Introduction and Background

1. The Botswana authorities would like to thank the Fund management and staff for the valuable advice provided over the years, the open dialogue and the frank exchange of views during the 2005 Article IV consultation discussions. The government, though not a user of Fund resources, has benefited immensely from the Fund technical assistance, which has helped it hone the policies that have been essential for the achievements made in continued macroeconomic stabilization of the economy and consistently charting a positive growth path.

2. Botswana has been among the top economic performers in the world during the last three decades. This occurred despite initial adverse conditions, including minimal investment during the colonial period. Over the years, Botswana has been able to balance provision of social services with good economic management as evidenced by the high sovereign credit ratings awarded by both Moody’s and Standard and Poor’ rating agencies in the A grade for a third year in a row. Botswana’s ratings, which are the highest in Africa, are indicative of the firm commitment of Government to prudent fiscal and monetary policy, as well as continuing political and macroeconomic stability.

3. Notwithstanding this accomplishment, the authorities are aware that the country faces difficult developmental challenges, including further diversification of the economic base, the pressing challenge of the HIV/AIDS pandemic, further reduction of the prevalence of poverty by maintaining high economic growth rates so as to meet the Millennium Development Goals (MDGs) and the country’s vision 2016 objectives. The authorities have already made good progress in responding to these challenges, and their strategy going forward is sound. The ruling party was re-elected and formed a new government in the latter part of 2004 and has re-committed itself to continue pursuing sound macroeconomic policies, ensure stability and build on the achievements already made.

Recent Economic Developments and Prospects

4. The economy has continued to register positive growth rates in 2003/04 albeit at a lower pace than the previous years and growth is expected to decelerate further in 2004/05. Economic performance is expected to fall slightly in 2004 to 4 percent compared to 5.7 percent the year before, largely due to a general decline in the performance of the mining and the non-mining sectors. The fiscal position is expected to improve with the budget deficit set at 0.5 percent of GDP in fiscal year 2005/06. The fiscal performance will be supported by an expected improvement in mineral receipts and improvement in tax administration.

5. Employment has been growing and about 11 000 formal sector jobs were added to the labor market in 2004, which is double the additional formal sector jobs added in the previous year. This positive development notwithstanding, unemployment estimated at 23.8 percent, remains a major challenge that the authorities are addressing actively. They believe that sustained economic growth and development can only be achieved through a greater degree of self reliance by the private sector and through the reduction of the role of the state in economic activity.

6. It is in this vein that the Botswana Development Corporation (BDC) has promoted a number of new projects in several sectors including concrete crushing, electrical cable manufacturing, plastic recycling amongst others and has a number of projects being finalized. Every effort is being made to diversify the economy and accelerate the structural reforms necessary to support this initiative. Consequently, economic growth is forecast to be between 5–6 percent in the medium term as projected in the ninth National Development Plan (NDP 9). They are committed to regional economic integration efforts particularly on the trade front and further developing the country as a regional financial hub.

Fiscal Policy

7. The Botswana authorities will continue to pursue prudent fiscal management based on the overarching principle of fiscal sustainability. The authorities’ fiscal strategy is premised on achieving a balanced budget while they are also willing to run minimum and manageable budget deficits under given unique circumstances in future. The authorities, however, recognize the challenges they face arising from dwindling revenues as a result of the gradual slowdown of the diamond sector, projected further declines in SACU receipts and increased expenditure on HIV/AIDS. The fiscal position is expected to improve with the budget deficit estimated to be 0.5 percent of GDP in the 2005/2006 fiscal year. The fiscal performance will be supported by an expected improvement in mineral receipts and improvement in tax administration.

8. A new budget has been introduced that captures all expenditures and ensures that they are brought in line with the NDP 9 objectives. The authorities are in the process of rollingout the Budget Accounting and Budgeting System. This is part of a broader effort to improve public sector productivity, including the introduction of Performance Management System (PMS) and computerization of government activities. The authorities recently established a Unified Revenue Service (BURS), which will assist in improving revenue administration capacity.

Monetary, Exchange Rate and Financial Sector Issues

9. While the country’s monetary stance is anchored on the exchange rate peg, the authorities are exploring ways to further strengthen the monetary policy framework including a possible move to inflation targeting, which would aim at arresting inflationary pressures, maintain competitiveness and rein in macro economic stability. In this regard, the authorities have initiated efforts to improve the understanding of the monetary policy transmission mechanisms while developing management systems in the short-term inflation forecasting capacity. The effects of the devaluation were temporary and did not cause any significant disruption to the economy. The inflation rate has been declining since November 2004, with the six month annualized average inflation hovering around 5 percent. The authorities achieved their inflation rate target of 4–7 percent, hence feel that their decision to lower the bank rate recently from 14.25 to 14 percent was appropriate.

