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Botswana: Staff Report for the 2013 Article IV Consultation

Author(s):
International Monetary Fund. African Dept.
Published Date:
September 2013
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Recent Developments, Outlook, and Risks

A. The Long-Term Setting

1. Botswana has made impressive strides in economic development in the past few decades. A prolonged period of strong growth has raised overall incomes and delivered good economic outcomes. The government has been effective in addressing the country’s development challenges including narrowing the infrastructure gap and facilitating access to education and health. At the same time, as in many other small middle-income countries (SMICs) in the region, trend growth has softened in recent years, amidst persistent unemployment and high income inequality. There is a general recognition that the public-sector driven capital-deepening growth model has run its course.1

Growth Accounting for Botswana and Mauritius

2. As in other SMICs in the region, returning to a period of strong growth in Botswana would require a productivity-driven economy underpinned by a leaner and more efficient public sector. This approach will reduce the crowding out of the private sector, while seeking to support private-sector activity through regulatory and other structural reforms. Over the years, public sector dominance in Botswana has led to distortions in the broader economy and stifled progress toward a private sector-led economy. In particular, there has been:

  • High concentration of bank lending to households, including to public-sector employees: Households have become increasingly leveraged in recent years. The large number of relatively well-paid government employees provides a captive market for bank lending backed by wages, which limits the incentives to look for productive investment opportunities (including financing for small and medium-sized enterprises).
  • Persistently high unemployment with the government as the employer of last resort: Botswana’s unemployment rate has been close to 20 percent for the last two decades. The government is one of the largest employers in the economy with public employment accounting for more than 20 percent of total employment and 40 percent of formal employment. Government sector wages are high relative to the private sector with average wages in the government exceeding private-sector wages by 21 percent in 2011, which is high compared with other SMICs. Over the years, government employment and wage policies has attracted a large share of the labor force into the public sector, raised reservation wages and influenced schooling decisions which have contributed to the skill mismatch in the labor market 2
  • Lackluster progress in economic diversification: The fact that the public sector occupies a large segment of the economy has hindered the private sector from becoming a significant driver of growth in Botswana. As in many other SMICs, the concentration on household credit coincides with the economy’s reliance on consumption for growth relative to investment (Figure 4). Thus, the mining sector and government services are occupying significant shares of GDP, which yields less broad-based growth, increases exposure to external shocks and thus macroeconomic volatility.

Figure 1.Botswana: Recent Economic Developments

The fiscal withdrawal did not dampen non-mineral sector growth
The fiscal withdrawal did not dampen non-mineral sector growth

Figure 2.Small Middle-Income Countries in Sub-Saharan Africa: Regional Comparison

(Average 2002-2012, unless otherwise indicated)

Source: Country authorities, IMF staff estimates, and IMF World Economic Outlook.

Note: Comparison bar refers to the WEO ”Emerging and Developing Markets” analytical group.

Figure 3.Public Sector Wage and Employment Policies are Creating Distortions in the Labor Market

Figure 4.Household Borrowing has Accelerated Partly to Finance Private Consumption

Reducing the relative size of the government (as a share of GDP) would contribute to the creation of more productive investment opportunities for the financial sector, improve labor market outcomes and enhance prospects for greater economic diversification.

3. These long-term challenges dovetail with the government’s own policy priorities as laid out in the recent Mid-Term Review (MTR) of the 10th National Development Plan (NDP10). The MTR of NDP 10 reemphasizes the policy thrust to reduce the size of government relative to GDP so that the private sector can take the lead in returning Botswana to a period of strong and robust growth. Within this broad remit, the MTR of NDP 10 identified the following policies as priorities: (i) making the government more effective and efficient, (ii) tackling the high level of unemployment, (iii) enhancing more inclusive growth and (iv) boosting prospects for greater economic diversification.

B. Current Conditions

4. A strong post-crisis growth has moderatedreflecting a combination of decelerating net external demand partly offset by a solid contribution from domestic demand.

  • Output growth slowed down from about 6 percent in 2011 to about 4 percent in 2012. This deceleration was driven by the decline in mining sector growth due to the subdued global demand for diamonds. Construction and service sectors grew fast, offsetting the negative impact of the mining sector on the overall GDP (Figure 1 and Table 1). From the expenditure side of GDP, domestic demand was relatively strong in 2012, with private consumption and investment growing by about 9 and 13 percent respectively in real terms, with net external demand declining by 7 percent.
  • Preliminary data suggest that the growth moderation continued in the first quarter of 2013 with real GDP growing by about 3 percent. This reflects the continued weak performance of the diamond sector and the slowdown in the construction sector. The latter is probably a consequence of the ongoing phasing out of the big government construction projects such as Morupule B power plant. However, services sector growth remained quite brisk.
Table 1.Botswana: Authorities’ Response to Past IMF Policy Recommendations1
IMF 2011 & 2012 Article IV RecommendationsAuthorities’ Response
Fiscal Policy- consolidate fiscal policy and rebuild the fiscal buffers.

- contain the wage bill
Broadly consistent

The FY2013/14 Budget targets a small fiscal surplus, and is centered on further expenditure restraint, while improving the quality of spending. Mid-term review of the authorities NDP10 envisages fiscal surpluses in the next three year. Despite the authorities’ announcement of a 5 percent targeted reduction in the original FY2012/13 budget, spending on wages in percent of GDP increased by about a half percentage point in FY2012/13.
- delink fiscal policy stance from volatile mining revenueInconsistent

The fiscal stance is not formally delinked from volatile mining revenues. While the authorities recognize the need to delink the fiscal stance from volatility in the mining revenue, they are of the view that their sustainable budget index rule provides enough ground to deal with this volatility.
- broaden the tax basePartially consistent

One of the key objectives of the MTR of NDP 10 is to achieve a simplified tax system with high compliance and a low cost of administration.
Monetary Policy-increase transparency of the crawling peg regime through publishing currency weights of the Pula basket and rate of crawl.

- reestablish the traditional link between its policy rate and short-term interest rates.

- increase issuance of government securities.
Broadly consistent

Consistent with staff’s advice during the October 2012 mission, the authorities published both the Pula currency basket weights and its rate of crawl in the FY 2013/14 budget.

During 2010 the BoB used reverse repo operations to mop up intra-auction liquidity.

The government highlighted in the 2013/14 budget speech about their plans to issue more treasury bills and government bonds for promoting the growth of the capital market and reducing reliance on Bank of Botswana Certificates.
Financial Sector Policy-strengthen regulation and supervision of nonbank financial institutions

- keep a balance between financial inclusion and stability

-enhance monitoring of commercial banks’ exposure to households and mortgage lending and consider pre-emptive measures to enhance banks’ capacity to absorb shocks.

- develop a reliable property market index to help monitor price developments and take appropriate regulatory steps where needed.
Partially consistent

The government has put the appropriate regulation in place to allow the NBFIRA to collect supervisory levees from NBFIs to address some aspects of its funding problems.

The BoB has subscribed a quarterly report on property market that includes information on price development.

Scale—fully consistent, broadly consistent, partially consistent, marginally consistent, or inconsistent.

Scale—fully consistent, broadly consistent, partially consistent, marginally consistent, or inconsistent.

5. The acceleration in household borrowing supported the solid growth in domestic demand. The increase, however, is from a low base, because the level of financial intermediation remains low in Botswana relative to other emerging and developing economies. Private-sector credit (in percent of GDP) is about 30 percent in Botswana compared with above 80 percent in emerging and developing Asia. That said, private-sector credit, on average, grew by an annual 26 percent last year, driven mainly by the expansion in credit to households (with mortgages accounting for about fourteen percent, while unsecured credit about forty percent). Banks’ nonperforming loans (NPLs) which were 2.6 percent at end-December 2012 increased by about 30 percent in March 2013. The deterioration in the quality of banks’ loan portfolio to households accounts for the increased NPLs.

6. Meanwhile, the fiscal withdrawal has not significantly dampened non-mineral sector growth. The budget was balanced in FY2012/13 for the first time since the 2008 global financial crisis. A “growth-friendly” consolidation was implemented through reining in nonproductive current spending, which was supported by the windfall revenues from the Southern Africa Customs Union (SACU).3 However, spending on wages in percent of GDP, increased by about a half percentage point in FY2012/13 despite the authorities’ plans of a 5 percent targeted reduction in the wage bill in the original FY2012/13 budget (Table 4d). The increase was driven by the “temporary recession allowance” granted to civil servants at the lower end of the wage ladder to mitigate the effects of the recession. Execution of capital spending was below budget owing to problems in the implementation process that delayed the commencement of some government projects. On the revenue side, non-mineral income tax and mineral revenue underperformed, reflecting subdued economic activity.

7. Monetary policy was eased as inflation decelerated towards the upper end of the Bank of Botswana’s (BoB) 3–6 percent objective range. Consumer price inflation declined steadily in recent months and stood at 5.8 percent at end-June from about 7.4 percent at end-2012. Core inflation, which excludes administered prices, also declined. The BoB reduced its policy rate by 100 basis points during April—June, 2013.

Botswana Inflation

(Percent, year-on-year)

Sources: Country authorities.

8. The external current account has been in deficit since the 2008–09 global financial crisis. The combination of subdued diamond exports and fast import growth continues to drive the trade deficit. The high import growth reflected the large scale government construction projects, most notably the Morupule B power plant, cost of fuel import related to electricity supply, and to some extent strong private consumption growth financed by the rapid increase in household borrowing (Appendixes II and III). Net service balance also turned negative reflecting lower tourism receipts. Official transfers, mainly SACU revenues, have also contributed to the narrowing of the current account deficit from its 2009 level. As a result, the overall external position continues to be relatively strong with official reserves coverage standing at about 11 months of import cover at end-June 2013.

Current Account Balance

(Millions of US dollars)

Sources: Botswana authorities and IMF staff estimates.

9. The real effective exchange rate (REER) continues to be broadly stable under the crawling peg arrangement (Figure 1). Since 2005, the authorities have pursued a crawling peg regime with the aim of preserving external competitiveness through real exchange rate stability. The regime is implemented through a continuous adjustment of the nominal effective exchange rate of the Pula, based on the differential between the medium-term inflation objective and trading partners’ inflation forecasts. The authorities published both the Pula currency basket weights and its rate of crawl in the FY 2013/14 budget, which has improved the transparency of the crawling peg regime. Staff’s econometric analysis, using CGER methods, which incorporate features appropriate for a mineral-based economy like Botswana, shows that the REER is broadly in line with fundamentals from a medium-term perspective (Appendix II). While Botswana’s external position continues to be strong and there are no external stability concerns, high export concentration creates potential risks for external stability (Appendix II).

C. Outlook and Risks

10. Outlook

Output: Staff projects that real GDP will grow by about 4 percent in 2013 on the back of a strong non-mineral GDP growth and an anemic mining sector (Table 1). Growth is expected to pick up slightly to 4.4 percent in 2015 supported by the base effect of increased electricity production and a recovery in the mining sector and subsequently stabilize at around 4 percent.

Inflation: Headline inflation is likely to remain close to the upper end of BoB’s medium-term objective range in the remainder of 2013. However, below normal rainfall for the region, poses a potential upside risk to food prices. At the same time, fiscal consolidation, underpinned by government wage restraint, should help to contain demand-push inflationary pressures.

External position: The current account deficit is expected to narrow in the coming years supported by the public sector savings generated by the planned fiscal consolidation and the expected recovery in diamond exports along with global recovery. As measures by the government result in tempering the rate of growth of household borrowing, import growth should slow down. This combined with a stable electricity supply by Moropule B power plant, will contribute to closing the current account deficit. More broadly, success toward export diversification and an improvement in competitiveness, underpinned by the implementation of regulatory and structural reforms should help the return to a current account surplus and enhance external sustainability over the long term.

