Botswana: Staff Report for the 2003 Article IV Consultation

Botswana’s 2003 Article IV Consultation reports that Botswana’s core economic database is largely adequate for surveillance, although the quality and timeliness of national accounts and key trade data need to be improved. Financial sector reforms, including a partial privatization of the civil service pension scheme, are an important part of the economic strategy. The increased risk associated with these reforms should be addressed through enhanced supervision of the sector. The authorities are making efforts to strengthen monetary management.

Abstract

Botswana’s 2003 Article IV Consultation reports that Botswana’s core economic database is largely adequate for surveillance, although the quality and timeliness of national accounts and key trade data need to be improved. Financial sector reforms, including a partial privatization of the civil service pension scheme, are an important part of the economic strategy. The increased risk associated with these reforms should be addressed through enhanced supervision of the sector. The authorities are making efforts to strengthen monetary management.

I. Introduction and Medium-Term Challenges

1. Over the past 35 years, Botswana has been among the best performing economies in Africa (Figure 1). It has evolved from one of the poorest countries in the world to a middle-income country with the highest sovereign credit rating in the region. Sound economic policies, especially in managing its large diamond resources, and a commitment to democracy have contributed to this success. However, Botswana now faces the challenges of a plateauing in diamond production and one of the highest HIV/AIDS infection rates in the world (Box 1). These factors threaten the economic success that has been achieved to date.

Figure 1.
Figure 1.

Botswana and Selected Countries: Per Capita GDP, 1980-2003

(In U.S. dollars)

Citation: IMF Staff Country Reports 2004, 225; 10.5089/9781451806403.002.A001

Source: World Economic Outlook database.1/ Hong Kong SAR, Taiwan Province of China, Korea, and Singapore.

2. Faced with these problems, Botswana needs to develop appropriate social safety nets and implement policies aimed at sustaining and broadening economic growth, which is expected to decelerate relative to the high rates experienced over the past 35 years. In this regard, the Ninth National Development Plan (NDP 9; Box 2) is a timely elaboration on the authorities’ medium-term economic strategy. However, the NDP 9 incorporates only some of the programs to address the HIV/AIDS epidemic. Moreover, the costing and coverage of these programs have not been consolidated into a line item in the budget, which precludes a full analysis of their fiscal implications.

3. During 2003, the authorities prepared a comprehensive National Strategic Framework (NSF) for HIV/AIDS that consolidates all the programs related to the epidemic, as well as available donor support, and is considered to be among the best in Africa. In a similar vein, the government launched a National Strategy for Poverty Reduction (NSPR) that discusses the efforts being made in this area and complements the NSF. Looking ahead, an important challenge is to integrate these various strategies into a common medium-term budgetary expenditure framework. This step is critical to formulating an appropriate expenditure policy response and mobilizing domestic resources to achieve the NDP 9 goal of a balanced budget.

4. Reforms in the financial sector form an integral part of the economic diversification strategy and pose a major challenge to the authorities. The recent launching of an offshore center and the government’s transfer of accumulated pension benefits amounting to P 10.5 billion (27 percent of GDP) to private pension fund managers (as part of the civil service pension reform) entail risks that require enhanced financial supervision. These reforms, together with the recent introduction of government bonds, also have implications for the conduct of monetary policy. Moreover, with the authorities’ increased interest in refining the monetary policy framework, there is a need to strengthen the Central Statistics Office (CSO) in order to improve the timeliness and accuracy of macroeconomic data.

5. A successful transformation of the economy hinges on maintaining macroeconomic stability, while improving the implementation and coordination of structural reforms to broaden and sustain growth. For many years, the authorities have pursued prudent macroeconomic policies and have promoted open trade and capital account regimes. Yet, the country has not been able to take full advantage of its high credit ratings to attract foreign investment and promote private sector activities outside the mining sector. Therefore, greater efforts are needed to encourage economic diversification. Moreover, policies must address the need to increase savings in light of exhaustible diamond resources, while allowing for the rising expenditure to deal aggressively with the epidemic. Against this background, structural reforms should focus on (a) reducing the scope of government and enhancing domestic resource mobilization; (b) improving the tracking of priority expenditures; (c) removing impediments to private sector development; (d) broadening access to financial services; and (e) advancing efforts with regional cooperation while seeking increasing access to foreign markets. The Botswana authorities are well aware of the country’s challenges and have embraced this general approach.

