Botswana
2006 Article IV Consultation: Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Authorities for Botswana

The staff report for the 2006 Article IV Consultation on Botswana highlights economic developments and monetary and exchange rate policy. Botswana’s growth has been fueled by continued increases in diamond production; and real diamond output is projected to level off, and then decline sharply after about 15 years. Diversification of the economy will require implementation of substantial structural reforms, in particular the authorities’ planned reforms in labor markets, the investment environment, and the role of parastatals.

Abstract

The staff report for the 2006 Article IV Consultation on Botswana highlights economic developments and monetary and exchange rate policy. Botswana’s growth has been fueled by continued increases in diamond production; and real diamond output is projected to level off, and then decline sharply after about 15 years. Diversification of the economy will require implementation of substantial structural reforms, in particular the authorities’ planned reforms in labor markets, the investment environment, and the role of parastatals.

I. Introduction

1. Botswana has been among the world’s fastest growing economies over the past 40 years. Diamond-led growth combined with sound macroeconomic policies and good governance has moved Botswana from being one of the poorest countries in the world to the upper-middle income range and yielded the highest sovereign debt ratings and best Transparency International anti-corruption rank in Africa.

2. Nevertheless, Botswana faces serious challenges to continued economic development. The country remains heavily dependent on diamond production, which accounts for about threefourths of exports, one-third of GDP, and half of government revenue. However, diamond output, which almost doubled over the past decade, is projected to plateau at roughly at current production levels for the next decade and a half and decline sharply thereafter. Notwithstanding efforts by the authorities to diversify the economy, non-mining activity remains relatively weak (falling from 66 to 57 percent of GDP in the nine years to 2004/05) and, as a result, unemployment and poverty rates remain high.1 Botswana also has one of the world’s highest HIV/AIDS infection rates (estimated by UNAIDS at over 35 percent of the adult population) and many of Botswana’s other social indicators often lag behind those of countries at comparable income levels.

Income Level of Botswana and Comparator Countries

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Source: World Bank, World Development Indicators, 2006.

Poverty and Unemployment

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Source: World Bank, World Development Indicators, 2006.

World Bank WDI data for Botswana on the Gini coefficient and poverty are from a 1993 household survey and unemployment data are from the 2000-04 period. Botswana’s national data on the Gini coefficient and unemployment are from a 2002/03 household survey.

Nutrition and Education

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Source: World Bank, World Development Indicators, 2006.

3. Botswana has had continuous democratic rule since independence in 1966. The president and legislature were elected in 2004, and new elections are scheduled for 2009.

II. Recent Economic Developments

4. Botswana’s recent economic performance has also been generally good, apart from an upsurge in inflation following the May 2005 devaluation. Real GDP growth has rebounded to more than eight percent in 2004/05 (July-June), mainly due to growth in the mining sector (Tables 1 and 2 and Figure 1). The current account surplus is estimated at fifteen percent of GDP in 2005, mainly reflecting increased exports of both diamonds and other goods.2 The capital and financial accounts continued to show a modest but declining deficit, reflecting investments abroad by pension funds. International reserves increased to the equivalent of 21 months of goods and services imports by end-2005 (Table 3).

Figure 1.
Figure 1.

Botswana: Mining and Non-Mining Growth, 1995/96-2004/05

(In percent)

Citation: IMF Staff Country Reports 2007, 227; 10.5089/9781451806458.002.A001

Source: Botswana authorities.
Table 1.

Botswana: Selected Economic and Financial Indicators, 2001–2006

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

July-June.

Annual average.

April-March. For 2006, based on the 2006/07 Budget Speech.

Money and quasi money (M2) plus Bank of Botswana certificates held by commercial banks for customers and non-banks.

January-December. The domestic savings-investment balance in the national accounts differs from external current account balance due to differences in timing and methodology. The figures in the table also differ from those in Table 2 due to differentials in periods.

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

Table 2.

Botswana: Sectoral GDP and Savings-Investment Balances, 2000/01–2005/06 1/2/

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

July-June, unless otherwise indicated.

Historical data are based on export and import data from the national accounts, which differ significantly from balance of payments data.

GDP data do not match the sum of expenditure components due to errors and omissions.

Calendar year.

Table 3.

Botswana: Balance of Payments, 2001–2011

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

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

The large outflows since 2001 reflect offshore investment activities by private fund managers following the privatization of pension scheme.

The figures include net assets held by the government and the banks and net liabilities held by other sectors not included in the above financial account.

Includes valuation adjustment.