11. Risks

The main near-term risk relates to the uncertain external environment, which poses significant downside risks to diamond export demand4, and on the domestic front potential delays in the full commencement of the Morupule B power plant. Under some adverse scenarios, output growth could be lower by 1–1½ percentage points compared with the baseline forecast. Botswana is also exposed to spillovers through strong economic and financial linkages with South Africa, where recent developments and outlook suggest sluggish growth (Appendix I). Banks’ high exposure to households and rapid increase in the growth of unsecured lending is an emerging policy challenge. A key medium-term risk relates to the sustainability of long-term growth as trend growth has softened in the last decade requiring new growth drivers. Another medium-term risk is that, like other countries in SACU, Botswana faces the prospect that SACU revenues may decline either because of a prolonged period of low global growth or changes in the SACU revenue-sharing formula.

Policy Discussions

The authorities largely agreed with the staff’s assessment of recent economic developments, outlook, and prospects. They reiterated the need to pursue a “growth-friendly” fiscal consolidation plan and reduce the size of the government (as a share of GDP). Consistent with the Fund’s surveillance of SMICs in sub-Saharan Africa, the need to address the policy gaps, and the authorities’ policy priorities as laid out in the recent MTR of the NDP10, this year’s consultation focused on four main themes: (i) global economic spillovers; (ii) fiscal policy implications for labor market outcomes; (iii)the implications of rising household indebtedness for financial stability; and (iv) how to return the economy to an era of strong growth, enhance job creation and boost prospects for economic diversification.

A. Policy Theme 1: Near-Term Macroeconomic Policies and Global Spillovers

12. Near-term macroeconomic policy stance

  • Fiscal policy: Staff supports the FY2013/14 budget, which targets a small fiscal surplus and reins in unproductive current spending, while protecting growth-promoting capital spending. As in other SMICs in SSA, the government’s wage bill is high by international standards, which combined with subsidies and transfers, account for about 50 percent of total expenditures, thereby limiting the room for fiscal policy flexibility. Thus the targeted reduction in the expenditure-to-GDP ratio by 2.5 percentage points, reflecting mainly reduced wages and subsidies, is appropriate. The budget’s emphasis on the need to rebuild fiscal buffers, improve the quality of spending, and buttress medium-term fiscal consolidation, is also well placed.
  • Monetary policy: In staff’s view, a neutral monetary policy stance is appropriate in the near term. After five years of strong non-mineral sector growth, the negative output gap for the non-mineral sector has largely closed and at 5.7 percent, core inflation (excluding administered prices) is projected to remain firmly within the objective range for the reminder of the year. A simple Taylor rule under the baseline scenario suggests that the BoB should err on the side of caution on further cuts in its policy rate in the near term. In addition, lowering rates may do little to boost private investment given that other structural factors are holding it back, while it may stimulate private consumption and unsecured lending and result in a further buildup of vulnerabilities on households’ balance sheets. Beyond these, the real interest rate in Botswana is the lowest among MICs in the region (South Africa, Namibia, Mauritius, Cape Verde), while private sector credit growth is the fastest and average inflation the highest (Figure 1).

13. The authorities emphasized that they still see a need to improve the efficiency of public spending. More generally, they continue to put emphasis on a thorough assessment of pockets of unproductive spending and ways to increase efficiencies and generate value for money most notably in the area of education and spending on state-owned enterprise. They also noted that a medium term expenditure framework is being adopted that both better aligns ministries’ spending plans with strategic priorities as set out in the NDP 10 and improves expenditure projections and the relevance of budget ceilings, while reinforcing the integrity of the development budget through enhanced project evaluation and prioritization.

14. On monetary policy they noted that further adjustment in the policy rate will be guided by the medium-term outlook on inflation. The BoB pointed to evidence from recent Business Expectations Surveys, which suggests that inflation expectations are on a downward trend as well as the benign inflation outlook. They noted that the lower rate of crawl of the pula based on inflation forecast differentials compared with the actual inflation differential contributed to the reduction in inflationary pressures.

15. Managing global spillovers

  • If further adverse global spillovers beyond the staff’s baseline scenario lead to a decline in diamond prices and a significant loss of revenues, staff advised the authorities to allow the automatic stabilizers to work on the revenue side (Appendix I). Although this will slightly delay the fiscal consolidation path envisaged under the FY2013/14 budget by at most 1 percentage point of GDP, in staff’s view, it should not undermine medium-term fiscal sustainability. A more accommodative monetary policy stance would be appropriate in this adverse scenario, because lower domestic demand and the benign external inflation environment would reduce inflationary pressures. More generally, with increased policy uncertainty in South Africa, such spillovers call for policy response to be measured, carefully calibrated, and proportional to risks and pressures coming from the global economic environment.
  • The authorities agreed with staff’s view that the potential global spillovers to Botswana would be limited and short-lived. Although China and India’s shares in diamond consumption have been growing in recent years, they are still not the major player among Botswana’s trading partners. In addition, they expect the growth slowdown in South Africa to have limited spillover effects in Botswana. Over 85 percent of Botswana’s exports go to countries outside South Africa, and the funding base of banks is largely domestic. The authorities don’t expect demonstration effects of large wage demands in South Africa’s mines on Botswana’s mining sector as industrial relations in Botswana are less confrontational. However, there would be significant impact on business and economic activity if the recurring labor strikes were to disrupt the transportation of goods from South Africa to Botswana. They underscored their commitment to continue to rebuild the fiscal policy buffers, which have served them well in the past, to respond to such adverse shocks.

B. Policy Theme 2: Pursuing a “Growth-Friendly” Fiscal Consolidation and Improving Labor Market Outcomes

16. Medium-term fiscal consolidation plan

  • Medium-term fiscal sustainability requires reducing the non-mineral primary deficit to about 5 percent of nonmineral GDP from the current level of about 11 percent.5 In the staff’s view, the pace of the authorities’ medium-term fiscal consolidation is appropriate given the uncertain external environment, in particular the weak global demand for diamonds, and the existing policy space (large reserve buffers and very low debt).6 The envisaged consolidation should not unduly undermine the authorities’ goal of growth inclusion as Botswana has fairly generous social welfare programs and the authorities are working on making their targeting more effective. The government’s efforts to rationalize parastatals and public entities and identify additional programs that can be outsourced to the private sector would also contribute to lowering the government wage bill. Strengthening the operations of state-owned enterprises (SOEs) can generate the needed savings but only gradually.
  • The authorities affirmed their medium-term fiscal consolidation goals, centered on reining in unproductive current expenditures and improving the quality of spending. They underscored that their draft Privatization Master Plan II for SOEs is aimed at reducing their burden on fiscal resources and propelling them on a path towards commercial viability. In addition, the government is planning to introduce performance contracts between SOEs and the responsible line ministries, which assumes conducting annual audit and performance review to make sure that these SOEs remain focused and serve their purpose.
Central Government Operations, 2011/12–2016/17
2011/122012/132013/142014/152015/162016/17
(Percent of total GDP, unless otherwise indicated)
Total revenue & grants36.335.933.433.333.233.1
Total expenditure & net lending36.535.733.231.830.930.1
Current27.228.124.723.722.721.9
Capital9.47.38.58.28.28.2
Overall balance−0.20.20.21.52.33.1
Overall balance excluding SACU−8.1−12.2−10.3−9.1−8.2−7.5
Non-mineral primary balance1−20.1−13.8−11.5−10.0−8.9−7.8
Non-mineral primary balance excluding SACU1−28.4−29.2−24.5−22.9−21.7−20.6
Source: Botswana authorities and IMF staff estimates and projections.

Percent of non-mineral GDP.

Source: Botswana authorities and IMF staff estimates and projections.

Percent of non-mineral GDP.

17. The contribution of revenue mobilization to fiscal consolidation

  • In staff’s view, broadening the tax base should be an integral pillar of a balanced medium-term fiscal consolidation process. Measures in this regard include an increase in the effective tax rates on income and value added taxes through a judicious rationalization of the large tax expenditures and improvements in tax administration. Tax compliance should also be improved by reducing tax evasion and eliminating loopholes in the tax system. Staff recommends integrating tax expenditure quantifications into the budget process and maintaining tax incentives that provide fast recovery of investments (in the form of accelerated depreciation regime for productive assets) as they are most cost-effective relative to tax holidays.
  • The authorities noted that their strategy for achieving a balanced fiscal consolidation focuses on improving tax administration combined with expenditure restraint. They are fully cognizant of expected reduction of revenues due to depletion of diamond mines in the long run. Their primary focus is on strengthening the administrative capacity of the Botswana Unified Revenue Service (BURS) and simplifying the tax system to encourage tax compliance. Given that their revenue mobilization efforts through making the tax system more efficient, most likely will not fill expected revenue gap to the full extent, they will complement these with putting more emphasis on curtailing expenditures. While they concurred that the negative externalities of tax incentives outweigh their marginal benefits, their rationalization would require more time. Their medium-term expenditure framework, which is expected to be in place by 2016, should also assist their broader goal of a balanced fiscal consolidation.

18. The distortions created by public employment and wage policies in the labor market

  • Staff’s analysis suggests that reforms aimed at reducing rents of public employees and the size of public employment would improve labor market outcomes.7 The cumulative growth of average government sector wages for the period 2001—09 was about 126 percent, much higher than the 75 percent cumulative growth of nominal GDP per worker for the same period. Staff urged the government to articulate a clearer set of measures that would underpin the reduction of the wage bill to improve labor market outcomes. Staff advocated for the government to limit public sector wage awards below nominal GDP per capita growth, which takes into account both inflation and economy-wide productivity gains.8 Given that there is no wage premium at the medium to senior level civil servants, going forward, to cope with the intense regional competition for scarce skilled labor at those levels, the government could use wage decompression, which will give higher wages to high-skilled civil servants.
  • The focus of the authorities’ MTR of NDP 10 is to reduce the size of the government (as a share of GDP) and increase its efficiency. While the authorities took note of the staff’s advice to achieve targeted reduction of the wage bill, they highlighted a potential risk of social tensions when dealing with wages and public employment in an environment of relatively low growth, high unemployment, with labor disputes in the region. They reiterated that, given the complexities in this area, reforms would need to be implemented gradually. They also pointed out that the wage premium of the government is largely concentrated at the lower end of the wage ladder, while the middle and senior civil servants earn relatively lower wages compared with their private sector peers. In the last few years, public sector wage growth has moderated significantly following a three-year wage freeze. With regards to public employment, in some critical areas, the government may need to recruit more staff. Specifically while they have reduced the employment in some sectors of the government, they had to allow an increase in the employment in the Administration of Justices, Attorney General’s office, and in the Corruption Court to help pursue the government’s zero tolerance policy on corruption and deal with the large backlog of important legislative bills. In addition, the process of outsourcing some of the government services to the private sector was slow. To address the issue of skill mismatch in the labor market, the government is reviewing the Botswana Qualification Authority act and is continuing its work on the Internship Program and the Youth Development Fund.

