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.
On July 3, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation 1 with Botswana and considered and endorsed the staff appraisal without a meeting.2
Botswana’s economy grew faster than expected reaching a real Gross Domestic Product (GDP) growth of about 6 percent in 2013, which reflects the cyclical recovery of the mining sector along with the recovery in its major trading partners. However, the non-mineral sector slowed down, partly reflecting recurring power supply disruptions. Consumer price inflation decelerated significantly and stood at 4.4 percent at the end of March 2014—well within the Bank of Botswana’s (BoB) medium-term objective range of 3–6 percent. The deceleration in inflation largely reflects a base effect of fuel price increase in 2012 and the appreciation of the Pula against the rand.
Preliminary data suggest that the fiscal balance registered a small surplus in FY 2013/14. This outcome was supported by a further reining in current expenditure, higher mining revenue, and a one-off increase in the Bank of Botswana’s (BoB) profit transfer. Botswana’s current account recorded a surplus in 2013 compared to a deficit in 2012. The diamond sector contributed to the improvement of the current account balance, but imports continued to grow. As a result, the overall external position continues to be relatively strong with official reserve coverage standing at about 10 months of import cover at end-March 2014. Despite the recent deceleration, household borrowing grew at about 24 percent annually in January 2014, which was among the highest in the region. Banks’ nonperforming loans (NPLs), while rising, still remain low by international standards.
Staff projects Botswana’s real GDP growth to slow down to 4.4 percent in 2014 and subsequently stabilize at around 4 percent over the medium-term. The growth slowdown in 2014 is owing to the slowdown in diamond recovery and continued problems in the electricity and water supply which has affected the non-mineral sector. Headline inflation is likely to remain within the BoB’s medium-term objective range in 2014. The current account surplus is expected to stabilize at around 2 percent of GDP over the medium-term supported by the planned fiscal consolidation.
The main near-term risks relate to the uncertain external environment, such as the potential slowdown in emerging markets, which poses downside risks to mineral export demand. On the domestic front, the ongoing problems with power supply and continued high though decelerating growth in household borrowing are potential sources of vulnerabilities. A key medium-term risk relates to the sustainability of long-term growth as trend growth has softened in the last decade requiring the easing of structural bottlenecks and finding new growth drivers.
Executive Board Assessment
In concluding the 2014 Article IV consultation with Botswana, Executive Directors endorsed staff’s appraisal, as follows:
Botswana’s economic performance has been remarkable thanks to the authorities’ good governance and prudent management of natural resources. However, in recent years, trend growth has softened in the midst of high unemployment and income inequality.
The mid-term review (MTR) of the 10th National Development Plan (NDP10) serves as the authorities’ blueprint for structural transformation. Staff welcomes the MTR of NDP 10, which reemphasizes the need to reduce the size of government relative to GDP so that the private sector can take the lead in generating economic growth.
Under current conditions the economy is broadly internally and externally balanced and the authorities’ near-term macroeconomic policy stance is appropriate. Overall external stability is, however, affected by the lack of export diversification, which leaves Botswana’s economy vulnerable to fluctuations in the international demand for diamonds.
Staff welcomes the authorities’ medium-term fiscal strategy. The emphasis on rebuilding the Pula Fund and improving the performance of state owned enterprises is well placed. Improving the quality of spending on health and education and making the social welfare programs better targeted are essential to reducing income inequality and making growth more inclusive.
Staff urges the government to articulate a clearer set of measures to reduce the wage bill relative to GDP and broaden the tax base. Despite the modest wage awards in recent years and the de facto hiring freeze, the wage bill continues to be high reflecting the impact of promotions, non-wage allowances and overtime. The authorities should avoid granting unwarranted preferential tax regimes for businesses.
Botswana’s exchange rate regime has served the country well. Staff encourages the authorities to continuously look for opportunities to further strengthen the operational aspects of the exchange rate framework and deepen the money and foreign currency markets.
The continued increase in household borrowing warrants close monitoring. Staff urges the authorities to use macro prudential tools to limit potential vulnerabilities in the financial system. Plans to establish a national credit bureau is also welcomed. Policies to enhance financial inclusion should focus on mitigating the underlying market failures in the financial system and reducing intermediation costs.
Returning to a period of strong growth would require policies to reinvigorate total factor productivity. These include improving the quality of public spending, most notably on education and the public investment program to ensure the transformation of diamond wealth into sustainable assets, reducing further the regulatory burden on firms, alleviating infrastructure bottlenecks and improving access to finance by small and medium sized enterprises.
Botswana: Selected Economic and Social Indicators, 2010–2014
Calendar year.
Refers to the growth of value added of sectors other than mining, excluding statistical adjustments. The latter includes financial intermediation services indirectly measured (FISIM), taxes on products, and subsidies.
