Right of reply document

The published report of the discussion of the IMF Executive Board contained in the Public Information Notice (PIN) is a short summary of the many issues raised by Board members and does not cover all aspects of the discussion. However, while much of the assessment is positive and supportive, in this instance it is the view of the Botswana authorities that the Notice does not truly reflect the economic situation in the country in important respects. For this reason, the authorities have taken the decision to issue a separate statement.

In doing so, the authorities stress the high value that is placed on the annual Article IV consultations and, more generally, the various areas of successful cooperation between Botswana and the Fund. As part of the Article IV process, it is fully recognised that the Executive Board should make an objective and independent assessment including policy advice, and that this cannot be expected always to coincide with the views of the national authorities.

It is also recognised that the Botswana economy currently faces difficult challenges, the extent of which should not be downplayed, and which must be met if the process of development is to continue successfully. Growth has slowed and remains overly dependent on the mining sector; and there are concerns that unemployment is an increasingly serious problem. Moreover, there are substantial costs that are required to effectively tackle the HIV/AIDS pandemic and this is placing a severe strain on the resources available to the public sector at a time when slower revenue growth is anticipated.

However, the assessment of the Board, as recorded in the PIN, goes too far in painting a picture of economic malaise and this is reflected in the accompanying policy recommendations which call for major adjustments at the macroeconomic level. In particular, suggestions that the government should consider raising the rate of VAT and reducing the public sector wage bill would be appropriate for a situation of severe fiscal imbalance. However, while the period where the government budget in Botswana was consistently in surplus may have passed, so far there is no need for the significant fiscal adjustment called for in the Board assessment. Recently, there have been some technical difficulties experienced in the timely collection of fiscal data. It is clear, nevertheless, that the final budget for 2004/05 was in approximate balance. The Government has made a strong commitment to maintain a balanced budget over the course of the economic cycle, and institutional measures to support this are being put in place.

Policy formulation in Botswana has consistently been based on careful consideration of the relevant issues and consultation, and this approach will continue, as indicated by the presentation of the MidTerm Review of National Development Plan 9 to Parliament, in November 2005. In line with this approach, the decision taken in May 2005 to devalue the Pula was a measured reaction to a situation where all the evidence pointed to a serious overvaluation of the Pula. The consequences for both fiscal and monetary policy had already been considered carefully, in particular the need to ensure that inevitable upward pressures on costs were constrained from developing into broader inflationary pressures. The authorities’ subsequent actions have been consistent with this, with the necessary adjustments to monetary policy being made in the context of the scheduled mid-year review of the annual monetary policy statement. In contrast, the Board’s assessment that there is a need for ‘decisive policy action’ was more relevant to an unforeseen economic shock where the appropriate policy response has to be developed quickly. Moreover, since the devaluation was undertaken in order to help improve national competitiveness in support of economic diversification, rather than to correct external imbalance, the call for additional fiscal restraint to curb domestic demand does not seem appropriate, especially given the direct impact of the devaluation on purchasing power.

The Board’s assessment is correct to focus on areas where further structural reform could improve the functioning of the economy and encourage private sector development. However, the call for comprehensive reform of the legal and regulatory framework as a necessary precursor to privatisation is too sweeping. This is especially so in the context of the more detailed Staff Report, which explicitly noted progress on necessary legal reforms. Such a judgment could cast doubt on the Government’s capacity to implement a privatisation programme, especially as the Botswana Privatisation Masterplan, which was published in August 2005, includes an extensive list of public enterprises which are explicitly identified as being ready for privatisation without further work in these areas.

The authorities look forward to continued good relations with the Fund, including the discussions during the next Article IV consultation that will take place in 2006.