C. Policy Theme 3: Strengthening the Monetary Regime and Enhancing Financial Stability

19. The current exchange rate regime

  • The authorities noted that the crawling peg arrangement continues to serve Botswana well and merits continued support. They noted that the current policy framework remains appropriate given the circumstances, and a major review would only be necessary if and when there is a reason to believe that this is no longer the case.
  • The staff concurred. The current crawling peg regime minimizes the distortions associated with a hard peg while providing some flexibility in the exchange rate to absorb shocks. A shift to a strict peg to the South African rand will hinder the relative price adjustment required for terms of trade shocks given the lack of full price flexibility in both product and factor markets. At the same time, the characteristics of Botswana’s foreign exchange market, in particular “lumpy” diamond revenues that arrive periodically but in very large amounts on “diamond days,” and the lack of institutional readiness are constraints to a fully floating exchange rate regime. Thus, a more liquid foreign exchange market, combined with well developed derivative markets to help hedge volatilities, would be a prerequisite prior to adopting a floating exchange rate regime.
  • Staff encouraged the authorities to continuously look for opportunities to further strengthen the operational aspects of the regime. Staff welcomed the disclosure by the authorities on the Pula currency weights and the rate of crawl. The banks noted that the publication of the weights of the Pula’s currency basket and its rate of crawl has improved trading in the foreign exchange market. The authorities should also regularly assess the optimality of the Pula’s currency basket based on the changes in the underlying trade pattern and structural parameters of the economy. Going forward, staff encourages the authorities to continue to refine their analytic tools for monetary policy analysis and facilitate the deepening of the interbank market including for foreign exchange. These steps toward capacity building would, in their own ways, contribute more broadly to the strengthening of monetary management.

20. Financial sector developments

  • Botswana’s banking system is profitable and well-capitalized with relatively low NPLs.9 However, there are potential vulnerabilities stemming from the high concentration of banks’ loans to households and the recent acceleration in the growth of unsecured lending (Appendix III). Loans to households amount to about 60 percent of total loans in the banking system. The increase in household debt partly reflects the authorities’ desire for enhancing greater financial inclusion. Coming from a relatively low base, and largely backed by public sector wages, which limits the associated credit risk, at this stage, household lending by itself does not pose major risks to financial or macroeconomic stability. At the same time, given the rate at which unsecured lending has been growing, if not contained, this could eventually require macroeconomic policy adjustments and also lead to a large number of debt-distressed households, which could potentially undermine the government’s objective of enhancing greater financial inclusion. Thus, striking an appropriate balance between financial inclusion and stability is an emerging policy challenge.

Botswana: Private Sector Credit Composition, 2013 April

Botswana: Credit Growth Rates, 2008–13

  • The authorities should bolster financial stability including through the use of macro prudential measures to mitigate the risks from the growth in household borrowing. Staff recommends strengthening the authorities’ existing architecture for preserving financial stability to temper the rate of increase in household borrowing. The relevant measures include:
    • Macroprudential tools: Consideration should be given to enforcing a household debt-to-income (DTI) limit or higher risk weights for unsecured lending, and tightening the definition of loan-to-value (LTV) in mortgages as was done in Brazil, Hong Kong SAR and Malaysia and is being considered in other countries in the region. As a first check for potential vulnerabilities in the household sector, the BoB could consider performing a limited asset quality review by investigating a sample of the banks’ loan books. This would highlight how standard risk metrics such as DTI and LTVs are distributed across the banks’ debtors and across the banks themselves.
    • National Credit Bureaus: Financial market participants noted that the lack of a fully functioning national credit reference bureau means that the screening of borrowers is weak.
    • A study of households’ balance sheet: Staff sees merit in carrying out a comprehensive assessment of households’ borrowing, disposable income, and investment activities and monitoring them on a regular basis. The memorandum of understanding between the BoB and Non-Bank Financial Institutions Regulatory Authority (NBFIRA) could help facilitate the compilation of such statistics.
    • Property market monitoring: Staff also recommends continued close monitoring of the developments of the property market. Since 2009, residential property prices have increased by about 75 percent with moderate increases since 2012.
  • The authorities agreed that the pace of credit expansion warrants close monitoring. The BoB has most of the proposed tools at its disposal and is putting together elements of such an architecture through the establishment of its FSD. They stressed that the BoB is closely monitoring trends in household lending and risks to financial stability are low as banks themselves are applying prudential measures including on households’ DTI ratio. The BoB has assigned higher risk weight on both unsecured credit and residential mortgage loans compared with Basel II. The authorities acknowledged that while their surveillance is constrained by the paucity of information on household debt outside the banking system, the non-bank regulator is monitoring the activities of the key micro lenders with the remainder forming a very small part of the overall household debt. At the same time, they argued that it is important to acknowledge that this credit expansion, at least in part, also reflects the continued broadening of the banking industry in Botswana to include more households. Moreover, it should not be presumed that such borrowing is purely for consumption purposes. To prevent debt distress households from turning to another financial institution for borrowing, the government with the ongoing technical assistance from the World Bank is working to establish an integrated credit bureau to serve as the formal repository for both banks and non-banks on households’ credit history and profile. The BoB is also strengthening its capacity to monitor the property market and the Real Estate Institute of Botswana is working toward compiling an index of property prices. The BoB is also increasingly infusing financial stability analysis (disaggregated credit trends/ratios and property market developments) into monetary policy discussions.

21. NBFIRA’s capacity to supervise the rapidly growing NBFIs

  • NBFIs (non-bank financial institutions) have been growing rapidly in recent years and their assets account for about 50 percent of GDP. Furthermore, the cross linkages between NBFIs and the commercial banks have increased. Thus, any large shock to the non-banking system could reverberate through the banking system and pose systemic stress across the financial system and the broader economy. This said, NBFIRA is not yet fully equipped to discharge its mandate due to delays in building a skilled and experienced staff, and a legal and regulatory infrastructure that is not fully in place. Staff advocates for continued strengthening of the regulations on NBFIs, drawing on recommendations of the ongoing technical assistance from the Fund. To prevent less creditworthy households from turning to non-bank lenders at a higher cost, the BoB and NBFIRA should consider addressing regulatory arbitrage gaps between banks and non-banks.10 Staff recommends that NBFIRA steps up its efforts in monitoring the activities of micro lenders and other unregulated financial institutions. The BoB and NBFIRA should conduct a mapping exercise on the inter-linkages between the banking system and the NBFIs. The exercise could cover deposits in banks by NBFIs, loans from banks to NBFIs, off-balance sheet exposures (such as non-life credit insurance sold to banks), cross ownership, common exposures to the property sector and how NBFIs use banks for payments services.
  • The authorities are aware of the capacity issues in NBFIRA and continue to strengthen its skill base and regulatory infrastructure. In addition, the government is putting in place the supporting enabling legislation for pension fund and life insurance institutions, which would include parameters such as minimum capital requirements for non-banks, maximum concentration by borrower and sector, and relevant solvency indicators.

D. Policy Theme 4: Reinvigorating Growth, Enhancing Inclusion and Promoting Economic Diversification

22. Returning to a period of strong growth and enhancing economic diversification11

  • Botswana’s positive growth record over the years has delivered good economic outcomes. However, maintaining strong growth has become a challenge in recent years as in other SMICs in SSA, reflecting the reduced contribution from total factor productivity. In addition, growth has also become less inclusive in recent years based on staff’s analysis of growth incidence curves of the 2002/03 and 2009/10 household income and expenditure surveys (HIES)-see SM/13/22. Declining trend growth may exacerbate Botswana’s already high income inequality and persistent unemployment. Staff stressed that returning to an era of strong growth would require a set of reform-oriented, innovative policies to reinvigorate total factor productivity. These include increasing the quality of public spending, improving the efficiency and effectiveness of the tax system, reducing the costs of doing business, and diversifying the economy. In addition, given the negative impact of income inequalities on growth spells, staff recommended policies to target inequality more effectively, including fostering high quality investment in health and education.12
  • The nature of Botswana’s resource rich and landlocked economy is an obstacle to diversification, and leveraging its strong physical capital and institutions could improve diversification prospects. In addition, the restrictive service sector and shortage of high-skilled workers, has hindered knowledge transfer and innovation. Staff called for an approach to diversification that leverages Botswana’s areas of comparative advantage. The authorities should improve the skill base of the labor force to explore knowledge-based service sectors, a strategy that was pursued by Chile and other successful diversification cases. Delivering good outcomes from these policies would require supportive measures to liberalize the service sectors and reduce the domestic regulatory burden on firms.
  • The authorities are aware of the economy’s long-term challenges, and the recent MTR of NDP 10 aims to address them. The MTR of NDP 10 stressed the government’s intention to reinvigorate reforms and lay the foundations for greater private sector development in Botswana. The government’s multi-pronged approach to diversification (through the Economic Diversification Drive-EDD) leverages Botswana’s areas of comparative advantage to support new engines of growth. Given the country’s well-established infrastructure for mineral development, the focus is on expanding the mineral product space beyond diamonds, including downstream sectors which have relatively large employment multipliers, as well as cost-effective service sectors. In addition, the authorities noted that policy coordination among government agencies that was initiated in the thematic working groups for the MTR of NDP 10 was to ensure macro-micro congruence and overall consistency of the policy initiatives for boosting job creation and diversification. The authorities are also focusing on improving the business climate in the country in response to Botswana’s reduced rankings in the doing business indicators.

Average Total Factor Productivity

(Percent of South Africa)

Sources: World Bank.

Services Trade Restrictive Index

(Higher Index=More Restrictive)

Sources: World Bank.

E. Other Surveillance Issues

23. Data quality is broadly adequate for surveillance, although there is room for improvement. While steady progress has been made by Statistics Botswana most notably for rebasing the country’s national income accounts, challenges remain in the compilation of some of the components of the national accounts. In this respect, staff sees merit for further Fund technical assistance in the area of national accounts. There is also room for improvement in the compilation of the balance of payments statistics, including data on trade in services. Following the relocation of the aggregation and sales functions of the Diamond Trading Company (DTC, a De Beers subsidiary) from London to Gaborone, the BoB has introduced detailed new tables for import and export of diamonds to present the rising re-exports trade for diamonds. The BoB and Statistics Botswana are also working closely on the appropriate treatment of diamond related re-export trade both in the national accounts and balance of payments. Staff also welcomed the BoB’s efforts to collect information on property prices. Finally, in line with some of its upper-middle income country peers, staff commends Botswana’s plan to move towards subscribing to the IMF’s Special Data Dissemination Standard.

Figure 5.Botswana’s Progress on Economic and Export Diversification Remains Lackluster

Staff Appraisal

24. Botswana has made impressive strides in economic development over the past two decades. The positive growth record registered by the country has raised overall incomes and delivered good economic outcomes.

25. However, in recent years, Botswana’s trend growth has softened in the midst of persistent unemployment and high income inequality. Reducing the relative size of the government (as a share of GDP) would improve labor market outcomes, create more productive investment opportunities for the financial sector, and enhance economic diversification.

26. The recent mid-term review (MTR) the 10th National Development Plan (NDP10) serves as the authorities’ blueprint for structural transformation. Staff welcomes the MTR of NDP 10, which stressed the government’s intention to reinvigorate the implementation of reforms to lay the foundations for greater private sector development in Botswana.

27. The uncertain global economic environment and the potential spillovers to Botswana call for a delicate balancing act in the implementation of macroeconomic policies in the near term. Botswana’s fiscal and external positions are very strong, thanks to the government’s prudent macroeconomic management. A “growth-friendly” fiscal consolidation strategy adopted in the FY2013/14 budget is appropriate. In the near term, staff advocates for a broadly neutral monetary policy stance. In a more adverse scenario, the authorities should allow the automatic stabilizers to work on the revenue side. In such adverse scenarios, there might be some scope to ease monetary policy given that inflationary pressures would likely decline.

28. The authorities’ medium-term fiscal strategy adopted in the FY2013/14 budget should help to rebuild the policy buffers. In the staff’s view, the pace of the government’s medium term fiscal consolidation strategy is appropriate.

29. Staff urges the government to articulate a clearer set of measures to underpin the reduction of the wage bill as a share of GDP, which should help improve labor market outcomes. Botswana’s public employment and wage policies lead to high reservation wages and attract a larger share of labor force into public sector at the expense of the private sector.

