IMF Executive Board Concludes 2018 Article IV Consultation with Botswana

September 5, 2018

On August 31, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Botswana. [1]

Sizable buffers and prudent policies have kept the economy stable despite diamond market weakness and volatility, but progress with structural reforms has been mixed. The diamond cum public sector-led development model has been showing its limitations with sluggish growth and weak job creation. In recent months, the authorities approved key legislation to improve the business environment and announced plans to proceed with privatizations, rationalize parastatals, and relax restrictions on visas and work permits.

In 2017, despite higher diamond production, real GDP growth dropped to 2.4 percent primarily because of the closure of a major copper and nickel mining company. Non-mineral growth decelerated reflecting the indirect effects of the company’s closure on electricity and transportation, coupled with a small slowdown in trade and construction. Inflation remained near the lower end of the Bank of Botswana’s objective range of 3–6 percent, with the 12-month rate at 3.1 percent in July 2018.

The fiscal position was nearly balanced, as lower mineral and non-tax revenues were offset by higher SACU receipts, and higher outlays in wages and transfers were compensated by lower spending on goods and service and bursaries. At the same time, the real effective exchange rate remained stable, the current account balance maintained a large surplus, public debt remained low, and international reserves exceeded their adequate level by a comfortable margin.

In 2018–19, it is expected that improving conditions in the diamond market and fiscal stimulus will temporarily boost economic activity. The medium-term economic outlook will depend heavily on the successful implementation of critical structural reforms.

Executive Board Assessment [2]

Executive Directors commended the authorities for implementing sound policies, which have contributed to macroeconomic stability, a low level of public debt, and strong buffers. Directors agreed that continued commitment to prudent policies and timely and focused implementation of structural reforms will be crucial to promote private sector growth, reduce unemployment, and diversify the economy.

Directors concurred that the fiscal policy stance is broadly appropriate. They underscored that, to maintain strong buffers, gradual and growth-friendly consolidation will be needed over the medium term. On the expenditure side, Directors encouraged efforts towards containing the growth of recurrent outlays while safeguarding capital and social spending. On the revenue side, in addition to tax administration reforms, they recommended steps to streamline VAT exemptions and reform the system of property taxation.

Directors noted that the current accommodative monetary policy stance is consistent with the output gap and subdued inflation. They agreed that the crawling peg system remains appropriate and encouraged the authorities to maintain adequate levels of international reserves. Directors also noted that the banking sector remains sound despite an increase in nonperforming loans in a few non-systemic banks, and supported the authorities’ intentions to strengthen macroprudential regulations, closely monitor the risks associated with households’ debt, and improve the AML/CFT framework.

Directors underscored the importance of adjusting the country’s development model to boost growth potential, lower unemployment, and promote diversification. In this connection, they welcomed the authorities’ commitment to accelerate the implementation of key structural reforms. Directors underscored the need to reform the public sector and its role in the economy, especially by restructuring and privatizing parastatals, undertaking a civil service reform, and strengthening the prioritization of public investment projects.

Directors stressed the need to remove distortions, (especially monopolies and regulations that raise the cost of doing business), better target social spending, improve education policies, liberalize the granting of visas and work permits, and realign educational and vocational polices to address skill mismatches. They also encouraged continued efforts to deepen financial markets and foster financial inclusion, especially by strengthening creditor rights and information on borrowers’ creditworthiness, increasing the volume and frequency of issuance of government bonds, and enhancing the breadth and depth of mobile money payments.

Directors welcomed the steps recently taken to strengthen fiscal transparency and encouraged further efforts in this regard. They also called for measures to address data gaps and further improve the quality and timeliness of economic statistics.


Botswana: Selected Economic Indicators, 2014–2018

2014

2015

2016

2017

2018

Preliminary

Projections

(Annual percent change, unless otherwise indicated)1

National income and prices

Real GDP

4.1

-1.7

4.3

2.4

4.6

Mineral2

0.5

-19.6

-3.5

-11.2

5.4

Nonmineral

4.9

1.7

5.5

4.2

4.5

Consumer prices (average)

4.4

3.1

2.8

3.3

3.8

Diamond production (millions of carats)

24.7

20.8

20.9

22.9

24.2

External sector

Exports of goods and services, f.o.b. (% change)

7.5

-23.8

13.7

-15.6

9.5

of which: diamonds

10.4

-28.4

24.6

-19.1

9.9

Imports of goods and services, f.o.b. (% change)

-3.5

-10.0

-15.4

-11.5

15.7

Current account balance

13.2

5.6

13.7

12.3

9.5

Overall Balance

3.7

-5.4

-2.3

1.8

1.9

Terms of trade (2005=100)

165.5

195.7

174.4

155.8

159.4

Nominal effective exchange rate (2010=100)

94.8

94.9

95.1

95.4

95.5

Real effective exchange rate (2010=100)

104.3

105.2

104.8

105.0

105.1

External public debt3

17.2

18.4

14.3

12.9

12.4

of which: public and publicly guaranteed

4.8

5.3

4.7

4.4

4.1

Money and banking

Monetary Base

-8.5

18.6

3.7

-13.7

11.3

Broad money (M2)

4.6

19.9

5.4

2.7

9.4

Credit to the private sector

13.7

9.0

9.0

5.3

6.7

(Percent of GDP, unless otherwise indicated)

Investment and savings

Gross investment (including change in inventories)

28.2

32.6

28.6

28.1

27.5

Public

8.2

8.8

8.5

8.0

8.1

Private

20.0

23.8

20.0

20.1

19.4

Gross savings

43.5

41.2

38.8

40.3

37.0

Public

19.8

16.1

16.2

15.9

12.8

Private

23.7

25.1

22.6

24.4

24.2

Central government finances 4

Total revenue and grants

38.3

31.2

33.2

31.6

28.9

Total expenditure and net lending

34.7

35.8

32.5

31.5

32.6

Overall balance (deficit –)

3.7

-4.6

0.6

0.1

-3.7

Non-mineral primary balance5

-16.1

-18.1

-17.6

-12.9

-16.7

Total central government debt

22.6

23.2

21.3

19.4

18.9

(Millions of U.S. dollars, unless otherwise indicated)

Gross official reserves (end of period)

8,323

7,546

7,189

7,502

7,865

Months of imports of goods and services 6

12.7

13.6

14.6

13.2

13.1

Months of non-diamond imports 6

18.5

18.3

18.9

17.7

17.8

Percent of GDP

54.3

58.0

44.9

41.1

42.4

Sources: Botswana authorities and IMF staff estimates and projections.

1 Calendar year, unless otherwise indicated.

2 Projections are based on diamond production due to lack of information on the breakdown of mining value added by mineral.

3 Includes central government-guaranteed debt.

4 Year beginning April 1.

5 The non-mineral primary balance is computed as the difference between non-mineral revenue and expenditure (excluding interest receipts and interest payments), divided by non-mineral GDP.

6 Based on imports of goods and services for the following year.


[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summing up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

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