Statement by the IMF Staff Representative

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.

October 9,2002

1. The following information has become available since the staff report was issued on August 14. It does not change the thrust of the staff appraisal.

2. The transition from sales tax to value added tax (VAT) has gone well. Most traders registered before the July launch, and despite some teething problems, the system is working without significant disruptions. We will continue to monitor the VAT, in particular the impact on prices, government revenue, and the refund mechanism for exporters.

3. Headline inflation rose from just under 6 percent in June 2002 to 8.8 percent in July and 9.9 percent in August 2002. Much of the rise is the result of the replacement of the sales tax with the VAT, which is more broad-based. The impact in July—about 3 percentage points—is in line with staff expectations, but a larger than expected rise in food prices in August could push inflation for the year above the current projections of 6 ¾ percent. In its mid-year review of monetary policy, the Bank of Botswana indicated its intention to be guided by underlying inflation, that is excluding the VAT effect, when assessing inflationary developments, provided that public and private wage settlements are not adjusted to compensate for this tax increase. The staff supports this view.

The regional food situation has not caused problems in Botswana on the scale experienced by some of its neighbors, and the authorities are providing relief to those in need through existing drought relief programs. These include short-term employment projects, which this year have been undertaken as part of the National Master Plan for Agricultural Development.

Botswana: Staff Report for the 2002 Article IV Consultation
Author: International Monetary Fund