Botswana: Staff Report for the 2009 Article IV Consultation—Informational Annex

After several years of robust growth, real GDP growth slowed to 2.9 percent in 2008 owing to a decline in mining output. The nonmining primary deficit (NMPD) amounted to 28.6 percent of nonmining GDP in 2008/09, well above the 16.8 percent NMPD in 2007/08. Botswana continues to peg the pula to a basket of the rand and the SDR in an effort to maintain a stable real effective exchange rate (REER). The 12-month inflation rate fell to 8.4 percent in May 2009 from 15 percent in mid-2008, mostly reflecting reduced pressure on fuel and food prices.

Abstract

After several years of robust growth, real GDP growth slowed to 2.9 percent in 2008 owing to a decline in mining output. The nonmining primary deficit (NMPD) amounted to 28.6 percent of nonmining GDP in 2008/09, well above the 16.8 percent NMPD in 2007/08. Botswana continues to peg the pula to a basket of the rand and the SDR in an effort to maintain a stable real effective exchange rate (REER). The 12-month inflation rate fell to 8.4 percent in May 2009 from 15 percent in mid-2008, mostly reflecting reduced pressure on fuel and food prices.

I. Relations with the Fund

(As of April 30, 2009)

I. Membership status Joined July 24, 1968; VIII.

II. General resources account

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III. SDR department

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IV. Outstanding purchases and loans None

V. Financial arrangements None

VI. Project obligations to Fund None

VII. Implementation of HIPC initiative None

VIII. Exchange rate arrangements

The exchange rate of the Botswana pula is a crawling peg arrangement against a basket of currencies. As of May 31, 2009, the exchange rate of the U.S. dollar to the pula was US$1=P6.88, and that of the South African rand to the pula was R1=P0.84.

Botswana accepted the obligations of Article VIII, Sections 2, 3, and 4 of the Fund’s Articles of Agreement, as of November 17, 1995, and maintains an exchange rate system free of restrictions in the making of transfers and payments of current account transactions.

IX. Article IV consultation

Botswana is on a standard 12-month consultation cycle. The last Article IV consultation was concluded by the Executive Board on December 7, 2007. Directors agreed with the thrust of the staff appraisal.

X. Technical assistance assignments/projects

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XI. Technical assistance missions

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II. JMAP: Botswana—World Bank and IMF Work Programs

(As of June 9, 2009)

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III. Statistical Issues

1. Data provision is adequate to conduct surveillance, but there are some shortcomings. The accuracy of data, particularly for the national accounts and balance of payments, needs improvement. National accounts are now prepared on a calendar basis rather than the July-June schedule. Historical data have been adjusted accordingly

2. A ROSC reassessment took place October 31–November 13, 2006 and the report, along with the authorities’ response, was published on April 6, 2007. Cross-cutting recommendations were to monitor the consistency of the main macroeconomic datasets and reconcile differences regularly; establish a list of institutional units consistent with sectorization in the 1993 System of National Accounts (1993 SNA), to be applied consistently across all datasets; and support greater use of preliminary data by formalizing revision policies and implementing regular revision cycles.

3. As one of 22 countries participating in the Fund’s General Data Dissemination System (GDDS) Project for Anglophone African Countries, Botswana has undertaken to use the GDDS as framework for the development of its national statistical system. Also, in preparation for eventual SDDS subscription, Botswana is participating in the monetary and financial statistics modules of the Anglophone Africa project (funded by the U.K. Department for International Development (DFID)). This project aims to assist participating countries to implement plans for improvement identified in the metadata, which were posted on the Fund’s Dissemination Standards Bulletin Board on October 24, 2002. Recent advances include the publication of the National Summary Data Page on the BoB website and the dissemination of advance release calendars for key macroeconomic data.