30. Broadening the tax base would make the process of fiscal adjustment more balanced. This would require enhanced efforts in streamlining the existing large and discretionary tax expenditures. Staff welcomes efforts by the authorities toward a simplified tax system with high compliance and a low cost of administration as articulated in the recent mid-term review of NDP 10.

31. Botswana’s exchange rate regime has served the country well. The government’s publication of the weights of the Pula currency basket and its rate of crawl bodes well for enhancing the transparency of the exchange rate regime.

32. The government’s emphasis on greater financial inclusion through its financial sector development strategy, while preserving the stability of the financial system, is appropriate. Staff recommends that the authorities strengthen their existing architecture for monitoring financial sector developments to temper the rate of increase in household borrowing and thereby help minimize the associated vulnerabilities. In this context, staff welcomes efforts by the Bank of Botswana in strengthening the work of its Financial Stability Division.

33. Returning to an era of strong growth would require a set of reform-oriented, innovative policies to reinvigorate economy-wide productivity growth. These include increasing the quality of public spending, improving the efficiency and effectiveness of the tax system, including by fighting tax evasion, reducing the cost of doing business, and diversifying the economy.

34. The government’s multi-pronged approach to diversification that leverages Botswana’s areas of comparative advantage is a step in the right direction. Delivering good outcomes from these policies would require supportive measures to liberalize the service sectors and reduce the domestic regulatory burden on firms.

35. Staff recommends that the next Article IV consultation with Botswana take place on the standard 12-month cycle.

Table 2.Botswana: Risk Assessment Matrix (RAM)1
Sources of RiskRelative LikelihoodImpact if RealizedStaff Advice on Policy Response
External Risks
Short termGlobal oil shock triggered by geopolitical eventsLowMediumThe authorities have traditionally allowed a full pass-through of the oil shock accommodating its first round effects on inflation while containing second-round effects if generalized price pressures begin to emerge.
Oil prices could increase beyond the cyclical levels for geopolitical considerations. Because Botswana imports all fuel requirements, terms of trade shocks from the fuel price hike would adversely affect domestic demand and also inflation in Botswana.
Short/Medium termRe-emergence of financial stress in the euro area and a protracted period of slower European growthMedium/HighMedium to HighSee paragraph 15
As a result of incomplete delivery of policy commitments in the euro area, financial stress could re-emerge and bank-sovereign-real economy links could re-intensify. The consequences would include further financial fragmentation and negative shocks to growth that could lead to a protracted period of slower European growth. This would directly affect Botswana’s mineral exports, which count for almost 75 percent of total exports.
Deeper-than-expected slowdown in emerging market economiesMediumMedium to HighSee paragraph 15
Disappointing activity in emerging markets would primarily affect commodity prices, which, combined with the increased share of China and India in Botswana’s foreign trade, would have a particularly significant impact on Botswana’s export earnings.
Emerging markets capital flow reversal and distortions from unconventional monetary policyMediumMediumSee paragraph 15
While Botswana has not been significantly affected by the recent surge in capital inflows, a reversal of these inflows would raise the risk premium and could have large macroeconomic consequences for South Africa. The impact could spillover to Botswana, given Botswana’s strong economic and financial linkages with South Africa, including a significant share of South African rand in Botswana’s currency basket.
Growth slowdown and persistent labor unrest in South AfricaMedium/LowLowSee paragraph 15
Key channels of impact could arise from the rand being part of Botswana’s currency basket and from the close financial linkages—both banks and nonbanks. In the real sector, the disruptions of supply of inputs from South Africa, including electricity, could negatively affect domestic production. The resultant slower activity in South Africa would have an indirect impact on Botswana’s fiscal position through the risk of lower SACU transfers.
Domestic Risks
Short termDelayed commencement of the Morupule B power plantMediumMedium to HighSee paragraph 15
A delay in the full commencement of the Morupule B power plant would weigh heavily on the domestic economy going forward, lowering electricity output and extending to the general private sector that bears the opportunity cost of power shortages. In addition, import bills for electricity and fuel will remain at record-high levels.
Short/Medium termDeterioration of credit portfolio of unsecured lendingLowMedium to HighSee paragraph 20
A deterioration of the credit portfolio of unsecured lending could undermine the soundness of Botswana’s banking system because the bulk of household credit—which counts for more than 55 percent of banks’ total loans—is unsecured loans. In addition, this shock could easily propagate through the nonbank sector given the strong linkages between banks and non-banks.

The RAM shows events that could materially alter the baseline path—the scenario most likely to materialize in staff’s view. The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability of 30 percent or more). The RAM reflects staff views on the source of risks and overall level of concern at the time of discussions with the authorities.

The RAM shows events that could materially alter the baseline path—the scenario most likely to materialize in staff’s view. The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability of 30 percent or more). The RAM reflects staff views on the source of risks and overall level of concern at the time of discussions with the authorities.

Table 3.Botswana: Selected Economic and Financial Indicators, 2009–17
200920102011201220132014201520162017
(Annual percentage change, unless otherwise indicated)
National income and prices
Real GDP1−7.88.66.14.23.94.14.44.14.0
Mineral−46.222.7−2.3−7.01.50.52.42.42.4
Nonmineral25.06.27.86.24.34.74.74.34.3
Consumer prices5.87.49.27.46.15.55.35.25.2
Diamond production (millions of carats)17.722.823.020.921.421.421.922.422.9
External sector
Exports of goods and services, f.o.b. (US$)−26.833.441.7−9.73.11.83.93.93.9
Of which: diamonds−30.349.938.37.13.71.33.63.63.5
Imports of goods and services, f.o.b. (US$)−4.717.928.07.3−3.20.82.63.74.2
Terms of trade4.6−4.4−0.33.65.71.91.53.23.0
Nominal effective exchange rate4.24.6−4.7−7.8
Real effective exchange rate12.58.3−0.8−3.5
(Percentage change with respect to M2 at the beginning of the period)
Money and banking
Net foreign assets−34.3−17.525.40.211.25.86.37.79.0
Net domestic assets33.029.9−21.07.33.74.54.32.81.4
Broad money (M2)−1.312.44.37.415.010.310.610.610.4
Velocity (nonmineral GDP relative to M3)1.61.61.71.81.81.91.91.91.9
Credit to the private sector5.16.111.813.911.87.87.27.77.4
(Percent of GDP, unless otherwise indicated)
Investment and savings1
Gross investment (including change in inventories)37.935.438.739.338.336.436.035.234.6
Gross savings27.629.938.534.536.535.235.735.435.5
Central government finances3
Total revenue and grants37.432.436.335.933.433.333.233.133.0
Total expenditure and net lending50.939.936.535.733.231.830.930.129.2
Overall balance (deficit–)−13.5−7.5−0.20.20.21.52.33.13.8
Non-mineral primary balance4−29.9−25.9−20.1−13.8−11.5−10.0−8.9−7.8−6.8
Total central government debt17.819.419.418.115.913.811.910.38.9
External sector
Current account balance−10.2−5.4−0.2−4.9−1.8−1.2−0.30.20.9
Balance of payments−6.3−7.03.3−0.8−1.4−1.1−0.60.20.7
External public debt514.911.814.914.512.410.79.17.76.5
(Millions of US$, unless otherwise indicated)
Gross official reserves (end of period)8,6697,8838,3868,2708,0607,8887,7917,8217,958
Of which: Pula Fund6,5436,9386,901
Months of imports of goods and services616.611.811.111.010.610.19.69.29.0
Percent of GDP85.457.352.252.847.745.142.440.639.7
Financial position in the IMF (as of May 31, 2012)
Holdings of currency (percent of quota)66.7
Holdings of SDRs (percent of allocation)149.4
Quota (SDR millions)87.8
Social indicators
Per capita GDP (2010): US$8,117; Life expectancy at birth (2007): 51
Poverty headcount ratio at national poverty line (percent of population, 2008):30.3
Sources: Botswana authorities and IMF staff estimates and projections.

Calendar year.

Refers to the growth of value added of sectors other than mining, excluding statistical adjustments. The latter includes financial intermediation services indirectly measured (FISIM), taxes on products, and subsidies.

Year beginning April 1.

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.

Includes publicly guaranteed debt.

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

Sources: Botswana authorities and IMF staff estimates and projections.

Calendar year.

Refers to the growth of value added of sectors other than mining, excluding statistical adjustments. The latter includes financial intermediation services indirectly measured (FISIM), taxes on products, and subsidies.

Year beginning April 1.

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.

Includes publicly guaranteed debt.

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

Table 4a.Botswana: Central Government Operations, 2008/09–2016/171
2008/092009/102010/112011/122012/132013/142014/152015/162016/17
(Millions of pula)
Total revenue and grants29,56329,02331,21038,48740,98543,52248,01852,85958,138
Total revenue28,94128,25430,88137,95440,88143,08647,53352,32357,572
Tax revenue20,45520,04520,50524,84729,47031,74134,69238,29042,222
Income taxes8,0597,9219,36211,2499,23712,99713,89615,31616,869
Mineral3,4512,3602,9495,1363,2624,0293,9214,2734,664
Nonmineral4,6085,5616,4136,1135,9758,9689,97511,04212,204
Taxes on goods and services24,3773,9434,6384,8515,7164,7475,2805,8456,460
Customs Union receipts37,7507,9316,2078,42414,21613,68315,16616,74318,466
Other268250298323301314349387427
Nontax revenue8,4868,20910,37513,10711,41111,34512,84114,03315,351
Mineral royalties and dividends6,7316,7299,11110,6878,8149,22510,59711,54912,606
Interest523237313842465156
Property income−202211131158116211121134149
Of which: BoB transfers856008641,4900000
Fees and charges1,0491,2371,0971,3679521,8672,0762,2992,540
Grants623769329533104436485537566
Total expenditure and net lending35,15039,49038,41738,66840,71943,24245,92049,25252,775
Current expenditure23,88925,73227,08928,83632,08732,19434,11736,19038,396
Wages and salaries8,7019,25211,89912,94114,55014,48115,32516,15617,009
Interest282370524587672778702689732
Other14,90616,11014,66715,30816,86516,93518,09119,34420,655
Of which: grants and subsidies7,0588,1068,3487,1927,1937,1937,7208,2548,814
Capital expenditure11,45813,00611,3729,9568,27811,10311,86113,12314,447
Net lending−197752−44−124354−55−58−61−68
Primary balance (deficit -)−6,213−10,129−6,721−489−5901,0162,7534,2466,038
Overall balance−5,587−10,467−7,208−1812662802,0983,6075,363
Financing4,69610,4677,208181−266−280−2,098−3,607−5,363
Foreign (net)−1746,8523,621871−1,329−72−836−974−944
Drawing1397,1953,7541,11802652046161
Amortization−255−343−201−166−1,266−275−977−972−942
IMF transactions (net)4−58068−80−63−63−63−63−63
Domestic4,8703,6153,587−6901,063−208−1,262−2,633−4,419
Of which:
Issuance1,9541,0503,6052,8241,9402,0002,0002,0002,000
Amortization−6000−2,101−2,201−2,160−2,000−2,000−2,000−2,000
Change in cash balance (- increase)4,6076,7882,0462,2751,796−208−1,262−2,633−4,419
Memorandum items:
Non-mineral primary balance5−16,395−19,218−18,781−16,312−12,666−12,238−11,766−11,576−11,232
Sources: Ministry of Finance and Development Planning; and IMF staff estimates and projections.

Fiscal year begins on April 1.

Refers to sales tax and VAT.

SACU receipts consist of external trade and excises on imported goods as well as a development component derived from excises.

These transactions reflect Botswana’s SDR allocation and contribution to the IMF’s General Resource Account (GRA).