Recent Developments in HIV/AIDS in Botswana

Botswana’s relatively promising ranking on development indicators has been adversely affected by the HIV/AIDS epidemic. According to a 2001 national survey, the HIV/AIDS infection rate for adults is estimated at about 35.4 percent. The overall prevalence rate has more than doubled since 1992, and an estimated 138,000 Batswana had died of AIDS by 2002, with 69,000 children orphaned by the epidemic. The effects of such high prevalence rates on human development have been remarkable. According to the 2001 census, life expectancy had fallen from 65 years to 56 years, and infant mortality rate had risen from 48 per 1000 live births in 1992 to 55.2 in 2001. Similarly, the population is projected to decline to 1.3 million in 2015, compared with a no-AIDS scenario of 2.5 million.

Table 1.

HIV/AIDS Infection Rate (In Percent)

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Sources: Botswana authorities; World Bank, and World Development Indicators.
Table 2.

Social Indicators in Botswana

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Source: Botswana 2002 Second-Generation HIV/AIDS Surveillance.

The economic impact of HIV/AIDS in Botswana in a static, no-treatment has been well researched. In a model by McFarlane and Sgherri (2001)1, nonmining GDP growth is projected at 1.38 percent in 2010, compared with 5.2 percent in the absence of the epidemic. In another study by Haacker (2002)2, output per capita in Botswana was found to decline by 10.2 percent in the medium term as a result of the negative consequences of HIV/AIDS.

The HIV/AIDS epidemic poses a serious challenge to the achievement of the government’s objectives of poverty reduction, economic diversification, and growth. These objectives, which are formally articulated in the Ninth National Development Plan (NDP 9, 2003/04-2008/09) depend crucially on the government’s ability to attract foreign investment into nonmining areas, and to undertake the requisite structural reforms to improve the level of private sector participation in the economy. The National Strategy for Poverty (NSP), which recognizes that HIV/AIDS is both a cause and consequence of poverty, unemployment, and inequality aims to eliminate poverty in Botswana by 2016. The strategy seeks to direct antipoverty interventions at the root causes affecting income, capacity, and participation by integrating poverty reduction strategies into the medium-term economic framework. The costs of these programs are stretched further by the huge expenditure outlay required to manage the HIV/AIDS epidemic which, based on the National Strategic Framework (NSF) for HIV/AIDS, is estimated at over P 12 billion, an annual average of 5 percent of GDP in the program period. Coming at a time when diamond output is plateauing, the immediate challenge facing the government is how to finance the cost of managing the epidemic, while mitigating its adverse consequences. Effective management of the epidemic would enable Botswana to moderate the decline in human development indices and the adverse macroeconomic impact of the disease.

The NSF proffers a systematic, multisectoral approach to managing the epidemic based on prevention, care and support, management of the national response, economic impact mitigation, and a strengthened legal and ethical environment. The treatment of the epidemic will focus on the administration of antiretroviral drugs to the infected, while the treatment of tuberculosis and opportunistic sexually transmitted diseases (STDs), together with voluntary testing and counseling (VCT) are targeted at a wider audience than the HIV infected. In December 2003, Botswana signed an agreement for an $ 18.5 million funding from the Global Fund for HIV/AIDS, Malaria, and Tuberculosis. A recent staff study3 shows that a successful implementation of the NSF program, reaching at least 90 percent of the a-risk group would considerably slow the decline in the growth rate of nonmining output projected in recent macroeconomic studies using the no treatment scenario. After an initial sharp decline in the program years, by 2010, the decline in nonmining output would moderate to about 4 percent. A key factor in the improved performance of nonmining output in the treatment scenario is the moderation in the decline in the population growth rate, which by 2010 is projected at 1.4 percent, compared with the no-treatment scenario of -0.9 percent. The subsequent positive trend in labor force size and its efficiency and productivity provides the necessary push for growth in nonmining output.