10. The authorities are working tirelessly to improve the financial sector and deal with the sizeable deficit on the capital and financial account. Efforts to develop the domestic bond market are still on-going though the economy is still experiencing excess liquidity arising from the privatization of the public pension system. Moreover, the Bank of Botswana is using monetary policy tools to deal with the excess liquidity by issuing central bank certificates. In line with its objective of building a prosperous and innovative nation, the government has established the International Financial Services Centre (IFSC) aimed at attracting sustainable investments into the country. To improve the quality of supervision and reduce vulnerability in the finance sector, the authorities intend to establish a Financial Supervisory authority for non-banks. In this respect, they have recently completed a Financial Sector Reform and Strengthening Initiative and the recommendations are currently under consideration by the Ministry of Finance and Development Planning. The country has completed its draft AMLC/CFT strategy aimed at bringing the framework in line with international standards, and is considering the merits of applying for an FSAP to further strengthen the financial system.

Structural Issues

11. The Botswana authorities remain committed to structural reforms in order to achieve the transformation of the economy and set a sustainable growth path. In this respect, the National Employment, Manpower and Incomes Council, an umbrella body with the responsibility to oversee the structural reform process as enshrined in the NDP 9, has been reconstituted with a broader reform agenda. The authorities have announced a Privatization Master Plan and other initiatives aimed at improving performance of the public enterprises. They believe that the privatization process should be orderly and that it should benefit all citizens through garnering political consensus on the pace of the divesture process.

12. To also improve tax administration and revenue collection, the authorities have embarked on an extensive follow-up on tax evaders and are improving the legal framework to ensure that more people are brought into the formal tax net and comply with the laws of the land. In this regard the authorities intend to improve the audit and enforcement procedures.

13. Special focus and support has also been given to small scale enterprises through the Citizens Entrepreneurial Development Agency (CEDA). During 2004, the government undertook a study to review Revised National Policy on Incomes, Employment, Prices and Profits of 1990. The government is currently considering the recommendations of the study before they are presented to Parliament.

14. The government is committed to creating an enabling environment necessary to attract Foreign Direct Investments (FDI) into the country. The authorities are forging links with other regional partners on trade and investment, and have adopted a Foreign Direct Investment Strategy, a new Competition Policy and are revising the legal operating environment supportive of this initiative. Several other pieces of legislation aimed at improving the country’s image as an attractive investment destination are currently being introduced, reviewed or modernized. The authorities are also in the process of implementing the recommendations of the FIAS study on administrative barriers to investment.

Health and HIV/AIDS

15. The country launched its Millennium Development Goals Status Report in September 2004, which indicated that a lot needed to be done to improve the country’s health situation, most notably with regards to HIV/AIDS and malaria. The authorities have committed themselves to providing a comprehensive and accessible health care and services to its populace throughout the country. The authorities are also committed to achieve the target of reducing mother to child HIV infection by 2015. In this respect, they have devised a comprehensive strategy to deal with the pandemic, which includes catering for orphans, sourcing and distribution of drugs, provision of food for affected vulnerable groups, clothing and school uniforms and other related necessities. Thanks to the authorities determined efforts and assistance of the international community, there are currently encouraging signs that the incidence rate of HIV/AIDS may have already begun to level off as the latest official statistics show that the incidence of the disease among those 18 months of age and older is 17.3 percent, while the incidence for the population aged 15 to 49 years is 25.3 percent. The country, while focusing on fighting the HIV/AIDS pandemic, has had to deal with a rising mortality rate. The authorities have embarked on a country-wide endeavor to provide health services and are introducing a number of infrastructural developments, including building new facilities and upgrading existing ones. The government has intensified its efforts to train nationals in the health sector to deal with the acute shortage.

Other Issues

16. The government is committed to fight poverty. Though some gains have been made in recent years, there still remains a substantial number of people (23.4 percent of the population) below the poverty line. The government has established a Rural Development Council whose work is guided by the Revised National Policy for Rural Development and supported by a substantial allocation of the development budget to ensure that the plight of the rural poor are properly addressed and that rural development institutions are adequately funded so that they can play their rightful role in this effort.

Conclusion

17. The authorities are fully cognizant of the changing economic environment and are committed to taking appropriate steps to deal with these challenges driven by the need to be self reliant and meet the MDGs. Not only is the international environment unpredictable, but the domestic economic environment has also been equally challenging as shown by the decline in the contribution of the diamond sector and the deteriorating social indicators exacerbated by the HIV/AIDS pandemic. It is in this respect that the authorities have embarked on a broad-based structural reform agenda, realigned the budget with a focus on social issues and fight against poverty, while ensuring that it remains balanced and does not pose long-term threats to the economy. The authorities recognize the need to prioritize government expenditure and foster prudent fiscal management of public resources given the limited resource envelope, while promoting growth and diversifying the economy.