Botswana: Staff Report for the 2010 Article IV Consultation—Informational Annex

The economy entered the crisis from a position of considerable strength because of past prudent macroeconomic management. Macroeconomic policies are being appropriately redirected away from short-term demand management toward medium-term considerations. Fiscal policy was strongly countercyclical during the past two years as the government ramped up spending despite a drop in revenues. The framework for managing the government’s assets and liabilities needs strengthening to cope with a more challenging fiscal environment. The authorities agreed that their development model would need to change.

Abstract

The economy entered the crisis from a position of considerable strength because of past prudent macroeconomic management. Macroeconomic policies are being appropriately redirected away from short-term demand management toward medium-term considerations. Fiscal policy was strongly countercyclical during the past two years as the government ramped up spending despite a drop in revenues. The framework for managing the government’s assets and liabilities needs strengthening to cope with a more challenging fiscal environment. The authorities agreed that their development model would need to change.

I. Relations with the Fund (As of July 9, 2010)

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

II. General resources account

article image

III. SDR department

article image

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 July 9, 2010, the exchange rate of the U.S. dollar to the pula was US$1= P6.983, and that of the South African rand to the pula was R1=P0.92353.

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 July 20, 2009.

X. Technical assistance

article image
article image

II. Joint World Bank and IMF Work Program (As of June 21, 2010)

article image
article image

III. Statistical Issues As of June, 2010

article image
article image

IV. Medium-Term Public Debt Sustainability Analysis1

Botswana’s gross public debt rose sharply to 15 percent of GDP in 2009/10 albeit from a very low base. Under the staff baseline scenario, the public debt ratio-to-GDP increases to 17.6 percent of GDP in 2010/11 before falling to 10.5 percent of GDP by 2015/16. However, as the government draws on its savings to finance fiscal deficits in the near term, its net asset position declines from 39.1 percent of GDP in 2009 to 20.8 percent of GDP in 2012 before increasing gradually thereafter. This declining path for public debt is robust to various shocks, though holding the fiscal deficit constant at current levels results in an unsustainable debt path, underscoring the need for substantial expenditure reduction.

Botswana’s gross public debt rose sharply from US$0.7 billion (6.2 percent of GDP) in 2008/09 to about US$2 billion (15 percent of GDP) in 2009/10. About 72 percent of the debt is owed to bilateral and multilateral foreign creditors, while the rest is domestic debt. Botswana has had a historically low level of public debt, thanks to prudent fiscal policies, which has led to fiscal surpluses and a significant accumulation of government reserves including the Pula Fund. However, the global financial crisis and the resulting lower demand for diamonds have contributed to a sharp decline in government mineral revenues. This, combined with a significant rise in public spending, resulted in a fiscal deficit of 14.2 percent of GDP in FY 2009/10, which was financed through a drawdown in reserves, a budget support loan from the African Development Bank (AfDB) of US$1.5 billion (of which US$1 billion has so far been drawn), and other borrowing.

The baseline scenario underlying the macroeconomic framework assumes that revenue and grants increase from a low of 31.6 percent of GDP in 2009/10 and stabilize at around 37 percent of GDP in the medium term. Primary expenditure is projected to fall as recent stimulus spending is unwound and as ongoing infrastructure projects are completed. As a result, the overall balance gradually improves to a surplus of 4.7 percent of GDP in 2015/16. Staff assumes that about one-third of the deficits from 2010/11 through 2012/13 will be financed by domestic borrowing with the remaining two-thirds financed by drawing down savings in the Pula Fund. As a result, gross debt-to-GDP is projected to fall to 10.5 percent of GDP by 2015/16.

The government’s net creditor position deteriorates somewhat over the medium term, declining from 39.1 percent of GDP in 2009/10 to 20.8 percent of GDP in 2012/13 before recovering to 25.1 percent of GDP by 2015/16.

