Botswana: Staff Report for the 2014 Article IV Consultation—Debt Sustainability Analysis
Author: International Monetary Fund. African Dept.
Publication Date:
15 Jul 2014
eISBN:
9781498337922
Language:
English
Keywords:
ISCR; CR; exchange rate; real GDP; interest rate; debt ratio; debt accumulation; inflows in percent; dollar deflator growth; inflows in percent of GDP; Debt sustainability analysis; Real interest rates; Exchange rate adjustments; debt inflow
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KEY ISSUESSetting: The seeds of good governance and prudent macroeconomic and naturalresources management planted by the Botswana authorities paid off with an impressive increase in the GDP per capita during the last three decades. However, as in many other small middle-income countries (SMICs) in the region, trend growth has softened in recent years, reflecting the decline in the contribution of total factor productivity (TFP) to growth which calls for policies to reduce structural bottlenecks in the economy.Current conditions and outlook: Botswana’s economy remains broadly internally and externally balanced and the authorities’ near-term macroeconomic policy mix is appropriate. Output growth is expected to slowdown in 2014 reflecting partly weaknesses in the non-mineral sector, while inflation is expected to remain within the Bank of Botswana’s (BoB) medium-term objective range of 3-6 percent.Fiscal policy: Staff supports the FY2014/15 budget, which reins in unproductive current spending, while protecting growth-promoting capital spending. Achieving medium-term fiscal consolidation objectives adopted in the budget, would require articulating concrete measures to reduce the wage bill relative to GDP and broaden the revenue base.Financial sector development: Botswana’s banking system is well-capitalized and profitable with relatively low nonperforming loans. Although from a low base, credit growth to households continues to expand at a high rate, which poses potential vulnerabilities for the financial sector. Thus, staff recommends that macro prudential measures be considered to temper the rate of growth of household borrowing. In this context, staff welcomes the government’s emphasis on enhancing greater financial deepening and inclusion, while preserving the stability of the financial system.Reinvigorating growth: Returning to an era of strong growth and accelerating Botswana’s convergence to higher income levels would require policies to reinvigorate TFP growth. These include improving the quality of public spending, notably in public investment projects and education to ensure the transformation of diamond wealth into sustainable assets. The authorities’ efforts to improve the country’s competitiveness, including through reducing the regulatory burden on firms, is also welcomed.Past advice: There is broad agreement between the Fund and the authorities on the macroeconomic policy stance and structural reform policy priorities. Consistent with staff’s advice, the FY 2014/15 budget outlined a framework to reduce the burden of loss- making state-owned enterprises on fiscal resources and propel them toward commercial viability. Furthermore, the budget includes medium-term projections of government accounts, as recommended by staff during past consultations. However, progress towards reducing the wage bill relative to GDP remains modest.

Abstract

KEY ISSUESSetting: The seeds of good governance and prudent macroeconomic and naturalresources management planted by the Botswana authorities paid off with an impressive increase in the GDP per capita during the last three decades. However, as in many other small middle-income countries (SMICs) in the region, trend growth has softened in recent years, reflecting the decline in the contribution of total factor productivity (TFP) to growth which calls for policies to reduce structural bottlenecks in the economy.Current conditions and outlook: Botswana’s economy remains broadly internally and externally balanced and the authorities’ near-term macroeconomic policy mix is appropriate. Output growth is expected to slowdown in 2014 reflecting partly weaknesses in the non-mineral sector, while inflation is expected to remain within the Bank of Botswana’s (BoB) medium-term objective range of 3-6 percent.Fiscal policy: Staff supports the FY2014/15 budget, which reins in unproductive current spending, while protecting growth-promoting capital spending. Achieving medium-term fiscal consolidation objectives adopted in the budget, would require articulating concrete measures to reduce the wage bill relative to GDP and broaden the revenue base.Financial sector development: Botswana’s banking system is well-capitalized and profitable with relatively low nonperforming loans. Although from a low base, credit growth to households continues to expand at a high rate, which poses potential vulnerabilities for the financial sector. Thus, staff recommends that macro prudential measures be considered to temper the rate of growth of household borrowing. In this context, staff welcomes the government’s emphasis on enhancing greater financial deepening and inclusion, while preserving the stability of the financial system.Reinvigorating growth: Returning to an era of strong growth and accelerating Botswana’s convergence to higher income levels would require policies to reinvigorate TFP growth. These include improving the quality of public spending, notably in public investment projects and education to ensure the transformation of diamond wealth into sustainable assets. The authorities’ efforts to improve the country’s competitiveness, including through reducing the regulatory burden on firms, is also welcomed.Past advice: There is broad agreement between the Fund and the authorities on the macroeconomic policy stance and structural reform policy priorities. Consistent with staff’s advice, the FY 2014/15 budget outlined a framework to reduce the burden of loss- making state-owned enterprises on fiscal resources and propel them toward commercial viability. Furthermore, the budget includes medium-term projections of government accounts, as recommended by staff during past consultations. However, progress towards reducing the wage bill relative to GDP remains modest.

