Botswana: Staff Report for the 2002 Article IV Consultation

This 2002 Article IV Consultation highlights that real GDP growth of Botswana slipped to an estimated 1¼ percent in 2001/02 (July–June), largely reflecting a downturn in the global diamond market and a drop in Botswana’s diamond production. The non-mining sectors performed better, especially the service industries. Their success is in part a product of Botswana’s market-friendly environment, sound macroeconomic policies, and investments in education and physical infrastructure. The overall fiscal balance moved into deficit in 2001/02 (April–March), only the second deficit in 20 years.

Abstract

This 2002 Article IV Consultation highlights that real GDP growth of Botswana slipped to an estimated 1¼ percent in 2001/02 (July–June), largely reflecting a downturn in the global diamond market and a drop in Botswana’s diamond production. The non-mining sectors performed better, especially the service industries. Their success is in part a product of Botswana’s market-friendly environment, sound macroeconomic policies, and investments in education and physical infrastructure. The overall fiscal balance moved into deficit in 2001/02 (April–March), only the second deficit in 20 years.

I. Recent Developments

  • The cyclical decline in the global diamond market caused GDP growth to slow to near 1¼ percent in 2001/02 (July–June). However, private nonmining output grew by about 6 percent, in line with growth in the past decade.

  • Fiscal policy was expansionary in 2001/02. Government spending rose by 16 percent during the year, despite a major decline in revenue. Thus, there was a downward swing of 11.5 percentage points in the government’s overall balance.

  • Monetary policy is anchored by the pegged exchange rate arrangement. During 2001, the pula appreciated in real effective terms by 6.7 percent. Domestic interest rates have been unchanged since October 2000.

  • Botswana has been affected by unusual weather conditions and the regional food shortage. The existing social safety net is helping to alleviate adverse consequences for the poor.

1. Botswana was buffeted by two external shocks in 2001: weak demand for diamonds and volatility in the South African rand exchange rate against major currencies (Tables 1 and 2 and Figure 1). Based on preliminary information and projections, output growth slowed in 2001/02 (July–June) to about 1¼percent from 9¼ percent in the previous year, entirely owing to a cyclical drop in diamond production, which has recently been reversed (Figure 2).1 Private sector nonmining output, which is perhaps a better gauge of underlying economic activity, expanded by an estimated 6 percent in 2001/02, in line with average growth in the 1990s. Growth in the manufacturing sector weakened in 2001/02, and the rise in nonmining output largely reflected the strength of service industries. Public infrastructure and several new private shopping centers boosted the construction sector, while manufacturing lagged, in part reflecting a 6.7 percent real appreciation of the pula during 2001, The expansion of credit to the private sector, which serves as a proxy for domestic demand, has been strong, especially to households. At the same time, however, increasing real interest rates over the past 18 months have helped to stow credit growth to the business sector and thus dampen business investment. Employment in the formal sector increased by 4 percent during the year ended March 2001, but unemployment is estimated to have been 15 percent. More recent data are not available.

Table 1

Botswana: Selected Economic and Financial Indicators, 1998-2003

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Sources: Botswana authorities; and Fund staff estimates and projections.

Year beginning July 1.

Annual average.

Year beginning April 1.

Money and quasi money (M2) plus Bank of Botswana certificates.

As of end-December.

Medium- and long-term public and publicly guaranteed debt outstanding.

Table 2

Botswana: Sectoral GDP and Savings-Investment Balances, 1995/96-2002/03 1/

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Sources: Botswana authorities, and Fund staff estimates and projections.

Historical data are based on export and import data from the national accounts (July-June year), which differ significantly from balance of payments data.

Calendar year.

Figure 1.
Figure 1.

Botswana: Selected Exchange Rate Indicators, January 1995–June 2002

(1995 = 100; foreign currency per pula)1

Citation: IMF Staff Country Reports 2002, 244; 10.5089/9781451806397.002.A001

Source: Botswana authorities.1/ A rise in the index indicates an appreciation of the pula.
Figure 2.
Figure 2.

Botswana: Main Economic Indicators, 1990-2001

Citation: IMF Staff Country Reports 2002, 244; 10.5089/9781451806397.002.A001

Sources: Botswana authorities; and Fund staff estimates.1/ National accounts year beginning July 1.2/ Fiscal year beginning April 1.

2. Price developments were generally positive in 2001 and the first half of 2002 (Figure 2). Consumer price inflation declined to under 6 percent at the end of 2001, compared with 8½ percent at the end of 2000, largely because of lower inflation in Botswana’s trading partners and the modest real effective appreciation of the pula. Inflation was under 6 percent in June 2002, as higher imported food costs were offset by low rates of increase in other imported goods and local services. Government wages were raised by 20 percent in 2001 as a catch up to past inflation, but also to make public service more attractive and thereby address vacancies. The rise boosted household demand and perhaps put upward pressure on private sector wages. Minimum wages were raised by 10 percent.

3. Botswana’s government budget moved into deficit in 2001/02 (April–March) (Table 3). The deficit, estimated at 21/2 percent of GDP, was only the second in nearly 20 years and, as in the preceding occasion, is largely attributed to an unexpected drop in mineral revenue. (Mineral revenue constitutes more than one-half of government income.) At the same time, recurrent spending was increased by P 834 million (3 percent of GDP) in the three supplementary budgets during 2001/02, with about one–third of the rise going to teacher salaries (see above). This rise was mostly offset by lower–than–planned capital spending, and, as a result, total government spending increased by 16 percent in 2001/02, or nearly 10 percent in real terms.