5. The fiscal surplus rose sharply to more than eight percent of GDP in 2005/06.3 Higher diamond revenues and lower-than-budgeted spending were the main factors behind the increased surplus (Table 4 and Figure 2). The 2006/07 budget (April-March) projects a much smaller surplus, with expenditures rebounding strongly and mineral revenue growth slowing. However, data for the first quarter of 2006/07 show a revenue-to-GDP ratio broadly in line with the first quarter of 2005/06 while expenditure-to-GDP ratio appears substantially below the level seen in the same quarter of 2005/06, implying a surplus for the first quarter of 2006/07 at an annual rate of five percent of GDP.

Figure 2.
Figure 2.

Botswana: Fiscal Operations, 1996/97-2006/07

(In percent of GDP)

Citation: IMF Staff Country Reports 2007, 227; 10.5089/9781451806458.002.A001

Source: Botswana authorities.
Table 4.

Botswana: Central Government Operations, 2001/02–2006/07 1/

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

Fiscal year begins on April 1. Classified according to the 2001 GFS methodology.

Investment expenditure includes development expenditure and human capital investment (i.e., education and health spendings).

6. The authorities announced a shift in the exchange rate regime from a fixed peg against a basket to a crawling peg against a basket comprising the South African rand and the SDR at the time of the May 2005 devaluation. According to the 2006 Monetary Policy Statement of the Bank of Botswana (BoB), the rate of crawl is set at the difference between the inflation targets and projections of countries in the basket and Botswana’s own inflation objectives of 4–7 percent for 2006 and an average of a 3–6 percent range for the 2006-08 period; these objectives were reaffirmed in the August 2006 Mid-term Review of the Monetary Policy Statement. 4 The weights and the rate of crawl have not been announced.

7. Coinciding with the devaluation and the change in exchange rate regime, inflation has accelerated (Figure 3). Inflation had been on a downward trend in early 2005, but consumer price inflation accelerated from 6.3 percent in the 12 months to May 2005 and peaked at 14.2 percent in the 12 months to April 2006. Inflation in the first nine months of 2006 has reached 7.8 percent and already exceeds the authorities’ objective of a 4 to 7 percent rate for the December 2005-December 2006 period. Monthly inflation rates between May and September 2006 have been equivalent to annual rates in the 7 to 9 percent range. Notwithstanding the crawl, the real effective exchange rate has appreciated since May 2005, offsetting some of the real effect of the devaluation in the period through September 2006 (Figures 4 and 5).

Figure 3.
Figure 3.

Botswana: Inflation, Jan. 2001-Sept. 2006

(In 12-month percentage change)

Citation: IMF Staff Country Reports 2007, 227; 10.5089/9781451806458.002.A001

Sources: Botswana authorities and IMF staff estimate.
Figure 4.
Figure 4.

Botswana: Bilateral Exchange Rates, Jan. 2000-Sept 2006 (2000=100)

Citation: IMF Staff Country Reports 2007, 227; 10.5089/9781451806458.002.A001

Source: EDSS.
Figure 5.
Figure 5.

Botswana: Real and Nominal Effective Exchange Rates, Jan. 2000-Aug. 2006 (2000=100)

Citation: IMF Staff Country Reports 2007, 227; 10.5089/9781451806458.002.A001

Source: EER Facility.

8. Money and credit trends have been mixed since May 2005 (Table 5). Real, domestic-currency money demand appears to have fallen significantly. Notwithstanding cumulative inflation of 15 percent in the fourteen months between May 2005 and July 2006, pula-denominated broad money (M3) has been almost unchanged in nominal terms while foreign currency deposits have more than doubled.5 Credit trends are less clear; real credit to the private sector fell in the last seven months of 2005 but rose in the first seven months of 2006. Interest rates remained broadly flat in nominal terms (Figure 6), and real interest rates are now negative for most deposit rates. The BoB increased its policy interest rates by a cumulative total of one percent since May 2005. However, banking system excess liquidity is high; credit to non-government is less than the commercial banks’ holdings of Bank of Botswana Certificates (BoBCs).6 Notwithstanding Botswana’s open capital account, interest rates also have a limited relationship with the exchange rate; the absence of organized forward markets in the pula and with very thin markets for pula-denominated fixed-income securities that can be held by non-banks makes it difficult to engage in covered interest arbitrage while prudential limits on banks’ open position constrain them from taking advantage of interest differentials.

Figure 6.
Figure 6.

Botswana: Interest Rates, Jan. 2000-Sept. 2006

(In percent)

Citation: IMF Staff Country Reports 2007, 227; 10.5089/9781451806458.002.A001

Source: Botswana authorities.
Table 5.

Monetary Survey, 2002–2006

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

Excludes the Bank of Botswana Certificates held by commercial banks on their own accounts.