The non-mineral primary balance is computed as the difference between non-mineral revenue and expenditure. (excluding interest payments and receipts, which are roughly proxied by BoB transfers and interest).

Sources: Ministry of Finance and Development Planning; and IMF staff estimates and projections.

Fiscal year begins on April 1.

Refers to sales tax and VAT.

SACU receipts consist of external trade and excises on imported goods as well as a development component derived from excises.

These transactions reflect Botswana’s SDR allocation and contribution to the IMF’s General Resource Account (GRA).

The non-mineral primary balance is computed as the difference between non-mineral revenue and expenditure. (excluding interest payments and receipts, which are roughly proxied by BoB transfers and interest).

Table 4b.Central Government Operations, 2009/10–2017/18

(GFSM 2001 Classification) 1

2009/102010/112011/122012/132013/142014/152015/162016/172017/18
(Millions of pula)
Revenue29,02331,21038,48740,98543,52248,01852,85958,13863,915
Taxes20,04520,50524,84729,47031,74134,69238,29042,22246,533
Taxes on income, profits, and capital gains7,9219,36211,2499,23712,99713,89615,31616,86918,574
Payable in the mineral economy2,3602,9495,1363,2624,0293,9214,2734,6645,101
Payable in the non-mineral economy5,5616,4136,1135,9758,9689,97511,04212,20413,472
Taxes on property273560513842475257
Taxes on goods and services4,1664,9005,1135,9645,0235,5866,1846,8357,545
Value added and sales tax3,9434,6384,8515,7164,7475,2805,8456,4607,131
Motor vehicle taxes189229232220224249276305337
Other343330295157637077
Taxes on international trade7,9316,2098,42514,21813,68415,16716,74318,46720,357
Customs Union receipts27,9316,2078,42414,21613,68315,16616,74318,46620,356
Taxes on exports121211111
Grants769329533104436485537566566
Other receipts8,20910,37512,2439,92111,34512,84114,03315,35116,817
Property income6,9729,27910,8768,9699,47810,76511,73412,81014,012
Mineral royalties and dividends6,7299,11110,6878,8149,22510,59711,54912,60613,786
Interest243168189155253168186205226
Property interest income3211131158116211121134149164
Other Interest323731384246515662
Fees and charges1,2371,0971,3679521,8672,0762,2992,5402,804
Expense25,73227,08928,83632,08732,19434,11736,19038,39640,791
Compensation of employees9,25211,89912,94114,55014,48115,32516,15617,00917,898
Purchases of goods and services8,0046,3198,1169,6729,74210,37211,09011,84212,638
Interest370524587672778702689732849
Grants and subsidies8,1068,3487,1927,1937,1937,7208,2548,8149,406
Gross Operating Balance3,2914,1209,6518,89711,32813,90016,66919,74223,124
Net adquisition of nonfinancial assets13,00611,3729,9568,27811,10311,86113,12314,44715,847
Net lending/borrowing−9,715−7,252−3056202252,0393,5465,2957,277
Transactions in financial assets and liabilities−9,715−7,252−3056222252,0393,5465,2957,277
Net adquisition of financial assets−6,036−2,089−2,399−1,4401531,2032,5724,3516,330
Domestic−6,036−2,089−2,399−1,4401531,2032,5724,3516,330
Currency and deposits−6,788−2,046−2,275−1,7962081,2622,6334,4196,404
Loans (net lending)752−44−124354−55−58−61−68−75
Foreign000000000
Net incurrence of liabilities3,6795,162−2,094−2,062−72−836−974−944−948
Domestic−3,1731,541−2,965−73300000
Loans1,0503,6052,8241,9402,0002,0002,0002,0002,000
Amortization0−2,101−2,201−2,160−2,000−2,000−2,000−2,000−2,000
Other−4,22337−3,588−51300000
Foreign6,8523,621871−1,329−72−836−974−944−948
Loans7,1953,7541,1180265204616161
Amortization due (paid)−343−201−166−1,266−275−977−972−942−946
Other068−80−63−63−63−63−63−63
Memo items:
Overall balance−10,467−7,208−1812692802,0983,6075,3637,352
Non-mineral primary balance4−19,218−18,781−16,312−12,666−12,238−11,766−11,576−11,232−10,749
Source: Ministry of Finance and Development Planning and Fund staff estimates.

Fiscal year begins on April 1.

SACU receipts consist of taxes on international trade and excise on imported goods as well as the impact of a development component derived from excises.

Includes transfers received from the Bank of Botswna (BoB) on account of interest income on government investments made by the BoB on behalf of the government.

The non-mineral primary balance is computed as the difference between non-mineral revenue and expenditure (excluding interest payments and receipts, which are roughly proxied by BoB transfers and interest).

Source: Ministry of Finance and Development Planning and Fund staff estimates.

Fiscal year begins on April 1.

SACU receipts consist of taxes on international trade and excise on imported goods as well as the impact of a development component derived from excises.

Includes transfers received from the Bank of Botswna (BoB) on account of interest income on government investments made by the BoB on behalf of the government.

The non-mineral primary balance is computed as the difference between non-mineral revenue and expenditure (excluding interest payments and receipts, which are roughly proxied by BoB transfers and interest).

Table 4c.Central Government Operations, 2009/10–2017/18

(GFSM 2001 Classification)1

2009/102010/112011/122012/132013/142014/152015/162016/172017/18
(Percent of GDP)
Revenue37.432.436.335.933.433.333.233.133.0
Taxes25.821.323.525.824.424.124.024.024.0
Taxes on income, profits, and capital gains10.29.710.68.110.09.69.69.69.6
Payable in the mineral economy3.03.14.92.93.12.72.72.72.6
Payable in the non-mineral economy7.26.75.85.26.96.96.96.97.0
Taxes on property0.00.00.10.00.00.00.00.00.0
Taxes on goods and services5.45.14.85.23.93.93.93.93.9
Value added and sales tax5.14.84.65.03.63.73.73.73.7
Motor vehicle taxes0.20.20.20.20.20.20.20.20.2
Other0.00.00.00.00.00.00.00.00.0
Taxes on international trade10.26.58.012.510.510.510.510.510.5
Customs Union receipts210.26.58.012.510.510.510.510.510.5
Taxes on exports0.00.00.00.00.00.00.00.00.0
Grants1.00.30.50.10.30.30.30.30.3
Other receipts10.610.811.68.78.78.98.88.78.7
Property income9.09.610.37.97.37.57.47.37.2
Mineral royalties and dividends8.79.510.17.77.17.37.37.27.1
Interest0.30.20.20.10.20.10.10.10.1
Property interest income30.30.10.10.10.20.10.10.10.1
Other Interest0.00.00.00.00.00.00.00.00.0
Fees and charges1.61.11.30.81.41.41.41.41.4
Expense33.228.227.228.124.723.722.721.921.1
Compensation of employees11.912.412.212.811.110.610.19.79.2
Purchases of goods and services10.36.67.78.57.57.27.06.76.5
Interest0.50.50.60.60.60.50.40.40.4
Grants and subsidies10.48.76.86.35.55.45.25.04.9
Gross Operating Balance4.24.39.17.88.79.610.511.211.9
Net adquisition of nonfinancial assets16.811.89.47.38.58.28.28.28.2
Net lending/borrowing−12.5−7.5−0.30.50.21.42.23.03.8
Transactions in financial assets and liabilities−12.5−7.5−0.30.50.21.42.23.03.8
Net adquisition of financial assets−7.8−2.2−2.3−1.30.10.81.62.53.3
Domestic−7.8−2.2−2.3−1.30.10.81.62.53.3
Currency and deposits−8.7−2.1−2.1−1.60.20.91.72.53.3
Loans (net lending)1.00.0−0.10.30.00.00.00.00.0
Foreign0.00.00.00.00.00.00.00.00.0
Net incurrence of liabilities4.75.4−2.0−1.8−0.1−0.6−0.6−0.5−0.5
Domestic−4.11.6−2.8−0.60.00.00.00.00.0
Loans1.43.72.71.71.51.41.31.11.0
Amortization0.0−2.2−2.1−1.9−1.5−1.4−1.3−1.1−1.0
Other−5.40.0−3.4−0.40.00.00.00.00.0
Foreign8.83.80.8−1.2−0.1−0.6−0.6−0.5−0.5
Loans9.33.91.10.00.20.10.00.00.0
Amortization due (paid)−0.4−0.2−0.2−1.1−0.2−0.7−0.6−0.5−0.5
Other0.00.1−0.1−0.10.00.00.00.00.0
Memo items:
Overall balance−13.5−7.5−0.20.20.21.52.33.13.8
Non-mineral primary balance4−24.8−19.5−15.4−11.1−9.4−8.2−7.3−6.4−5.6
Source: Ministry of Finance and Development Planning and Fund staff estimates.

Fiscal year begins on April 1.

SACU receipts consist of taxes on international trade and excise on imported goods as well as the impact of a development component derived from excises.

Includes transfers received from the Bank of Botswna (BoB) on account of interest income on government investments made by the BoB on behalf of the government.

The non-mineral primary balance is computed as the difference between non-mineral revenue and expenditure (excluding interest payments and receipts, which are roughly proxied by BoB transfers and interest).

Source: Ministry of Finance and Development Planning and Fund staff estimates.

Fiscal year begins on April 1.

SACU receipts consist of taxes on international trade and excise on imported goods as well as the impact of a development component derived from excises.

Includes transfers received from the Bank of Botswna (BoB) on account of interest income on government investments made by the BoB on behalf of the government.

The non-mineral primary balance is computed as the difference between non-mineral revenue and expenditure (excluding interest payments and receipts, which are roughly proxied by BoB transfers and interest).

Table 4d.Botswana: Central Government Operations, 2008/09–2016/171
2008/092009/102010/112011/122012/132013/142014/152015/162016/17
(Percent of GDP)
Total revenue and grants39.437.432.436.335.933.433.333.233.1
Total revenue38.636.432.135.835.933.133.032.932.8
Tax revenue27.325.821.323.525.824.424.124.024.0
Income taxes10.710.29.710.68.110.09.69.69.6
Mineral4.63.03.14.92.93.12.72.72.7
Nonmineral6.17.26.75.85.26.96.96.96.9
Taxes on goods and services25.85.14.84.65.03.63.73.73.7
Customs Union receipts310.310.26.58.012.510.510.510.510.5
Other0.40.30.30.30.30.20.20.20.2
Nontax revenue11.310.610.812.410.08.78.98.88.7
Mineral royalties and dividends9.08.79.510.17.77.17.37.37.2
Interest0.10.00.00.00.00.00.00.00.0
Property income−0.30.30.10.10.10.20.10.10.1
Of which: BoB transfers1.10.00.00.81.30.00.00.00.0
Fees and charges1.41.61.11.30.81.41.41.41.4
Grants0.81.00.30.50.10.30.30.30.3
Total expenditure and net lending46.950.939.936.535.733.231.830.930.1
Current expenditure31.933.228.227.228.124.723.722.721.9
Wages and salaries11.611.912.412.212.811.110.610.19.7
Interest0.40.50.50.60.60.60.50.40.4
Other19.920.815.214.514.813.012.512.111.8
Of which: grants and subsidies9.410.48.76.86.35.55.45.25.0
Capital expenditure15.316.811.89.47.38.58.28.28.2
Net lending−0.31.00.0−0.10.30.00.00.00.0
Primary balance (deficit -)−8.3−13.1−7.0−0.5−0.50.81.92.73.4
Overall balance−7.5−13.5−7.5−0.20.20.21.52.33.1
Financing6.313.57.50.2−0.2−0.2−1.5−2.3−3.1
Foreign (net)−0.28.83.80.8−1.2−0.1−0.6−0.6−0.5
Drawing0.29.33.91.10.00.20.10.00.0
Amortization−0.3−0.4−0.2−0.2−1.1−0.2−0.7−0.6−0.5
IMF transactions−0.10.00.1−0.1−0.10.00.00.00.0
Domestic6.54.73.7−0.70.9−0.2−0.9−1.7−2.5
Of which:
Issuance2.61.43.72.71.71.51.41.31.1
Amortization−0.80.0−2.2−2.1−1.9−1.5−1.4−1.3−1.1
Change in cash balance (- increase)6.18.72.12.11.6−0.2−0.9−1.7−2.5
Memorandum items:
Non-mineral primary balance4−28.5−29.9−25.9−20.1−13.8−11.5−10.0−8.9−7.8
Nominal GDP (in current of local currency)757896106114130144159176
Sources: Ministry of Finance and Development Planning; and IMF staff estimates and projections.