Medium-Term Public Debt Sustainability

Botswana’s gross public debt was broadly unchanged in nominal pula terms but decreased slightly relative to GDP in 2013/14 compared with 2012/13. However, there was a slight change in the structure of the debt: the external debt decreased slightly, while domestic debt increased offsetting the decline in the external debt. As a result, the share of external debt in total debt decreased slightly to 67 percent in 2013/14.

Botswana’s historically low level of public debt reflects the authorities’ prudent macroeconomic policies. This resulted in a significant reserve accumulation, which allowed them to face the Great Recession with strong policy buffers. Therefore, countercyclical policies were successfully implemented without much debt accumulation.

Staff’s analysis, based on the permanent income hypothesis, suggests that in order to fully preserve mineral wealth for future generations, the non-mineral primary balance (NMPB) should be reduced to about 5 percent of non-mineral GDP from the current level of about 14 percent.1

The baseline scenario, underlying the staff’s macroeconomic framework, assumes continuing fiscal consolidation with the primary surplus amounting about 2 percent of GDP on average for 2014/15–19/20. The main burden of fiscal adjustment falls on primary expenditure. By 2019/20, the stock of gross public debt is projected at 7 percent of GDP (Table 1).

Table 1.

Botswana Public Sector Debt Sustainability Analysis (DSA) - Baseline Scenario

(in percent of GDP unless otherwise indicated)

article image
Source: IMF staff.

Public sector is defined as general government.

Bond Spread over U.S. Bonds.

Defined as interest payments divided by debt stock at the end of previous year.

Derived as [(r - p(1+g) - g + ae(1+r)]/(1+g+p+gp)) times previous period debt ratio, with r = interest rate; p = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = 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 4 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 ae(1+r).

For projections, this line includes exchange rate changes during the projection period.

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.

Figure 1 shows two alternative scenarios:

Figure 1.
Figure 1.

Botswana Public DSA - Composition of Public Debt and Alternative Scenarios

Citation: IMF Staff Country Reports 2014, 204; 10.5089/9781498337922.002.A003

Source: IMF staff.

  • The first scenario aims to demonstrate what would be the fiscal outcome if the main macro-variables are maintained at their historical 10-year averages. In this scenario, debt-to-GDP ratio does not decline further and stabilizes at about 14 percent of GDP—much higher than suggested by the baseline scenario. The main driver of this kind of dynamics is the deteriorated primary balances due to countercyclical fiscal policy response to the 2008–09 financial crisis.

  • The second scenario assumes no change in the policy and holds the primary fiscal balance constant at its 2014/15 level (1.4 percent of GDP) throughout the medium-term. In this case, public debt also stabilizes at a level higher than suggested by the baseline scenario, because the baseline scenario assumes further fiscal consolidation.

Medium-Term External Debt Sustainability

Botswana’s gross external debt decreased to 26 percent of GDP in 2013 from 28.5 percent in 2012. The government’s external borrowing was mainly from multilateral organizations, including from the International Bank for Reconstruction and Development and the African Development Bank.

The stock of Botswana’s gross external debt is projected to decline gradually from about 26 percent of GDP in 2013 to about 13.5 percent of GDP in 2019 (Table 2). Ongoing fiscal consolidation supported by a steady improvement in international terms of trade, and stable FDI inflows should support a reduction in the external debt ratio.

Table 2.

Country: External Debt Sustainability Framework, 2009-2019

(In percent of GDP, unless otherwise indicated)

article image

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

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 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.

An alternative scenario, with key debt-creating variables at their historical levels, suggests that Botswana could become a net creditor vis-à-vis the rest of the world over the medium-term. This is a notable improvement over the baseline projections (Figure 2).

Figure 2.
Figure 2.

Country: External Debt Sustainability: Bound Tests 1/2/

(External debt in percent of GDP)

Citation: IMF Staff Country Reports 2014, 204; 10.5089/9781498337922.002.A003

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/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.

Simulations suggest that Botswana’s external debt-to-GDP ratio is sensitive only to a current account shock. A real depreciation shock, while it increases the debt-to-GDP ratio initially, has only a marginal impact on the medium-term debt dynamics. Moreover, Botswana’s external debt is not very sensitive to a shock in interest rates and economic activity.

1

The associated background work can be found in the 2012 Article IV staff report (http://www.imf.org/external/pubs/cat/longres.aspx?sk=26166.0).

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Cover IMF Staff Country Reports
Botswana: Staff Report for the 2014 Article IV Consultation
Author: International Monetary Fund. African Dept.
Volume/Issue:
Volume 2014: Issue 204
Publisher:
International Monetary Fund
ISBN:
9781498337922
ISSN:
1934-7685
Pages:
54
DOI:
https://doi.org/10.5089/9781498337922.002
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    Botswana Public DSA - Composition of Public Debt and Alternative Scenarios

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    Country: External Debt Sustainability: Bound Tests 1/2/

    (External debt in percent of GDP)

Botswana Public DSA - Composition of Public Debt and Alternative Scenarios

Country: External Debt Sustainability: Bound Tests 1/2/

(External debt in percent of GDP)