National accounts and prices

4. Using the production and expenditure approaches, national accounts are now principally based on the concepts and definitions recommended by the 1993 SNA, in line with the strong commitment of the authorities to migrate to the 1993 SNA, but some changes are needed for full observance. For instance, classification and sector breakdowns are still broadly in line with 1968 SNA. Staff welcomes the authorities recent decision to harmonize the accounting period for national accounts It would be important to conduct comprehensive enterprise surveys every few years and introduce estimates for the informal sector. Detailed recommendations are contained in the April 2007 ROSC report.

5. The consumer price index is comprehensive and provides breakdowns between urban and rural areas and between tradable (domestic and imported) and nontradables. The Classification of Individual Consumption by Purpose (COICOP) in the rebased CPI (September 2006) broadly conforms with the guidelines of 1993 SNA and the CPI Manual, although there are still deviations with respect to the imputation of rents and owner-occupied housing. Estimates from the Household Income and Expenditure Survey (HIES) are used for the weights of market expenditure for goods and services. With respect to the wholesale price index (WPI), the ROSC mission recommended the development of concepts and definitions to meet the needs of data users. The Central Statistics Office is to decide whether to produce an output index (PPI), an Intermediate Consumption Index or a Supply Price Index. Currently, the WPI of industrial output is not representative of industrial production, because it measures changes in the prices of only six product groups.

Fiscal accounts

6. The concepts and definitions used in compiling central government finance statistics generally follow the methodology of the IMF’s Government Finance Statistics Manual (GFSM 1986) but cover only budgetary central government activities. No fiscal statistics are compiled for extrabudgetary institutions and consolidated central government. The classification used for budgetary central government partially follows the concepts of GFSM 1986. Detail on some components of current spending is lacking. Transactions are recorded on a cash basis consistent with the GFSM 1986 guidelines. In general, the statistics disseminated in official publications are presented clearly and are made available to all users simultaneously. The data ROSC mission recommended at least annual compilation and dissemination of GFS for extrabudgetary institutions, and the consolidated general government. The authorities have yet to decide on a suitable “migration path” to adopt the GFSM 2001 methodology. The authorities regularly report monthly data on budgetary central government for inclusion in the International Financial Statistics (IFS), but no data are reported for inclusion in the Government Finance Statistics Yearbook.

7. The periodicity of central government finance statistics meets GDDS standards, except for timeliness. It should be noted that information is available to permit compilation and dissemination of government finance statistics within the GDDS recommendations.

Monetary accounts

8. The Bank of Botswana’s (BoB) compilation of the depository corporations survey is generally consistent with the methodology recommended in the Fund’s Monetary and Financial Statistics Manual (MFSM). The survey covers BoB and all other depository corporations, excluding Savings and Credit Cooperatives, that issue liabilities included in the national definition of broad money as recommended in the MFSM. Classification and sectorization are largely consistent with MFSM, except for the classification of financial derivatives. In addition, some nonbudgetary central government units are classified as nonfinancial public corporations and accrued interest is not consistently presented together with the underlying instrument.

9. Monetary data for publication in International Financial Statistics are reported regularly using Standardized Report Forms. Although reporting is more timely, data concerning the central bank are still being reported to STA with a longer lag than those for the other depository corporations.

External sector statistics

10. The concepts, structure and definitions of the balance of payments statistics follow the fifth edition of the Balance of Payments Statistics Manual (BPM5). Institutional classifications generally follow BPM5, although data sources raise minor issues, in particular, administrative sources using definitions and classifications that deviate from BPM5. Source data are adequate, but International Transaction Reporting System (ITRS) data, used mostly for services, have become unreliable, and alternative data sources are needed. Data compilation, estimation, and adjustments mostly employ sound techniques. However, the methods for estimating missing data and calculating flows from stock data are inadequate.

11. Balance of payments statistics are compiled and published in the BoB’s monthly statistical bulletin and the Annual Report, thus meeting GDDS periodicity and timeliness recommendations, although only annual balance of payments statistics are reported to STA for publication. There are discrepancies with national accounts statistics concerning imports, exports, and payments related to settlements within the Southern African Customs Union (SACU), mainly due to different data sources and valuation methods. A recent TA mission has identified gaps in recording of portfolio investments and services.