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 8.7 percent of GDP by 2013/14, reflecting strong economic growth and the prudent fiscal stance in the recent past. The second scenario shows the outcome if the government’s policies remain unchanged from 2010/11, in the sense that the fiscal balance is held constant at its 2010/11 level. In this case, debt indicators would worsen considerably, with public debt rising to 56.3 percent of GDP by the end of the forecast period, underscoring the downside risk of delay or failure to reduce expenditure to sustainable levels.

Table 1.

Botswana: Common Indicators Required for Surveillance

(As of July 9, 2010)

article image

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 from October 31 to 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.

The bounds tests illustrate the sensitivity of the fiscal position to exogenous shocks (Figure 1). The debt-to-GDP ratio would increase by between 1 to 17 percentage points of GDP depending on the shock. The most benign shock is that from the real interest rate, which results in a 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 17 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, 280; 10.5089/9781455206582.002.A002

Sources: International Monetary Fund, country deskdata, 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-yearhistorical average forthe variable is also shown.2 Permanent 1/4 standard deviation shocksapplied to real interest rate, growth rate, and primary balance.3 One-time real depreciation of30 percent and 10 percent of GDP shock to contingent liabilities occur in 2010, with real depreciation defined as nominal depreciation (measured by percentage fall in dollar value of local currency)minusdomestic inflation (based on GDP deflator).
Table 2.

Botswana: Public Sector Debt Sustainability Framework, 2005-2015

(In percent of calendar-year GDP, unless otherwise indicated)

article image

The public sector coverage refers to the central government. Gross debt is used.

Discrepancies in debt-to-GDP ratios reported in this table and those reported in the Staff Report (pages 7 and 15) reflect the use of calendar year versus fiscal year GDP estimates.

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.

V. Medium-Term External Debt Sustainability Analysis1

Botswana’s gross external debt increased from $0.4 billion (3.2 percent of GDP) in 2008 to $1.9 billion (15.4 percent of GDP) at the end of 2009. The increase largely reflects increased external borrowing by the public sector to finance a large fiscal deficit as well as (government-guaranteed) borrowing by the Botswana Power Corporation to finance the expansion of the Morupule power plant. As a result, public and publicly-guaranteed debt rose six-fold between end-2008 and end-2009, to 14.1 percent of GDP.

External Debt Indicators, 2009

article image
Sources: Bank of Botswana and Fund staff estimates.

After a sharp rise last year due to the deterioration in the fiscal and current account balances, external debt should stabilize this year at 15.9 percent of GDP under the baseline scenario. The fiscal and current account balances should return to a surplus by 2011, at which time external debt should also begin to decline steadily. Consistent with the macroeconomic framework, the recovery in the baseline scenario is predicated on a rebound in diamond exports and declining imports as the power plant projects near completion. Risks to the baseline include higher than envisaged investment in power projects, a substantial element of which would be financed through external borrowing, or a delay of the planned fiscal consolidation.

Simulations suggest that Botswana’s external debt-to-GDP ratio is robust to growth interest rate, and currency shocks. It appears more susceptible to a current account shock and to a combination of growth, interest rate and current account shocks. The ratio could rise significantly in the event of a current account shock, but would still remain below 30 percent of GDP. However, neither scenario is very likely under current circumstances absent a further collapse in the diamond market.

Table 3.

Botswana: External Debt Sustainability Framework, 2005-2015 (In percent of GDP, unless otherwise indicated)

article image

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 growth rate, 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 (based on GDP deflator).

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 2.
Figure 2.

Botswana: External Debt Sustainability: Bound Tests 1/ (External debt in percent of GDP)

Citation: IMF Staff Country Reports 2010, 280; 10.5089/9781455206582.002.A002

Sources: International Monetary Fund, Botswana 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 2010.
1

Prepared by Dalmacio Benicio.

1

Prepared by Irene Yackovlev.

Botswana: 2010 Article IV Consultation: Staff Report and Supplement; Public Information Notice on the Executive Board Discussion
Author: International Monetary Fund
  • View in gallery

    Botswana: Public Debt Sustainability: Bound Tests 1

    (Public debt in percent of GDP)

  • View in gallery

    Botswana: External Debt Sustainability: Bound Tests 1/ (External debt in percent of GDP)