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Botswana: Staff Report for the 2012 Article IV Consultation—Debt Sustainabilityanalysis

Author(s):
International Monetary Fund
Published Date:
August 2012
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Medium-Term Public Debt Sustainability

Botswana’s gross public debt increased in pula values in 2011/12 compared with 2010/11, while it fell by one percentage point relative to GDP. Domestic and external borrowing contributed to the increase in gross public debt. The share of external debt in total debt increased sharply to 67 percent in 2009/10 driven by the government borrowing to finance its countercyclical fiscal policy.

The Botswana’s historically low level of public debt reflects the authorities’ prudent macroeconomic policies. This resulted in a significant reserve accumulation, which allowed them to face the Great Recession with strong policy buffers. Therefore, countercyclical policies were successfully implemented without much debt accumulation.

The baseline scenario, underlying the staff’s macroeconomic framework, assumes continuing fiscal consolidation with the primary balance turning from a deficit of 6.6 percent of GDP in 2010/11 into a surplus of 1.3 percent of GDP on average for the period of 2012/13–17/18. The main burden of fiscal adjustment falls on primary expenditure. By 2017/18, the stock of gross public debt is projected at 8 percent of GDP.

Table 1 shows two alternative scenarios:

Table 1.Country: Public Sector Debt Sustainability Framework, 2007–2017(In percent of GDP, unless otherwise indicated)
ActualProjections
20072008200920102011201220132014201520162017Debt-stabilizing primary balance 9/
Baseline: Public sector debt 1/7.56.216.718.417.415.313.812.210.69.38.0-0.2
o/w foreign-currency denominated1.71.23.22.92.62.32.01.81.51.20.6
Change in public sector debt1.9−1.310.51.7−1.0−2.0−1.5−1.7−1.5−1.4−1.3
Identified debt-creating flows (4+7+12)−4.67.013.23.9−0.2−2.6−2.3−2.3−2.5−1.4−0.6
Primary deficit−4.17.612.26.61.9−1.4−1.4−1.6−1.9−1.1−0.3
Revenue and grants36.530.335.230.830.730.329.329.129.029.028.8
Primary (noninterest) expenditure32.337.947.437.432.528.827.927.627.127.828.5
Automatic debt dynamics 2/−0.4−0.61.0−2.7−2.1−1.2−1.0−0.7−0.6−0.2−0.3
Contribution from interest rate/growth differential 3/−0.4−1.01.2−2.6−2.5−1.2−1.0−0.7−0.6−0.2−0.3
Of which contribution from real interest rate−0.2−0.80.8−1.6−1.7−0.6−0.4−0.2−0.10.20.1
Of which contribution from real GDP growth−0.2−0.20.3−1.0−0.8−0.6−0.6−0.5−0.5−0.4−0.4
Contribution from exchange rate depreciation 4/0.00.4−0.2−0.10.4
Other identified debt-creating flows0.00.00.00.00.00.00.00.00.00.00.0
Privatization receipts (negative)0.00.00.00.00.00.00.00.00.00.00.0
Recognition of implicit or contingent liabilities0.00.00.00.00.00.00.00.00.00.00.0
Other (specify, e.g. bank recapitalization)0.00.00.00.00.00.00.00.00.00.00.0
Residual, including asset changes (2-3) 5/6.5−8.3−2.7−2.2−0.80.60.80.61.00.0−0.7
Public sector debt-to-revenue ratio 1/20.520.447.559.756.750.747.341.836.632.027.8
Gross financing need 6/−2.78.012.77.22.3−0.2−0.8−1.0−1.4−0.40.4
in billions of U.S. dollars−336.31082.51476.31068.1414.6−44.7−153.8−206.1−292.9−87.082.0
Scenario with key variables at their historical averages 7/15.315.615.615.915.314.0-1.0
Scenario with no policy change (constant primary balance) in 2012-201715.313.812.311.39.67.2-0.2
Key Macroeconomic and Fiscal Assumptions Underlying Baseline
Real GDP growth (in percent)4.83.0−4.77.05.13.84.24.24.34.44.7
Average nominal interest rate on public debt (in percent) 8/6.85.06.53.83.07.63.93.74.17.17.1
Average real interest rate (nominal rate minus change in GDP deflator, in percent)−3.6−12.612.3−10.8−10.3−3.7−2.6−1.5−0.82.21.7
Nominal appreciation (increase in US dollar value of local currency, in percent)0.4−20.112.73.6−14.4
Inflation rate (GDP deflator, in percent)10.417.6−5.814.613.311.36.45.34.94.95.3
Growth of real primary spending (deflated by GDP deflator, in percent)14.220.719.1−15.5−8.7−7.90.82.92.67.17.2
Primary deficit−4.17.612.26.61.9−1.4−1.4−1.6−1.9−1.1−0.3

Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.

Derived as [(r - π(1+g) - g + αε(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; α = share of foreign-currency denominated debt; and ε = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1+g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 2/ αε(1+r).

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

Derived as nominal interest expenditure divided by previous period debt stock.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.

Derived as [(r - π(1+g) - g + αε(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; α = share of foreign-currency denominated debt; and ε = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1+g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 2/ αε(1+r).

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

Derived as nominal interest expenditure divided by previous period debt stock.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

  • The first scenario aims to demonstrate what would be the fiscal outcome if the main macro-variables are maintained at their historical 10-year averages. In this scenario, debt-to-GDP ratio increases and stabilizes at a level much higher than suggested by the baseline scenario. The main driver of this kind of dynamics is the deteriorated primary balances due to countercyclical fiscal policy response to the 2008-09 financial crisis.
  • The second scenario assumes no change in the policy and holds the primary fiscal balance constant at its 2012/13 level (1.4 percent of GDP) throughout the medium-term. In this case, public debt decreases to 7.2 percent of GDP by 2017/18. The outcome of this scenario is similar to that of the baseline scenario since primary fiscal balance in 2012/13 is very close the average primary balance for the period of 2012/13–17/18. Relatively unfavorable outcome of the first scenario underscores the downside risk of delay or failure to implement committed fiscal consolidation.

The bounds tests illustrate the sensitivity of the public debt-to-GDP ratio to exogenous shocks (Figure 1). The most benign shock is that stemming from keeping fiscal policy unchanged. Public debt is relatively vulnerable to primary fiscal balance and growth shocks. These shocks generate an increase in debt-to-GDP ratio by 18 and 9 percentage points respectively.

Figure 1.Country: Public Debt Sustainability: Bound Tests 1/2/

(Public debt in percent of GDP)

Sources: International Monetary Fund, country desk data, and staff estimates.

1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.

2/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.

3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and primary balance.

4/ One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2010, with real depreciation defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator).

Medium–Term External Debt Sustainability

Botswana’s gross external debt increased from US$2.6 billion in 2009 to US$3.1 billion in 2011 but fell by 5 percentage points relative to GDP. The nominal increase in the debt mainly reflects external borrowing by the Botswana Power Corporation to finance the construction of the Moropule B energy plant and loan disbursements from the World Bank to cover an array of social and institution-building programs. The latter included, among others, the development of databases at Statistics Botswana, capacity-building initiatives at NBFIRA, and a medium-term debt strategy at the Ministry of Finance and Development Planning.

The stock of Botswana’s gross external debt is projected to decline gradually from a peak of about 23 percent of GDP in 2009 to about 6 percent of GDP in 2017 (Table 2).