Selected Countries: Fiscal Indicators

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Average,1998-2001

2001/02

Table 3

Botswana: Central Government Operations, 1997/98-2002/03 1/

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

Fiscal year beginning April 1.

Includes Bank of Botswana revenue

4. The Bank of Botswana held interest rates unchanged from October 2000 through June 2002 (Tables 4 and 5). Thus, rates on three-month Bank of Botswana Certificates remained in the 12½-13 percent range through 2001, while in real terms rates rose to 7 percent at the end of2001, compared with 4 percent a year before, as inflation moderated. The stock of Bank of Botswana Certificates, the main instrument used to manage liquidity, increased by P 1.4 billion (4¾ percent of GDP) during 2001, as an expansionary fiscal stance and the transfer of public pension assets to private sector managers necessitated the absorption of excess liquidity (see paragraph 25).

Table 4.

Botswana: Monetary Survey, 1995-20021/

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Sources: Bank of Botswana; and Fund staff estimates and projections.

End of period.

Bank of Botswana certificates held by non-banks

Table 5

Botswana: Assets and Liabilities of the Bank of Botswana, 1995-2002

(In millions of pula; end of period.)

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Sources: Bank of Botswana.

5. Botswana’s external current account recorded a surplus of 10¼ percent in 2000 (the last period for which data are available; Table 6). The surplus largely reflected the buoyant global diamond market and diamond exports (which account for approximately 70 percent of Botswana’s receipts). The current account is estimated to have been in surplus also in 2001, albeit a considerably smaller one mainly because of lower diamond export earnings. End–2001 reserves were US$5.9 billion (32 months of imports), or approximately one year’s GDP.

Table 6

Botswana: Balance of Payments, 1995-2001 1/

(In millions of U.S. dollars, unless otherwise indicated)

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Sources: Botswana authorities; and Fund staff estimates.

Based on pula-denominated estimates converted at the period-average exchange rate.

Includes valuation adjustment.

6. Thirty–nine percent of Botswana’s adult population is thought to be infected with HIV. Demographic projections indicate that, by 2006, the number of AIDS cases could more than double, the number of AIDS deaths reach 45,000 a year, and the working–age population could actually decline. The government’s comprehensive response to this tragedy is outlined below.

II. Report on Discussions

7. Economic diversification is Botswana’s overriding policy objective Diversification is necessary if Botswana is to reduce unemployment and poverty and adjust to the plateau in diamond production. Thus, discussions with the authorities focused on monetary and fiscal policies to provide a sustainable macroeconomic environment that is conducive to private sector development, specific diversification strategies, structural measures to boost efficiency, especially in government, and Botswana’s poverty reduction strategy. They also covered HIV/AIDS, in particular the fiscal implications of the disease, and impediments to growth including HIV/AIDS, shortages of skilled labor, a scarcity of serviced land, and competitiveness.

A. Economic Prospects

8. Sound policies have enabled the economy to withstand two external shocks in 2001 and the regional food shortage in 2002. Output growth is expected to rebound in 2002/03 (July–June), reflecting stable mineral production and strong growth in the private nonmining sectors. The service sectors will account for most economic growth as tourism rebounds, growth in retail sales remains buoyant, and new shopping malls open. The manufacturing sector is expected to grow only modestly and below the ten-year average growth rate because of the adverse effects of the recent real effective appreciation of the pula. Unusual weather patterns and their impact on crops are expected to hold crop production close to last year’s level, which was suppressed by drought. Nevertheless, the impact on real GDP growth is minor because crop and cattle production combined represent only 2 percent of Botswana’s economy. However, the regional food shortage and buoyant domestic demand are expected to contribute to a rise in consumer price inflation to 6¾ percent by end–2002, somewhat outside the Bank of Botswana’s indicated range of 4 to 6 percent. The current account surplus would shrink to 6¾ percent of GDP in 2002, compared with 7½ percent in 2001, owing to relatively flat diamond revenue, lower interest income on reserves, a decline in Southern African Customs Union (SACU) revenue, and higher food imports.

9. In the medium term, it is unlikely that Botswana will match the 8½ percent average economic growth and surpluses in the external current account and government budget that it has recorded over the past 15 years (Table 7 and text table). Officials at the Ministry of Finance and Development Planning and the staff team agreed that real GDP growth would be lower because diamond production—accounting for roughly one-third of the economy—had reached a plateau. Unless a significant new deposit is discovered, this sector would no longer serve as the economy’s engine of growth or sustain rapid external and government revenue growth. The government has been preparing for this structural change for some time through its diversification strategy and prudent macroeconomic policies. Looking ahead, however, it is likely that spending growth in nonhealth areas will be restrained and government budgets will be closer to balance, compared with surpluses in the past. Current projections show a surplus emerging from 2005. reflecting improvements in efficiency and tax administration. These projections are uncertain and will depend heavily on HIV/AIDS spending (paragraph 27). The external current account would correspondingly move from substantial surpluses toward balance.

Medium-Term Scenario, 2000-05

(Annual percentage change, unless otherwise indicated)

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Year beginning July 1.

Year beginning April 1.

Percent of GDP.

Table 7

Botswana: Medium-Term Scenario, 2002-2007

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Sources: Botswana authorities; and Fund staff estimates and projections.

Year beginning July 1.

Year beginning April 1.

Medium- and long-term public and publicly guaranteed debt outstanding.