1 Maitland MacFarlan and Silvia Sgherri, “The Macroeconomic Impact of HIV/AIDS in Botswana,” IMF Working Paper 01/80 (Washington: IMF, 2001).2 Markus Haacker, “The Economic Consequences of HIV/AIDS in Southern Africa,” IMF Working Paper 02/38 (Washington: IMF, 2002).3 L. F. Johnson and R. E. Dorrington, “The Demographic and Epidemiological Impact of HIV/AIDS Treatment and Prevention Programs,” Mimeo, 2002.

Botswana’s Ninth National Development Plan (NDP 9), 2003/04-2008/09

In April 2003, Botswana launched the NDP 9, which focuses on diversifying the economy away from mineral production and exports and addressing the problems of unemployment and poverty. Although the government has given the highest priority to HIV/AIDS, which is recognized as a major threat to the country’s economic and social objectives, the macroeconomic framework of the plan does not explicitly include the impact of the epidemic. NDP 9 also does not consolidate HIV/AIDS expenditures, but such a consolidation is now available in the more recent National Strategic Framework for HIV/AIDS. The plan places major emphasis on improving efficiency and fostering the growth of the private sector, which is viewed as the main engine of growth.

As with previous plans, NDP 9 was the outcome of a participatory process that involved broad consultation with stakeholders in the public and private sectors, and civil society. The plan identifies potential for diversification in agriculture, tourism, financial services, and aspects of the mining industry, which the government will support through (a) funding of research; (b) an environment conducive to private sector initiative and innovation; and (c) the provision of financial assistance, to small and medium-scale enterprises and joint ventures with foreign enterprises.

The plan targets an average real GDP growth of 5.5 percent a year, which is about the same average rate achieved during the previous plan period (1997/98-2002/03). With the added boost from the proposed policies and reforms, the nonmining sectors are expected to maintain growth rates averaging 7 percent a year. Growth in the mining sector is projected to average less than ½ of 1 percent a year, compared with the 5.3 percent achieved during the NDP 8.

NDP 9 Macroeconomic Indicators

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Sources: Botswana, National Development Plan, 2003/04-2008/09; and staff estimates.

To support the overall growth target, the investment ratio is projected to rise from 26 percent of GDP in 2002/03 to an average of 30 percent over the plan period. Foreign direct investment is projected to rise steadily to over 5½ percent of GDP by 2008/09 in response to additional efforts to improve Botswana’s attractiveness as an investment destination. The public investment program over the six-year period is estimated at P 35.7 billion (US$7.4 billion)

Fiscal policy will target a near budget balance as efforts will be made to enhance revenue mobilization in order to cope with (a) increased spending pressures, especially on HIV/AIDS; (b) a possible decline in SACU receipts as tariffs are reduced in the context of existing and prospective trade agreements; and (c) a slowdown in the growth of diamond revenue, as diamond production, which accounts for about 50 percent of total revenue, approaches full capacity. Revenue measures focus on the VAT, introduced in 2002, user charges, and improved tax administration. The cabinet has already approved the setting up of an autonomous Botswana Unified Revenue Service (BURS) to strengthen revenue collection. Areas of emphasis include the strengthening of tax-auditing capacity and the possible creation of a large taxpayer unit in the BURS. The cabinet has also approved a broad cost recovery program, including user fees that will become effective in 2006. Consistent with the objective of maintaining an attractive tax environment to encourage business investment, no significant changes to personal and corporate tax rates are envisaged.