Table 2.Country: External Debt Sustainability Framework, 2008–2017(In percent of GDP, unless otherwise indicated)
ActualProjections
2008200920102011201220132014201520162017Debt-stabilizing non-interest current account 6/
Baseline: External debt8.122.919.617.917.716.615.113.511.56.0-2.6
Change in external debt−2.014.7−3.2−1.8−0.2−1.1−1.6−1.6−2.0−5.5
Identified external debt-creating flows (4+8+9)−11.40.9−6.9−8.0−6.8−6.4−5.8−5.6−5.2−5.5
Current account deficit, excluding interest payments−7.74.31.7−2.7−4.2−3.8−3.3−3.2−2.9−3.2
Deficit in balance of goods and services−3.810.37.44.04.25.15.05.15.57.0
Exports42.032.532.938.637.035.734.633.632.531.3
Imports38.242.840.342.541.240.839.638.838.038.3
Net non-debt creating capital inflows (negative)−3.6−5.8−3.8−3.3−3.1−3.0−2.9−2.8−2.8−2.7
Net foreign direct investment, equity3.95.63.83.33.13.03.02.92.82.7
Net portfolio investment, equity−0.30.20.10.00.00.00.00.00.00.0
Automatic debt dynamics 1/−0.12.4−4.8−2.00.50.50.50.50.40.4
Contribution from nominal interest rate0.81.00.31.11.11.21.11.11.00.9
Contribution from real GDP growth−0.30.5−1.2−0.8−0.7−0.7−0.7−0.6−0.6−0.5
Contribution from price and exchange rate changes 2/−0.60.9−3.8−2.2
Residual, incl. change in gross foreign assets (2-3) 3/9.413.93.76.26.75.34.24.13.20.0
External debt-to-exports ratio (in percent)19.370.459.746.347.946.643.640.235.319.2
Gross external financing need (in billions of US dollars) 4/−895.9651.1340.4−252.8−520.7−471.6−343.8−341.7−320.1−439.9
in percent of GDP−6.65.62.3−1.4−2.9−2.5−1.7−1.6−1.5−1.9
Scenario with key variables at their historical averages 5/17.710.52.4-5.7-14.4-25.2-3.4
Key Macroeconomic Assumptions Underlying Baseline
Real GDP growth (in percent)3.0−4.77.05.13.84.24.24.34.44.7
GDP deflator in US dollars (change in percent)6.5−10.320.212.8−2.40.91.01.01.01.4
Nominal external interest rate (in percent)8.510.21.76.66.47.07.17.57.78.6
Growth of exports (US dollar terms, in percent)−2.9−34.030.339.1−2.91.52.02.42.02.2
Growth of imports (US dollar terms, in percent)18.2−4.321.125.1−1.94.02.33.13.56.9
Current account balance, excluding interest payments7.7−4.3−1.72.74.23.83.33.22.93.2
Net non-debt creating capital inflows3.65.83.83.33.13.02.92.82.82.7

Derived as [r - g - ρ(1+g) + εα(1+r)]/(1+g+ρ+gρ) times previous period debt stock, with r = nominal effective interest rate on external debt; ρ = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, ε = nominal appreciation (increase in dollar value of domestic currency), and α = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [- ρ(1+g) + εα(1+r)]/(1+g+ρ+gρ) times previous period debt stock. ρ increases with an appreciating domestic currency (ε>0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Derived as [r - g - ρ(1+g) + εα(1+r)]/(1+g+ρ+gρ) times previous period debt stock, with r = nominal effective interest rate on external debt; ρ = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, ε = nominal appreciation (increase in dollar value of domestic currency), and α = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [- ρ(1+g) + εα(1+r)]/(1+g+ρ+gρ) times previous period debt stock. ρ increases with an appreciating domestic currency (ε>0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Ongoing fiscal consolidation in an environment of export growth, supported by a steady improvement in international terms of trade, and stable FDI inflows should support a reduction in the external debt ratio.

An alternative scenario, with key debt-creating variables at their historical levels, suggests that Botswana could become a net creditor vis-à-vis the rest of the world over the medium-term. This is a notable improvement over the baseline projections (Figure 2).

Figure 2.Country: External Debt Sustainability: Bound Tests 1/2/

(External debt in percent of GDP)

Sources: International Monetary Fund, Country desk data, and staff estimates.

1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.

2/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.

3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.

4/ One-time real depreciation of 30 percent occurs in 2010.

Simulations suggest that Botswana’s external debt-to-GDP ratio is sensitive only to current account shock. Real depreciation shock, while increases the debt-to-GDP ratio initially, have only marginal impact on the medium-term debt dynamics. Moreover, Botswana’s external debt is not sensitive to the shock of interest rates and economic activity.

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