living standards, undermines trust, and exposes inequality. When prolonged, it does not simply weaken economies, it unsettles societies, often with lasting political consequences.

WAY FORWARD

Reversing the Trajectory: Policy and Investment Priorities
The pathway out of stagflation is narrow but navigable, but without reform, Botswana risks a prolonged period of low growth and high inflation. The key is to break the reinforcing loop between weak growth and rising costs, while simultaneously creating new sources of productivity and foreign exchange. The first priority is restoring fiscal credibility while protecting investment. This means containing recurrent expenditure, but ring-fencing capital spending in high-impact sectors. Increasing the debt ceiling to 60% of GDP may be necessary, but it must be accompanied by a clear medium-term fiscal consolidation framework to maintain investor confidence. Second, Botswana must urgently unlock external capital. The failure to activate large-scale investment partnerships has become a binding constraint. Priority projects in agro-processing, green energy, logistics and water must be restructured into bankable formats. Without foreign inflows, the economy will remain constrained by domestic liquidity and crowding-out effects. Third, the country must accelerate energy transition and cost reduction. Imported fuel is a major driver of inflation. Investment benefits from a stake in the Lobito Oil refinery will not materialise until 2033 and are more likely to negatively impact stagflation. On the other hand rapidly expanding solar generation, supporting eMobility, and reducing dependence on imported energy can structurally lower the cost base of the economy. This is one of the few areas where Botswana can directly attack inflation at source. Fourth, there must be a decisive shift toward export diversification and commercialisation of government services, not mega infrastructure projects, being hooked in massively expensive enablers like the oil refinery will dig us deeper into the stagflationary hole. Without new foreign exchange earnings, currency pressure and imported inflation will persist. Finally, Botswana must rebuild institutional capacity in economic management, particularly in areas such as demand modelling, investment structuring, and sector strategy.
Just as history has shown that stagflation is economically and socially destabilising, it has also been a revolutionary force for change. Stagflation maybe the bitter pill that Botswana needs to swallow for it to fully reform and really start its second republic.