Year beginning April 1.
The non-mineral primary balance is computed as the difference between non-mineral revenue and expenditure (excluding interest receipts and interest payments), divided by non-mineral GDP.
Includes publicly guaranteed debt.
Based on imports of goods and services for the following year.
Botswana: Selected Economic and Social Indicators, 2010–2014
| 2010 | 2011 | 2012 | 2013 Prel. |
2014 Proj. |
||||
|---|---|---|---|---|---|---|---|---|
| (Annual percent change, unless otherwise indicated) | ||||||||
| National income and prices | ||||||||
| Real GDP 1 | 8.6 | 6.2 | 4.3 | 5.9 | 4.4 | |||
| Mineral | 22.7 | −2.3 | −7.0 | 10.6 | 1.4 | |||
| Nonmineral2 | 6.2 | 7.9 | 6.3 | 5.2 | 4.8 | |||
| Consumer prices | 7.4 | 9.2 | 7.4 | 4.1 | 5.4 | |||
| Diamond production (millions of carats) | 22.8 | 23.0 | 20.9 | 22.7 | 22.4 | |||
| External sector | ||||||||
| Exports of goods and services, f.o.b. (US$) | 33.4 | 41.7 | −9.2 | 28.2 | 5.5 | |||
| Of which: diamonds | 49.9 | 38.3 | 7.1 | 39.7 | 3.6 | |||
| Imports of goods and services, f.o.b (US$) | 17.9 | 28.0 | 7.4 | −5.7 | 15.3 | |||
| Terms of trade | −6.1 | 0.4 | 4.2 | 6.2 | 0.2 | |||
| Nominal effective exchange rate | 4.6 | −4.7 | −7.8 | −7.0 | … | |||
| Real effective exchange rate | 8.3 | −0.8 | −3.5 | −4.1 | … | |||
| (Percentage change with respect to M2) | ||||||||
| Money and banking | ||||||||
| Net foreign assets | −17.5 | 25.4 | 0.2 | 16.8 | 10.5 | |||
| Net domestic assets | 29.9 | −21.0 | 7.3 | −12.8 | 2.0 | |||
| Broad money (M2) | 12.4 | 4.3 | 7.4 | 4.0 | 12.5 | |||
| Velocity (nonmineral GDP relative to M3) | 1.6 | 1.7 | 1.8 | 1.9 | 1.9 | |||
| Credit to the private sector | 6.1 | 11.8 | 13.9 | 9.6 | 10.9 | |||
| (Percent of GDP, unless otherwise indicated) | ||||||||
| Investment and savings 1 | ||||||||
| Gross investment (including change in inventories) | 35.4 | 38.7 | 39.2 | 33.9 | 31.5 | |||
| Gross savings | 29.9 | 38.5 | 34.5 | 44.2 | 37.1 | |||
| Central government finances3 | ||||||||
| Total revenue and grants | 32.4 | 36.3 | 36.5 | 35.5 | 35.2 | |||
| Total expenditure and net lending | 39.9 | 36.4 | 35.7 | 35.2 | 34.2 | |||
| Overall balance (deficit -) | −7.5 | −0.2 | 0.8 | 0.3 | 0.9 | |||
| Non-mineral primary balance4 | −25.9 | −20.1 | −13.2 | −14.0 | −12.3 | |||
| Total central government debt | 19.5 | 20.1 | 19.2 | 16.9 | 14.8 | |||
| External sector | ||||||||
| Current account balance | −5.4 | −0.2 | −4.6 | 10.4 | 5.7 | |||
| Balance of payments | −7.0 | 3.3 | −0.8 | 1.1 | 4.7 | |||
| External public debt5 | 19.7 | 20.7 | 19.8 | 17.4 | 14.7 | |||
| (Millions of US$, unless otherwise indicated) | ||||||||
| Gross official reserves (end of period) | 7,883 | 8,386 | 8,270 | 8,429 | 9,200 | |||
| Of which: Pula Fund | 6,938 | 6,901 | ||||||
| Months of imports of goods and services6 | 11.8 | 11.1 | 11.2 | 9.9 | 10.3 | |||
| Percent of GDP | 57.3 | 52.2 | 52.3 | 52.5 | 52.4 | |||
Calendar year.
Refers to the growth of value added of sectors other than mining, excluding statistical adjustments. The latter includes financial intermediation services indirectly measured (FISIM), taxes on products, and subsidies.
Year beginning April 1.
The non-mineral primary balance is computed as the difference between non-mineral revenue and expenditure (excluding interest receipts and interest payments), divided by non-mineral GDP.
Includes publicly guaranteed debt.
Based on imports of goods and services for the following year.