Table 1.

Botswana: Common Indicators Required for Surveillance

(As of June 10, 2009)

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Daily (D), weekly (W), monthly (M), quarterly (Q), annually (A), irregular (I), and not available (NA).

Reflects the assessment provided in the data ROSC published on April 6, 2007 and based on the findings of the mission that took place during October 31-November 13, 2006, for the data set corresponding to the variable in each row. The assessment indicates whether international standards concerning (respectively) concepts and definitions, scope, classification/sectorization, and basis for recording are fully observed (O), largely observed (LO), largely not observed (LNO), not observed (NO), or not available (NA).

Same as footnote 2, except referring to international standards concerning (respectively) source data, assessment of source data, statistical techniques, assessment and validation of intermediate data and statistical outputs, and revision studies.

Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially determined, including discount, money market, treasury bill, note, and bond rates.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra-budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

IV. Public Sector Debt Sustainability Analysis

The public sector debt sustainability analysis (DSA) shows little risk of debt distress, even under various stress tests. Despite the sizeable increase in public debt expected during 2009-10, the DSA indicates that Botswana’s public debt would remain sustainable over the medium term. However, continued large fiscal deficit over the medium term would worsen the debt indicators considerably, underscoring the need for fiscal measures.

1. At end-2008, Botswana’s public debt is estimated at about P5.1 billion, (5.6 percent of GDP). About 30 percent of the debt is owed to bilateral and multilateral foreign creditors, while the rest is domestic debt. Botswana has a historically low level of public debt thanks to sound fiscal policies, which has led to fiscal surpluses and an accumulation of government reserves. However, the global financial crisis and the resulting lower demand for diamond has contributed to a sharp decline in government mineral revenues. This, combined with a significant rise in public spending, would result in a large fiscal deficit of 11.1 percent of GDP in FY 2009/10, which is expected to be more than fully financed by a budget support loan from the African Development Bank (AfDB), amounting to about 13 percent of GDP. On current projections, the debt-to-GDP ratio would rise from 5.6 percent of GDP in 2008 to 24.4 percent of GDP by 2010, driven largely by rising external debt and a decline in GDP by 10.3 percent in 2009, before declining thereafter to reach 15 percent of GDP by 2014.

2. The baseline scenario underlying the macroeconomic framework assumes that the central government primary budget balance moves from a substantial surplus in 2007 to a deficit in 2008, and remains so through 2011 before returning into a surplus during 2012-2014. Revenue and grants are projected to remain stable around 33 percent of GDP in the medium term, while primary expenditure is projected to increase by 8.5 percentage point of GDP in 2009, as the government undertakes large infrastructure projects. Expenditures would gradually decline in the medium term, as ongoing infrastructure projects are completed. Reflecting the more expansionary fiscal stance, the public debt-to-revenue ratio, which was 17.1 percent in 2008, would increase to 46.4 percent of GDP by 2014.

3. Table 1 presents two additional scenarios. The first scenario shows the fiscal outcome if real GDP growth, real interest rates, and the primary balance are maintained at their historical 10 year averages. In this case, the public debt-to-GDP ratio would drop to zero by 2012, reflecting strong economic growth, as well as the prudent fiscal stance in the recent past. The second scenario shows the outcome if the government’s policies remain unchanged, with the result that the primary deficit for the projection period remains at the unprecedented level of 9.5 percent of GDP. In this case, debt indicators would worsen considerably, with public debt rising to 48.2 percent of GDP by the end of the forecast period, underscoring the need to reduce expenditures to sustainable levels.

Table 1.

Botswana: Public Sector Debt Sustainability Framework, 2004-2014

(In percent of GDP, unless otherwise indicated)

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Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.

Derived as [(r - π(1+g) - g + αε(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; α = share of foreign-currency denominated debt; and ε = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1+g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 2/ as αε(1+r).