Monetary and exchange rate policies will aim at maintaining low inflation and external competitiveness. The Bank of Botswana will maintain a stable exchange rate against a basket of currencies and an inflation rate no higher than the weighted-average inflation rate of Botswana’s trading partners. Ongoing reforms include (a) the privatization of the public pension system, which has so far involved transfers of funds to private pension managers equivalent to 28 percent of GDP; (b) promotion of the International Financial Services Center (an offshore center); (c) issuance of government bonds aimed at fostering financial deepening; and (d) the establishment of the Financial Supervisory Authority to supervise nonbank financial institutions.

The thrust of other structural reforms under the NDP 9 would be to increase productivity by removing impediments to market efficiency. Major reforms include a relaxation of controls on prices, wages, and salaries; privatization of public enterprises and improvements in procurement and asset disposal arrangements; further market liberalization through the adoption of a competition policy; and a rural sector development strategy aimed at improving economic opportunities for rural dwellers. The authorities also intend to establish an autonomous Central Statistics Office to improve the quality and transparency of the country’s statistics.

6. Botswana’s policies have been broadly consistent with Fund advice over the years. In this regard, the authorities have incorporated some of the HIV/AIDS programs in the NDP 9 and are working on developing a domestic deficit indicator of the fiscal stance to help guide monetary policy. In the area of statistics, Botswana is a participant in the GDDS and has made progress in implementing the recommendations of a recent ROSC mission.

II. Recent Developments

7. In 2003/04, productivity gains in diamond production are expected to contribute to a better-than-projected economic performance (Table 1 and Figure 2). Real GDP growth is expected to reach 5.4 percent, as automated diamond sorting led to an increase in production to 30 million carats, surpassing the original expectation by 7 percent. At the same time, private sector nonmining output growth is projected at over 5 percent for the second year in a row (Table 2). Inflation (end of period) declined from over 11 percent in 2002 to 6.4 percent in 2003, just above the Bank of Botswana’s (BOB) 4-6 percent target range. This outcome reflected a prudent monetary stance and the passing of the one-time impact on prices of the introduction of the value-added tax (VAT) in 2002.

Table 1.

Botswana: Selected Economic and Financial Indicators, 1999-2004

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

For national accounts, year begins July 1. Balance of Payments and monetary data follow calendar year, and fiscal year begins on April 1.

Calendar year.

End of period.

Fiscal year begins April 1.

For 2003, as of end-October.

From 2002 onwards, figures include the government transfer of deposits to private pension fund managers as a result of privatization of the civil servants’ pension scheme.

The decline in 2002 reflects largely the fall in quasi money as a result of shift of asset portfolios from time deposits to Bank of Botswana certificates.

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

Figure 2.
Figure 2.

Botswana: Main Economic Indicators, 1990-2003

Citation: IMF Staff Country Reports 2004, 225; 10.5089/9781451806403.002.A001

Sources: Botswana authorities; and Fund staff estimates.1/ National accounts year beginning July 1.2/ Fiscal year beginning April 1. For 2003/4, the figures represent the government budget.
Table 2.

Botswana: Sectoral GDP and Savings-Investment Balances, 1996/97-2003/04

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

Calendar year.

8. The overall fiscal deficit is projected to decline to below 1 percent of GDP in 2003/04, from 4 percent in 2002/03 (Table 3 and Figure 3). Total government tax revenue is expected to increase by 4.2 percentage points of GDP relative to the previous year (see Table below), owing to improvements in the collections from customs receipts from the Southern African Customs Union (SACU), 2 and to the introduction of the VAT in July 2002. However, compared with the budget estimates for 2003/04, revenue, notably the VAT, is not performing fully as expected because of problems in tax administration. Total expenditure is projected to rise by about 1 percentage point of GDP in 2003/04, as a significant increase in current outlays on HIV/AIDS, education, and drought relief will be offset in part by lower capital expenditure (development expenditure is likely to fall short by 1.2 percentage points of GDP relative to the budget). As the government did not award a wage increase in 2003/04, the share of wages in GDP is projected to decline by 0.5 percent to 11 percent. Given the uncertain outlook for SACU tax revenue, the cabinet approved in November 2003 the introduction of an autonomous Botswana Unified Revenue Service (BURS), for which parliament is expected to approve legislation in early 20043.