Fiscal year begins on April 1.

Refers to sales tax and VAT.

SACU receipts consist of external trade and excises on imported goods as well as a development component derived from excises.

The non-mineral primary balance is computed as the difference between non-mineral revenue and expenditure (excluding interest payments and receipts, which are roughly proxied by BoB transfers and interest).

Sources: Ministry of Finance and Development Planning; and IMF staff estimates and projections.

Fiscal year begins on April 1.

Refers to sales tax and VAT.

SACU receipts consist of external trade and excises on imported goods as well as a development component derived from excises.

The non-mineral primary balance is computed as the difference between non-mineral revenue and expenditure (excluding interest payments and receipts, which are roughly proxied by BoB transfers and interest).

Table 4e.Botswana: Central Government Operations, 2007/08–2016/171
2007/082008/092009/102010/112011/122012/132013/142014/152015/162016/17
(Percent of non-mineral GDP)
Total revenue and grants57.651.345.143.047.444.641.140.740.540.3
Total revenue56.450.243.942.646.844.440.740.340.139.9
Tax revenue34.735.531.228.330.632.030.029.429.329.3
Income taxes12.814.012.312.913.910.012.311.811.711.7
Mineral4.96.03.74.16.33.53.83.33.33.2
Nonmineral7.88.08.68.87.56.58.58.58.58.5
Taxes on goods and services25.77.66.16.46.06.24.54.54.54.5
Customs Union receipts315.813.512.38.610.415.512.912.912.812.8
Other0.50.50.40.40.40.30.30.30.30.3
Nontax revenue21.714.712.814.316.212.410.710.910.810.6
Mineral royalties and dividends17.211.710.512.613.29.68.79.08.98.7
Interest0.10.10.00.10.00.00.00.00.00.0
Property income0.4−0.40.30.20.20.10.20.10.10.1
Of which: BoB transfers1.81.50.00.01.11.60.00.00.00.0
Fees and charges2.11.81.91.51.41.01.81.81.81.8
Grants1.21.11.20.50.70.10.40.40.40.4
Total expenditure and net lending49.961.061.452.947.744.340.839.037.736.6
Current expenditure37.441.540.037.335.534.930.428.927.726.6
Wages and salaries13.815.114.416.416.015.813.713.012.411.8
Interest0.50.50.60.70.70.70.70.60.50.5
Other23.125.925.020.218.918.316.015.314.814.3
Of which: grants and subsidies9.812.212.611.58.97.86.86.56.36.1
Capital expenditure13.219.920.215.712.39.010.510.110.110.0
Net lending−0.6−0.31.2−0.1−0.20.4−0.10.00.00.0
Primary balance (deficit -)6.2−10.8−15.7−9.3−0.6−0.61.02.33.34.2
Overall balance7.7−9.7−16.3−9.9−0.20.30.31.82.83.7
Memorandum items:
Non-mineral revenue35.433.631.026.427.931.428.628.428.428.3
Non-mineral primary balance4−16.0−28.5−29.9−25.9−20.1−13.8−11.5−10.0−8.9−7.8
Non-mineral GDP (fiscal year; millions of pula)49,70857,62164,32072,57481,12391,980105,967117,864130,477144,205
Sources: Ministry of Finance and Development Planning; and IMF staff estimates and projections.

Fiscal year begins on April 1.

Refers to sales tax and VAT.

SACU receipts consist of external trade and excises on imported goods as well as a development component derived from excises.

The non-mineral primary balance is computed as the difference between non-mineral revenue and expenditure (excluding interest payments and receipts, which are roughly proxied by BoB transfers and interest).

Sources: Ministry of Finance and Development Planning; and IMF staff estimates and projections.

Fiscal year begins on April 1.

Refers to sales tax and VAT.

SACU receipts consist of external trade and excises on imported goods as well as a development component derived from excises.

The non-mineral primary balance is computed as the difference between non-mineral revenue and expenditure (excluding interest payments and receipts, which are roughly proxied by BoB transfers and interest).

Table 5.Botswana: Balance of Payments, 2008–2017
Est.Projections
2008200920102011201220132014201520162017
(US$ millions, unless otherwise indicated)
Current account balance39.7−1,040.9−744.4−36.7−703.0−272.5−188.1−57.736.3167.4
Trade balance−340.1−1,206.4−926.9−732.9−1,879.5−1,404.1−1,351.3−1,303.3−1,332.1−1,361.6
Exports, f.o.b.4,835.93,449.94,635.56,449.56,016.76,204.96,316.86,559.96,816.27,079.9
Diamonds3,068.72,139.53,207.84,435.24,748.34,923.64,986.15,167.35,352.35,541.2
Other raw materials948.8582.3686.2574.9530.5515.9531.8551.4573.7595.8
Other818.5728.2741.51,439.4737.8765.3799.0841.2890.2942.9
Imports, f.o.b−5,176.0−4,656.3−5,562.5−7,182.4−7,896.2−7,609.0−7,668.1−7,863.2−8,148.3−8,441.5
Services−208.7−428.6−432.7−338.6−457.4−458.0−455.6−469.5−488.4−556.5
Transportation−67.6−77.4−44.6−117.3−172.3−164.0−156.3−163.7−170.0−207.6
Travel6.3−27.2−10.1−48.3−74.7−77.1−78.4−76.5−80.1−101.4
Other services−147.4−324.0−378.0−172.9−210.4−216.9−220.8−229.3−238.3−247.5
Income−636.7−262.7−554.5−59.6−40.7−167.8−169.4−189.2−138.33.6
Current transfers1,225.2856.81,169.71,094.31,674.51,757.51,788.21,904.31,995.02,081.9
SACU receipts1,146.91,107.5977.71,153.91,677.41,694.41,688.91,775.31,859.81,940.8
Capital and financial account725.21,142.2−404.1807.1300.662.616.7−39.3−6.6−30.6
Capital account0.00.03.40.40.00.00.00.00.00.0
Financial account725.21,142.2−407.4806.8300.662.616.7−39.3−6.6−30.6
Direct investment616.9123.6−7.4425.7302.9325.0308.1296.1284.1272.7
Portfolio investment531.7−331.7−402.4−213.9−84.8−94.6−93.0−93.3−93.6−93.5
Other investment−423.41,350.32.3594.982.4−167.9−198.4−242.0−197.1−209.8
Assets−355.6338.7−222.582.3−64.4−184.2−162.8−173.9−123.9−128.1
Liabilities−67.81,011.6224.9512.7146.816.3−35.7−68.1−73.2−81.7
Net government long-term borrowing−13.4899.3−74.8450.7−100.0−45.6−71.8−95.2−91.6−86.3
Other net private long-term borrowing−106.7448.053.6138.4151.0162.1138.0133.5129.7120.7
Short-term borrowing52.350.1358.9−80.8−98.7−100.3−101.9−106.5−111.3−116.1
Reserve assets (increase–)−1,089.3639.3960.4−503.1116.5209.9171.497.0−29.6−136.8
Net errors and omissions324.5−740.6188.1−267.3286.00.00.00.00.00.0
Memorandum items:(Percent of GDP, unless otherwise indicated)
Balance of payments9.7−6.3−7.03.3−0.8−1.4−1.1−0.60.20.7
Current account0.4−10.2−5.4−0.2−4.9−1.8−1.2−0.30.20.9
Trade balance−3.0−11.9−6.7−4.8−13.0−9.0−8.4−7.7−7.5−7.4
Exports of goods43.234.033.742.141.740.039.438.938.638.4
Of which: diamonds27.421.123.328.932.931.731.130.730.330.1
Imports of goods46.245.840.446.854.749.047.846.746.145.8
Services balance−1.9−4.2−3.1−2.2−3.2−2.9−2.8−2.8−2.8−3.0
Income and transfers balance5.35.84.56.711.310.210.110.210.511.3
Financial account6.511.2−3.05.32.10.40.1−0.20.0−0.2
Direct investment5.51.2−0.12.82.12.11.91.81.61.5
Portfolio investment4.7−3.3−2.9−1.4−0.6−0.6−0.6−0.6−0.5−0.5
Other investment−3.813.30.03.90.6−1.1−1.2−1.4−1.1−1.1
(Annual percentage change, unless otherwise indicated)
Export volumes−15.9−29.017.625.2−6.42.10.62.62.72.6
Import volumes22.8−6.50.215.614.40.81.52.85.65.4
Terms of trade4.24.6−4.4−0.33.65.71.91.53.23.0
End-of-year reserves (US$ millions)9,115.68,668.87,883.18,386.18,269.68,059.87,888.47,791.47,821.07,957.8
(Months of imports of goods and services)120.516.611.811.111.010.610.19.69.29.0
Source: Bank of Botswana; IMF staff estimates.

Months of prospective imports.

Source: Bank of Botswana; IMF staff estimates.

Months of prospective imports.