Botswana: Selected Economic and Social Indicators, 2010–2014
| 2010 | 2011 | 2012 | 2013 Prel. |
2014 Proj. |
||||
|---|---|---|---|---|---|---|---|---|
| (Annual percent change, unless otherwise indicated) | ||||||||
| National income and prices | ||||||||
| Real GDP 1 | 8.6 | 6.2 | 4.3 | 5.9 | 4.4 | |||
| Mineral | 22.7 | −2.3 | −7.0 | 10.6 | 1.4 | |||
| Nonmineral2 | 6.2 | 7.9 | 6.3 | 5.2 | 4.8 | |||
| Consumer prices | 7.4 | 9.2 | 7.4 | 4.1 | 5.4 | |||
| Diamond production (millions of carats) | 22.8 | 23.0 | 20.9 | 22.7 | 22.4 | |||
| External sector | ||||||||
| Exports of goods and services, f.o.b. (US$) | 33.4 | 41.7 | −9.2 | 28.2 | 5.5 | |||
| Of which: diamonds | 49.9 | 38.3 | 7.1 | 39.7 | 3.6 | |||
| Imports of goods and services, f.o.b (US$) | 17.9 | 28.0 | 7.4 | −5.7 | 15.3 | |||
| Terms of trade | −6.1 | 0.4 | 4.2 | 6.2 | 0.2 | |||
| Nominal effective exchange rate | 4.6 | −4.7 | −7.8 | −7.0 | … | |||
| Real effective exchange rate | 8.3 | −0.8 | −3.5 | −4.1 | … | |||
| (Percentage change with respect to M2) | ||||||||
| Money and banking | ||||||||
| Net foreign assets | −17.5 | 25.4 | 0.2 | 16.8 | 10.5 | |||
| Net domestic assets | 29.9 | −21.0 | 7.3 | −12.8 | 2.0 | |||
| Broad money (M2) | 12.4 | 4.3 | 7.4 | 4.0 | 12.5 | |||
| Velocity (nonmineral GDP relative to M3) | 1.6 | 1.7 | 1.8 | 1.9 | 1.9 | |||
| Credit to the private sector | 6.1 | 11.8 | 13.9 | 9.6 | 10.9 | |||
| (Percent of GDP, unless otherwise indicated) | ||||||||
| Investment and savings 1 | ||||||||
| Gross investment (including change in inventories) | 35.4 | 38.7 | 39.2 | 33.9 | 31.5 | |||
| Gross savings | 29.9 | 38.5 | 34.5 | 44.2 | 37.1 | |||
| Central government finances3 | ||||||||
| Total revenue and grants | 32.4 | 36.3 | 36.5 | 35.5 | 35.2 | |||
| Total expenditure and net lending | 39.9 | 36.4 | 35.7 | 35.2 | 34.2 | |||
| Overall balance (deficit -) | −7.5 | −0.2 | 0.8 | 0.3 | 0.9 | |||
| Non-mineral primary balance4 | −25.9 | −20.1 | −13.2 | −14.0 | −12.3 | |||
| Total central government debt | 19.5 | 20.1 | 19.2 | 16.9 | 14.8 | |||
| External sector | ||||||||
| Current account balance | −5.4 | −0.2 | −4.6 | 10.4 | 5.7 | |||
| Balance of payments | −7.0 | 3.3 | −0.8 | 1.1 | 4.7 | |||
| External public debt5 | 19.7 | 20.7 | 19.8 | 17.4 | 14.7 | |||
| (Millions of US$, unless otherwise indicated) | ||||||||
| Gross official reserves (end of period) | 7,883 | 8,386 | 8,270 | 8,429 | 9,200 | |||
| Of which: Pula Fund | 6,938 | 6,901 | ||||||
| Months of imports of goods and services6 | 11.8 | 11.1 | 11.2 | 9.9 | 10.3 | |||
| Percent of GDP | 57.3 | 52.2 | 52.3 | 52.5 | 52.4 | |||
Calendar year.
Refers to the growth of value added of sectors other than mining, excluding statistical adjustments. The latter includes financial intermediation services indirectly measured (FISIM), taxes on products, and subsidies.
Year beginning April 1.
The non-mineral primary balance is computed as the difference between non-mineral revenue and expenditure (excluding interest receipts and interest payments), divided by non-mineral GDP.
Includes publicly guaranteed debt.
Based on imports of goods and services for the following year.
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
Article IV consultations are concluded without a Board meeting when the following conditions apply: (i) there are no acute or significant risks, or general policy issues requiring Board discussion; (ii) policies or circumstances are unlikely to have significant regional or global impact; (iii) in the event a parallel program review is being completed, it is also being completed on a lapse-of-time basis; and (iv) the use of Fund resources is not under discussion or anticipated.