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

Derived as nominal interest expenditure divided by previous period debt stock.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

4. The bounds tests illustrate the sensitivity of the fiscal position to exogenous shocks (Figure 1). The results show that with different levels of standard deviation shock to key indicators, the debt-to-GDP ratio is projected to increase by between 3 to 12 percentage points of GDP depending on the shock. The most benign shock is that from the real interest rate, which nevertheless could result in up to 3.4 percentage points increase in the debt-to-GDP ratio relative to the baseline scenario, while a worsening in the 10 year historical average primary balance by one standard deviation results in a 11.7 percentage points increase in the debt-to-GDP ratio.

Figure 1.
Figure 1.

Botswana: Public Debt Sustainability: Bound Tests 1/

(Public debt in percent of GDP)

Citation: IMF Staff Country Reports 2010, 172; 10.5089/9781455206575.002.A002

Sources: International Monetary Fund, country desk data, and staff estimates.1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.2/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and primary balance.3/ One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2009, with real depreciation defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator).

V. External Debt Sustainability Analysis

The external debt sustainability analysis indicates that Botswana’s external debt would remain sustainable in the medium term even under various stress tests. Total external debt is projected to increase substantially, although from a very low level at present, reflecting external budget support and financing of the power plant projects.

1. Botswana’s gross external debt stood at $1.2 billion (11.2 percent of GDP) at the end of 2008, with short-term debt accounting for one-fifth of total external debt. Public external debt was at a low level of 2.7 percent of GDP in 2008.

Table 1.

External Debt Indicators, 2008

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Sources: Bank of Botswana and Fund staff estimates.

2. Under the baseline medium-term macroeconomic scenario, gross external debt is projected to increase to 48.1 percent of GDP by 2012, and trend downward thereafter to 40.8 percent of GDP by 2014. This reflects primarily the new loan from the AfDB (US$1.5 billion) and the external borrowing related to the Morupule (US$750 million) and Mmamabula (US$2.4 billion) power plant projects. The initial increase in 2009 is also explained by the projected 10.3 percent contraction in real GDP due to significantly lower diamond production. The current account surplus, excluding interest payments, is expected to turn into a deficit during 2009-11, largely owing to a drop in external demand for diamonds in 2009 and a rise in imports related to the power plant projects. Current account surpluses are expected during 2013-14, reflecting a recovery in the diamond sector and electricity exports to South Africa. The external debt-to-export ratio is projected to rise significantly beginning in 2009 and to reach a peak of 121.1 percent in 2011 before gradually falling to 86.5 percent by 2014.

3. The bounds tests suggest that Botswana’s external debt position would remain sustainable even if there are shocks. Botswana’s external debt-to-GDP ratio is robust to growth and interest rate shocks, but appears more sensitive to a current account shock and an exchange rate shock (a 30 percent depreciation), and to a combination of growth, interest rate, and current account shocks.

Table 1.

Country: External Debt Sustainability Framework, 2004-2014

(In percent of GDP, unless otherwise indicated)

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Derived as [r - g - ρ(1+g) + εα(1+r)]/(1+g+ρ+gρ) times previous period debt stock, with r = nominal effective interest rate on external debt; ρ = change in domestic GDP deflator in US dollar terms, g = real GDP growt ε = nominal appreciation (increase in dollar value of domestic currency), and α = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-ρ(1+g)+εα(1+r)]/(1+g+ρ+gρ) times previous period debt stock. ρ increases with an appreciating domestic currency (ε > 0) and rising inflation (b

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Figure 1.
Figure 1.

Country: External Debt Sustainability: Bound Tests 1/

(External debt in percent of GDP)

Citation: IMF Staff Country Reports 2010, 172; 10.5089/9781455206575.002.A002

Sources: International Monetary Fund, Country desk data, and staff estimates.1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.2/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.3/ One-time real depreciation of 30 percent occurs in 2009.
Botswana: 2009 Article IV Consultation: Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Botswana
Author: International Monetary Fund
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    Botswana: Public Debt Sustainability: Bound Tests 1/

    (Public debt in percent of GDP)

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    Country: External Debt Sustainability: Bound Tests 1/

    (External debt in percent of GDP)