Table 6.Botswana: Monetary Survey, 2008–2017
2008200920102011201220132014201520162017
(Millions of pula, end of period)
Net foreign assets72,78159,31252,55063,59663,68269,17072,42176,31581,61688,405
Bank of Botswana68,36456,82349,58558,88557,88461,87063,69565,98870,08775,563
Assets68,54157,84750,77660,20159,22363,20965,03467,32771,42676,902
Liabilities−127−421−612−641−1,339−1,339−1,339−1,339−1,339−1,339
Commercial banks4,4162,4892,9654,7105,7997,3008,72610,32711,52912,842
Assets6,0593,8555,8385,5247,1158,61710,04311,64412,84614,158
Liabilities−1,642−1,365−2,873−813−1,317−1,317−1,317−1,317−1,317−1,317
Net domestic assets−33,553−20,596−9,016−18,174−14,880−13,067−10,538−7,850−5,910−4,843
Net domestic credit−11,721−2,2517,9568,17716,35622,73426,42228,85530,46130,516
Net claims on the government−29,730−22,404−14,580−22,726−20,963−20,670−21,668−23,958−27,930−33,838
Bank of Botswana−31,768−23,252−14,882−24,075−22,279−21,986−22,984−25,274−29,246−35,154
Commercial banks2,0388483021,3491,3161,3161,3161,3161,3161,316
Claims on parastatals1023033861,0211,0721,2361,3721,5151,6711,842
Claims on nongovernment17,90719,85022,15029,88236,24742,16746,71851,29856,72062,512
Claims on the private sector19,26821,25423,62228,78135,09140,83345,23749,66354,91760,525
Other financial institutions−1,361−1,404−1,4721,1011,1561,3341,4801,6351,8031,988
Other items (net)2−21,832−18,345−16,972−26,351−31,293−35,515−36,393−35,839−35,181−33,814
Money plus quasi-money (M2)39,22838,71743,53445,42248,80256,10461,88368,46675,70683,561
Money7,7687,1089,9389,33410,55512,15713,17014,73816,27117,910
Currency1,1031,1451,9162,0891,5581,5901,5611,7031,8572,021
Current deposits6,6665,9638,0237,2448,99710,56711,60813,03514,41415,889
Quasi-money31,45931,60933,59636,08838,24743,94748,71353,72859,43565,651
Other monetary liabilities30.00.00.00.00.00.00.00.00.00.0
Broad money (M3)39,227.838,716.843,534.445,421.848,802.056,103.861,883.068,465.875,706.283,561.3
(Contribution to growth in M2)
Net foreign assets37.8−34.3−17.525.40.211.25.86.37.79.0
Bank of Botswana30.9−29.4−18.721.4−2.28.23.33.76.07.2
Commercial banks6.9−4.91.24.02.43.12.52.61.81.7
Net domestic assets−16.133.029.9−21.07.33.74.54.32.81.4
Net domestic credit6.024.126.40.518.013.16.63.92.30.1
Net claims on the government−5.918.720.2−18.73.90.6−1.8−3.7−5.8−7.8
Of which: Bank of Botswana−12.121.721.6−21.14.00.6−1.8−3.7−5.8−7.8
Claims on nongovernment12.15.05.917.814.012.18.17.47.97.7
Claims on parastatals−0.20.50.21.50.10.30.20.20.20.2
Claims on the private sector12.65.16.111.813.911.87.87.27.77.4
Other items (net)−22.18.93.5−21.5−10.9−8.7−1.60.91.01.8
Memorandum items:
Nominal GDP (calendar year)75,86772,31693,390104,573109,799126,643140,570155,218171,234188,732
Nominal non-mineral GDP (calendar year)56,07762,25270,52278,73288,296103,030114,780127,116140,559155,143
Velocity (GDP relative to broad money, M2)1.91.92.12.32.22.32.32.32.32.3
Velocity (non-mineral GDP relative to broad money, M2)1.41.61.61.71.81.81.91.91.91.9
Private sector credit to GDP25.429.425.327.530.630.831.632.433.234.3
Private sector credit to non-mineral GDP34.434.133.536.638.037.938.739.640.541.7
Sources: Bank of Botswana and IMF staff estimates and projections.
Sources: Bank of Botswana and IMF staff estimates and projections.
Table 7.Botswana: Banking System Prudential Indicators, 2007–20131
2007200820092010201120122013 March
(Percent, unless otherwise indicated)
Regulatory capital (millions of pula) 22,020.62,991.63,670.74,582.04,801.96,919.17,007.3
Tier 1 capital (millions of pula)1,185.41,832.22,191.62,692.02,798.74,103.04,407.6
Risk weighted assets (millions Pula)10,947.217,694.418,734.722,311.822,784.933,255.334,659.5
Total assets (millions Pula)33,988.145,317.744,090.149,067.950,320.758,109.658,870.7
Regulatory capital to risk-weighted assets318.516.919.620.521.120.820.2
Regulatory Tier I capital to risk-weighted assets410.810.411.712.112.312.312.7
Capital-to-assets5.96.68.39.39.511.911.9
Asset composition and quality
Loans-to-assets33.939.744.843.944.358.259.6
Nonperforming loans (NPLs)-to-gross loans51.31.63.26.12.50.81.2
Compromised assets-to-gross loans53.30.90.92.72.82.63.4
NPLs net of specific provisions-to-gross loans 51.4−0.30.33.7−0.1−1.0−0.8
NPLs net of specific provisions-to-tier I capital50.1−2.53.04.2−8.5−6.2
Profitability
Return on average assets2.62.92.80.90.60.30.4
Return on average equity43.245.456.59.16.84.65.3
Net interest margin to gross income65.465.267.539.833.747.850.5
Non-interest income to gross income34.634.832.569.932.439.933.4
Non-interest expenses to gross income45.245.545.324.625.127.324.9
Liquidity
Liquid assets to total assets47.250.539.634.433.416.717.4
Of which:
BoBCs to total assets45.338.737.334.634.414.113.3
Liquid assets to short-term liabilities59.556.945.341.738.920.519.9
Foreign currency denominated loans to total loans12.19.27.28.58.16.87.1
Foreign currency deposits to total deposits32.726.912.914.815.513.912.5
Foreign currency denominated liabilities to total liabilities41.634.834.213.813.413.011.7
Deposits-to-assets83.285.286.082.485.983.782.8
Loans-to-deposits40.846.652.153.351.569.572.1
Sensitivity to market risk
Net open foreign exchange (FX) position as percent of regulatory capital6−8.128.722.515.413.010.913.2
Contingent foreign exchange (FX) assets-to-regulatory capital327.1132.731.839.937.433.035.3
Contingent foreign exchange (FX) liabilities-to-regulatory capital18.760.974.2130.5139.997.687.2
Source: Bank of Botswana and FSAP estimates.

The compilation methodology has changed somewhat since 2006; the number of banks has increased since 2007.

Regulatory capital refers to the total of Tier 1 and Tier 2 capital, less investments in subsidiaries and associates.

The minimum capital requirement is 15 percent of risk weighted assets.

The minimum capital requirement is 7.5 percent of risk weighted assets.

NPLs are defined as credits with interest past due of 182 days or more; compromised assets are defined as credits with interest past due of 91 days or more.

Foreign currency liabilities less foreign currency assets as a percent of regulatory capital.

Source: Bank of Botswana and FSAP estimates.

The compilation methodology has changed somewhat since 2006; the number of banks has increased since 2007.

Regulatory capital refers to the total of Tier 1 and Tier 2 capital, less investments in subsidiaries and associates.

The minimum capital requirement is 15 percent of risk weighted assets.

The minimum capital requirement is 7.5 percent of risk weighted assets.

NPLs are defined as credits with interest past due of 182 days or more; compromised assets are defined as credits with interest past due of 91 days or more.

Foreign currency liabilities less foreign currency assets as a percent of regulatory capital.

Appendix I. Managing Inward Global Spillovers1

1. Context: Natural-resource based and highly open economies like Botswana’s are vulnerable to global economic shocks. The global demand for diamonds—Botswana’s main export—highly depends on developments in advanced economies, and to a lesser extent in key emerging market economies—in particular, China and India, whose share of diamond consumption increased in recent years albeit coming from a low base. Botswana is also exposed to spillovers through strong economic and financial linkages with South Africa, where recent developments and outlook suggest sluggish growth.

2. An estimated vector autoregressive model indicates a significant but short-lived impact of a growth slowdown in advanced economies on diamond prices and hence Botswana’s output growth.1 A one standard deviation decline in output growth in advanced economies would decrease diamond prices by 1.2 percentage points (q-o-q) on impact (Figure 1). The price decline would reflect lower global diamond demand. The growth slowdown in advance economies would decrease Botswana’s output growth by 0.9 percentage points (q-o-q) on impact (Figure 2). Given Botswana’s high dependency on diamond exports, the decline would largely reflect lower diamond demand associated with an output decline in advanced economies, although according to our analysis the effect of lower diamond demand from other spillover effects cannot be formally separated. The effect would dissipate within two years. Although China’s and India’s shares in diamond consumption are growing at a fast pace, they are still not a major player in the global diamond market. Thus, our analysis shows that diamond prices would not significantly respond to a growth decline in emerging market economies.

Figure 1.Response to an output decline in advanced economies

(Quarterly percent change)

Figure 2.Response to an output decline in advanced economies

(Quarterly percent change)

Sources: WEO, Bloomberg, and IMF staff estimates.

3. South Africa has strong ties with other countries in the region, including its partners in the Southern African Customs Union (SACU)—Botswana, Lesotho, Namibia, and Swaziland (BLNS). South Africa’s economy is by far the largest—it accounts for about 90 percent of the region’s GDP at market exchange rates. It is also tightly integrated with the economies of its neighbors, while also being exposed to global shocks. It is often described as an “engine of growth” for the region. Thus, it is reasonable to expect that South Africa’s business cycle and its long-term growth rate will affect its neighbors. While there are multiple linkages (trade, investment, financial, institutional) that appear plausible, formal econometric analysis has found their net spillover impact to be statistically insignificant. This reflects the fact that Botswana’s trade linkage with South Africa is mainly through imports rather than diamond exports. South Africa appears to channel global economy shocks to the regional economy, rather than directly affecting countries in the region.2 Overall, a possible explanation is that the multiple spillover channels operate in ways that offset each other, so their net impact is relatively small.3

4. Staff also conducted a simulation analysis using the Global Integrated Monetary and Fiscal model (GIMF), tailored to Botswana’s specific economic circumstances. Four regions are included to capture Botswana, the United States, the euro area, and the rest of the world, which includes emerging market economies and South Africa. The model includes the financial sector and the natural resource sector set up as the diamond sector. Monetary policy is modeled as a Taylor rule, and, for Botswana, the crawling peg regime is captured by some weights in an interest rate reaction function on exchange rate differential to the rest of the world. The share of liquidity-constrained households who do not have access to finance is calibrated to 60 percent in Botswana, based on data from the 2009 Finscope survey.

5. The simulations suggest that global spillovers to Botswana would be limited and short-lived in adverse scenarios beyond the baseline (Figure 3). The adverse scenarios are based on a selected set of external risks in the Risk Assessment Matrix (Table 2). They consist of (i) re-emergence of financial stress in the euro area, (ii) a deeper-than-expected slowdown in emerging market economies, and (iii) capital flow reversal from emerging markets.4 Botswana’s output growth would be lower by 1–1½ percentage points than the baseline, and the impact would dissipate in about one year. The transmission works mainly through the trade channel as lower global demand for diamonds results in a decline in Botswana’s diamond exports. The resulting limited and transitory spillover impact reflects the storable nature of diamonds that allows Debswana (Botswana’s joint venture with De Beers) to smooth shocks by adjusting inventories, and also stems from the transitory impact of the initial shocks on the global economy.

Figure 3.Simulated Adverse Scenario Compared to the Baseline Using the GIMF Model

Sources: WEO, COMTRADE, and IMF staff estimates.

6. In light of the assessment that global spillovers to Botswana would be limited and short-lived, staff believes that in the event of such an adverse scenario beyond the baseline, an appropriate response would be to let the automatic stabilizers work on the revenue side. Pursuing more active discretionary fiscal stimulus measures would not be recommended owing to the need to re-build the fiscal buffers and the likelihood that the effect of fiscal expansion would leak abroad through imports in an open economy like Botswana. Consumer price inflation would be lower than the baseline scenario, as economic activity decelerates, which would provide space for further easing of monetary policy in such an adverse scenario.

Appendix II. External Stability and Competitiveness Assessment 1

1. Context: Botswana’s external position remains strong with a high level of international reserves and low external debt, even though the current account has been in deficit since the 2008–09 financial crisis (Figure 1). Since 2008, imports grew faster than diamond exports, resulting in trade deficit (Figure 2). The fast import growth was in line with strong household consumption, partly associated with the rapid growth in lending to household (Appendix III). The import growth in 2012 also reflected the need to increase energy imports owing to electricity supply shortages. Official transfers, mainly SACU revenue, have largely contributed to the narrowing of the current account deficit. As a result, the overall external position continues to be relatively strong with official reserve coverage standing at about 11 months of import cover at end-June 2013. Botswana has not been significantly affected by the recent surge in capital inflows from advanced economies as portfolio flows remain relatively small because foreign direct investment constitutes a bulk of the inflows in the balance of payments.

Figure 1.Current Account Balance

(In millions of US dollars)

Sources: Botswana authorities and IMF staff estimates

Figure 2.Trade Balance and Diamond Trade

Sources: Botswana authorities and IMF staff estimates

2. The current account balance is projected to return to a surplus over the medium term. This will be driven by the planned fiscal consolidation and the expected recovery in diamond exports along with the global recovery. As measures by the government succeed in tempering the rate of growth of household borrowing, import growth should slow. This, combined with a stable electricity supply from the Morupule B power plant, will contribute to closing the current account deficit.