Table 3.

Botswana: Central Government Operations, 1998/99-2003/04 1/

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

Fiscal year begins on April 1.

Authorities’ and staff estimates and projections.

Original budget estimates adjusted for supplementary expenditure and revised outlook for VAT revenue.

Expenditure on goods and services, and transfers.

Figure 3.
Figure 3.

Botswana: Selected Fiscal Indicators, 1996/97-2003/04 1/

Citation: IMF Staff Country Reports 2004, 225; 10.5089/9781451806403.002.A001

1/ Fiscal year begins April 1.

9. The government continued to draw down its deposits at the central bank as it implemented the partial privatization of the civil service pension scheme initiated in 2001. During fiscal-year 2003/04, government has transferred deposits equivalent to 8 percent of GDP in accumulated civil servant pension claims to the private pension fund managers. As of end-December 2003, a total of 27 percent of GDP had been transferred by the government to the private sector.

10. The Bank of Botswana maintained a tight monetary policy stance through the first half of 2003 before relaxing toward the end of the year (Table 4). The bank rate was raised by a total of 100 basis points to 15.25 percent in November 2002, in order to stem inflationary pressures associated with the recent rapid growth in fiscal deficits and sharp increase in private sector credit. In addition, in 2003 the Bank of Botswana almost doubled its placements of central bank certificates (BOBCs) compared with that in 2001—the main instrument of liquidity control—to 26 percent of GDP, with a view to draining in part the increase in banking system liquidity associated with the privatization of the public service pension system. The initial issue of government bonds (6 percent of GDP) in 2003 contributed to a further tightening of liquidity. Partly reflecting these measures, growth in private sector credit had decelerated to 15 percent by end-2003 (from 24 percent in the previous year). As inflationary pressures abated during the year, the Bank of Botswana cautiously eased monetary policy by lowering the bank rate in steps to 14.25 percent by end-2003.

Table 4.

Botswana: Monetary Survey, 1996-2003 1/

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Sources: Bank of Botswana; and Fund staff estimates.

End of period. For 2003, end-October.

Bank of Botswana Certificates (BoBCs) held by banks and nonbank financial institutions.

The decline in 2002 reflects largely the fall in quasi money as a result of shift of asset portfolios from time deposits to BoBCs.

From 2002 onward, figures include the government transfer of deposits to private pension fund managers as a result of the privatization of the civil servants’ pension scheme.

Central Government Operations, 2000/01-2003/04 1/

(In percent of GDP)

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

Fiscal year (April-March).

Southern African Customs Union.

11. The external current account surplus is expected to have narrowed slightly to 11 percent of GDP in 2003 (Table 6), as the surge in diamond exports was offset by strong import growth (associated with the large budget deficit in 2002/03 and the appreciating pula), and a higher repatriation of profits and dividends. Since mid-2001, the major currencies (the SDR and the rand) in the basket to which the pula is pegged have undergone a major realignment contributing to the 12 percent appreciation of the nominal effective exchange rate (NEER) through October 2003 (Figure 4).4 In the comparable period, partly reflecting the relatively higher inflation in Botswana, the real effective exchange rate (REER) appreciated by about 19 percent, contributing to some loss of external competitiveness for Botswana. Partly to correct for this development, effective February 6, 2004, the pula was devalued by 7.5 percent against the currency basket. Following a significant decline in 2002, net international reserves declined further by US$200 million during 2003 to a level of US$5.3 billion by year’s end (25 months of imports). The loss in reserves is associated with the transfer of civil service pension claims to private fund managers referred to above.

Table 5.

Botswana: Assets and Liabilities of the Bank of Botswana, 1996-2003

(In millions of pula; end of period)

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Source: Bank of Botswana.

For 2003, data as of end-October.

Table 6.

Botswana: Balance of Payments, 1997-2003 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 period-average exchange rate.

Includes valuation adjustment.