3. Botswana’s crawling peg arrangement has been largely resilient against external shocks, underpinned by a strong external position. Since 2005, the authorities have pursued a crawling peg regime to preserve external competitiveness through real exchange rate stability. While the regime has evolved over the years, exchange rate policy has revolved around two main objectives: (i) contain imported inflation and provide a nominal anchor for prices, and (ii) support the broader national competitiveness goal, export promotion, and economic diversification. The regime is implemented through a continuous adjustment of the nominal effective exchange rate (NEER) of the pula, based on the differential between the inflation objective and trading partners’ inflation forecast. The pula is pegged to a basket of currencies comprising SDR currencies and the South African rand.

Figure 3.Effective Exchange Rates

(Index, monthly, 2005=100)

Sources: IMF staff estimates.

Figure 4.Unit Labor Cost and Effective Exchange Rates

(Index, annual, 2005=100)

Sources: IMF staff estimates.

4. The pula is broadly in line with medium-term fundamentals. The estimates of exchange rate misalignments in Botswana, based on four CGER methodologies, are diverse, and their confidence intervals are wide (Table 1).2 Overall, staff analysis shows the REER is broadly in line with macroeconomic fundamentals from a medium-term perspective. However, the external sustainability approach, which takes into account the temporary nature of non-renewable mineral income, suggests a need for depreciation over the medium term to help rebalance the economy toward the nonmining sector. The high dependency on diamond exports makes the economy vulnerable to fluctuations of international diamond demand and prices. A higher degree of export diversification would help reduce the risks to Botswana’s external stability and support a broad-based and sustainable long-term growth.

Table 1.Estimated Real Exchange Rate Misalignments
Lower BoundMeanUpper Bound
Macroeconomic Balance−8.7−4.6−38.9
Equilibrium Real Effective Exchange Rate−10.710.645.4
External Sustainability6.1
Purchasing Power Parity−3.29.225.3
Source: IMF staff estimates.
Source: IMF staff estimates.

5. Non-price competitiveness indicators suggest that Botswana performs well relative to its peers, but important challenges remain (Figure 5). Botswana performs better than other middle-income countries in terms of strength of institutions, financial market development, and labor market efficiency. However, Botswana has been consistently lagging its peers on health and education. These indicators reinforce the need to prioritize investments in human capital to address constraints to improvements in competitiveness. Sustained effort on structural reforms geared toward reducing the regulatory burden on firms and reducing the costs of doing business would also help to boost competitiveness.

Figure 5.Botswana and Other Middle-Income Countries: Competitiveness Indicators, 2008 and 2012

(Score from 1 [less competitive] to 7 [more competitive])

Source: World Economic Forum.

Appendix III. Balancing Financial Inclusion and Stability— Policy Challenges from Household Debt 1

1. Context: Striking an appropriate balance between financial inclusion and stability is an emerging policy challenge for Botswana as in many SMICs. Because access to financial services in Botswana is still relatively low (estimates of the number of adults without access to financial services is about 33 percent), enhancing financial inclusion and more generally deepening financial intermediation are key priorities for the government as described in both the Vision 2016 and NDP 10. Deepening financial intermediation is expected to support the authorities’ policy priority for boosting prospects for economic diversification. At the same time, the recent acceleration in lending to households has become a source of concern. Specifically, while banks’ current exposure to household indebtedness does not in itself pose imminent macroeconomic risks in Botswana, the current growing trend of household indebtedness, if not contained, could eventually become a source of both financial sector and macroeconomic vulnerability.

2. Credit concentration and growth: The banking system’s loan portfolio is heavily concentrated in the household sector in Botswana and in other SACU countries. The ratio of household credit to total private credit ranges from 44 percent (Swaziland) to about 60 percent (Botswana). Notably, the proportion of households’ unsecured lending to total private credit is significantly high in Botswana. More generally, loans to households have been growing at an accelerated pace in recent years. This current rapid buildup—which is above 30 percent on the basis of year-on-year growth—warrants close monitoring considering the region’s benign inflation and tepid growth perspectives.

Botswana: Credit Growths, 2010-2013 April

3. Banking sector soundness: In broad terms, Botswana’s banking system is profitable and well capitalized, with relatively low nonperforming loans and adequate buffers to smooth shocks. The authorities are strengthening their toolkit for monitoring risks in the financial system. For example, the newly established Financial Stability Division at the Bank of Botswana is developing a simple stress testing framework, and the model’s preliminary results show systemic banks are resilient to large shocks. Beyond this, the top four banks (whose market share is above 80 percent) independently apply their own prudential measures to limit the credit risks from lending to households, such as ceilings on loan-to-value and debt-to-income ratios. Virtually all of the unsecured household lending is provided to public sector employees and is backed by wages (with debt repayments deducted directly from their pay checks), limiting the credit risk, unless there is generalized unemployment. Finally, a part of the unsecured lending is reportedly used for building houses in rural and urban areas, thus some of the loans are indirectly supported by real assets.2

4. Emerging vulnerabilities: However, there are emerging vulnerabilities stemming from the high concentration of banks’ loans to households and the acceleration in the growth of unsecured lending. The level of household debt has arguably increased with declined real incomes and increased access to credit from various sources—banks and nonbanks such as microlenders and retail stores. Although the asset sizes are relatively small compared to banks, microlenders provide unsecured lending to less creditworthy households with limited due diligence and at often punitive interest rates. Another source of vulnerability is lack of a comprehensive database on the overall level of household indebtedness. Commercial banks exchange debtors’ (negative) credit information through a credit bureau, but such monitoring does not cover lending from nonbank sources. Also, the households’ exposure to interest rate risk can be a source of stress on their balance sheets. Most of unsecured lending is contracted at variable-rate terms with relatively short maturities, and household credit growth was partly fueled by the recent years’ low interest rate environment as the policy rate was cut from 15 percent (in 2008) to the current level of 8.5 percent.

5. Macroeconomic dimensions: Besides financial stability concerns, the concentration of credit to the household sector could potentially crowd out resources for other productive economic sectors. The heavy concentration on household credit in Botswana, and more generally the SACU region, coincides with the economies’ reliance on consumption instead of investment for growth (main text Figure 4). The combination of lack of sound investment opportunities for local businesses, which partly reflects the public sector’s dominance in the economy in SACU, and the concentration of lending to households could further reinforce the region’s low savings and more generally consumption-based growth. To promote economic diversification and strengthen the foundation for future growth, policies would need to consider measures to reduce the size of the government (as a share of GDP), improve financial intermediation, and direct scarce resources to productive sectors.

6. Policy challenges: To minimize financial sector vulnerabilities and help direct resources to business investments, the authorities should implement measures to temper the rate of increase in household borrowing. One of the measures to consider is macroprudential policy, including the limit on loan-to-value and debt-to-income ratios, and higher risk weights for unsecured household lending. Additional policy tools would complement macroprudential measures in tempering the growth of household lending. First, a fully functioning national credit bureau should record households’ indebtedness, including debt to nonbanks, and other aspects of households’ profiles. Second, a comprehensive database on households’ balance sheets and disposable income would facilitate effective monitoring on household indebtedness and risk profiles. Finally, the Non-Bank Financial Institutions Regulatory Authority (NBFIRA) would need to strengthen its capacity to supervise the non-banks and avoid regulatory arbitrage between the bank and nonbank sector.

1This is also consistent with staff’s recent cross-country work on the factors that explain the slowdown in trend growth in SMICs (see chapter II in SM/13/22).
2See staff’s analysis in chapter 6 on closing the jobs gap in the Southern Africa Customs Union of the recently published book “Building a Common Future in Southern Africa,” Mongardini, J., (ed. 2013), IMF, Washington, D.C.
3The SACU revenue windfall which explains a large part of the fiscal adjustment in FY2012/13 is due to the backward looking nature of the SACU revenue sharing formula (the 2-year lagged adjustment mechanism).
4Diamonds constitute about 75 percent of Botswana’s exports—other minerals represent a tiny part of the export base. While the recent sharp decline in commodity prices may to some extent rub off on diamond prices, the storable nature of diamonds that allows buffering of shocks by adjusting inventories will likely limit the price decline. Indeed since the 2008-09 global financial crisis, Debswana has been keeping production volumes stable while using inventories in respond to global demand changes. The distinction between diamonds and other commodities is also reflected in the market structures. There are no international diamond markets in the same sense that other commodities are traded. Diamonds are sold through various channels (auctions, tenders and, of course, the Diamond Trading Company, as well as various trading ”networks”) and the various price indices are based on assessments of current trends by industry analysts, rather than any independently verifiable benchmark.
5Staff’s analysis, based on the permanent income hypothesis, suggests that in order to fully preserve mineral wealth for future generations, the non-mineral primary balance (NMPB) should be reduced to about 5 percent of non-mineral GDP from the current level of about 11 percent—background work could be found in 2012 Article IV staff report (http://www.imf.org/external/pubs/cat/longres.aspx?sk=26166.0).
6Botswana’s debt ratio has been historically very low and is expected to decline over the medium term—see the annex on the debt sustainability analysis (DSA) using the new market access DSA template.
7See chapter 1 of the accompanying selected issues paper. This paper, which looks at the impact of public sector employment and wage policies on labor market outcomes for MICs, was also presented at the Fund-wide Small Islands Club on July 25th, 2013.
8Other policy measures that staff have recommended to the authorities include short-term—streamlining the system of nonwage payments, including tighter eligibility criteria for allowances; medium-term—rationalizing the size and structure of government, tightening the link between pay and performance; and strengthening payroll systems (see 2012 Article IV consultation report http://www.imf.org/external/pubs/cat/longres.aspx?sk=26166.0).
9Like many SMICs in the region, financial access remains relatively low for both individuals as well as small and midsized enterprises. According to Finscope’s 2009 study, more than half of Botswana’s population is unbanked.
10The current regulatory framework provides the legal force to implement macroprudential measures when needed.
11See chapter 2 of the accompanying selected issues paper.
1Prepared by Futoshi Narita.
2A bulk of Botswana’s exports goes to countries other than South Africa. See also Canales-Kriljenko, Gwenhamo, and Thomas, 2013, IMF Working Paper, WP/13/31 (Washington: International Monetary Fund).
3This explanation is based on ongoing work by staff in the IMF African Department’s Southern II Division (Olivier Basdevant, Andrew Jonelis, Borislava Mircheva, Slavi Slavov) on the impact of the growth slowdown in South Africa on Botswana and other SACU members.
4Specific shocks in the model are: (i) an increase in credit spreads, reaching 3.4 percentage points after two years (2.4 percentage points in the first year) combined with a 100 basis point increase in the sovereign risk premium for the euro area, (ii) a 25 percentage point investment shock in the rest of world with a 10 percentage point commodity price shock, and (iii) a 200 basis point increase in the sovereign risk premium for the rest of the world.
1Prepared by Futoshi Narita.
2Staff took into account the Botswana-specific circumstances by using a target path of net foreign assets (NFAs), 77 percent of GDP in 2017, estimated in a fiscal sustainability analysis for Botswana, in the external sustainability approach. Also, staff applied Botswana-specific elasticities of imports and exports in calculating the REER misalignments. The resulting elasticity of the current account balance to the REER for Botswana is -0.5—more elastic than standard—reflecting high price-elasticity of mineral exports.
1Prepared by Seok Gil Park.
2Banks do not take certain types of land ownership deeds (tribal land) as collateral for mortgage loans in rural areas. Thus, debtors often take unsecured lending to finance housing projects on such land.

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