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Public Information Notice (PIN) No.04/78
July 30, 2004
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Concludes 2003 Article IV Consultation with Botswana

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2003 Article IV consultation with Botswana is also available.

On March 24, 2004, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Botswana.1

Background

Botswana has been among the best-performing economies over the past 35 years. During this period, Botswana has evolved from one of the poorest countries in the world to a middle-income country with the highest sovereign credit rating in Africa. This success has been widely attributed to sound economic policies, especially in managing its large diamond resources, and a commitment to democratic principles. However, Botswana remains heavily dependent on the diamond sector, which is reaching a production plateau; the diamond sector accounts for about one-third of GDP and 70 percent of export earnings. Botswana also has one of the highest HIV/AIDS infection rates, which threatens to unravel its economic success to date.

Faced with these problems, Botswana's major challenge is to develop appropriate social safety nets and diversify the economy to support economic growth, which is expected to decelerate relative to the high rates experienced over the past 35 years. In April 2003, Botswana launched the Ninth National Development Plan (NDP 9) for 2003/04-2008/09, which focuses on diversifying the economy away from mineral production and exports and addresses the problems of unemployment, poverty reduction, and HIV/AIDS. Later in the year, the authorities prepared a comprehensive National Strategy Framework (NSF) for HIV/AIDS, which consolidated all the related programs to address the epidemic and available donor support, and is considered to be among the best in Africa. However, the NSF has not yet been issued as a Government policy paper, a prerequisite for its reconciliation with the NDP 9 and the annual budgets.

During 2003/04, productivity gains in the diamond-sorting process led to higher-than-expected real growth of 5.4 percent, as diamond production has surpassed the earlier expectation of 28 million carats to record 30 million carats, while nonmining output growth is projected to maintain 5 percent level for the second year in a row. Inflation declined during 2003, from over 12 percent in June to 6.4 percent in December 2003, reflecting mainly tight monetary policy and a moderation in the growth of government expenditure.

The overall fiscal outturn for 2003/04 is likely to be nearly balanced against the announced intention to return to a long-standing tradition of surpluses. Some revenue items, notably the value-added tax (VAT), are expected to show a sizable shortfall compared with the budget, reflecting in part the weak tax administration, while expenditures on HIV/AIDS and drought relief will exceed the budget provisions.

The Bank of Botswana maintained a tight monetary policy stance throughout the second half of 2002 and in most of 2003 to stem inflationary pressures arising in part from high levels of government spending and the sharp increase in private sector credit. In addition, the total outstanding placement of the Bank of Botswana Certificates—the main instrument of liquidity control—increased to 10 billion pula (29 percent of GDP), as the authorities sought to drain the increase in banking system liquidity associated with the privatization of the public service pension system. The issue of government bonds (2.5 billion pula) in 2003 contributed to a further tightening of liquidity. As inflationary pressures abated, the Bank of Botswana cautiously eased policy by lowering the bank rate in steps from 15.25 percent to 14.25 percent by end 2003.

The pula is pegged to a currency basket comprising the rand and the SDR. It was devalued by 7.5 percent against the basket in February 2004 to partly reverse a steady real effective appreciation over the last two years. The external current account surplus is expected to have moderated to 11 percent of GDP in 2003, as the surge in diamond exports was offset by import growth (facilitated by a real appreciation of the pula), as well as a larger repatriation of profits and dividends. The authorities are implementing a number of structural reforms to improve access to export markets; these steps will help to maintain external competitiveness and promote diversification. End-year international reserves were US$5.3 billion (23 months of imports).

Executive Board Assessment

Directors noted that Botswana's sound macroeconomic policies have contributed to sustained growth and single-digit inflation, which, together with strong institutions and prudent natural resource management, have helped place Botswana among the best-performing economies in Africa over the last three decades. At the same time, they observed that the leveling-off of diamond production is likely to slow the rate of growth in the period ahead, and very high HIV/AIDS infection rates threaten to undermine the remarkable progress that has been achieved in strengthening the economy and alleviating poverty. Against this background, Directors emphasized the need for policies aimed at diversifying the economy and sustaining growth, while providing for adequate resources to fight the HIV/AIDS pandemic. They welcomed the Ninth National Development Plan (NDP 9) as a timely and appropriate reflection of the authorities' medium-term economic strategy.

Directors commended the government on the launching of a comprehensive National Strategic Framework (NSF) for HIV/AIDS that consolidates all the programs related to the pandemic, as well as on the complementary National Strategy for Poverty Reduction (NSPR). They urged the authorities to integrate all these programs into the NDP 9 macroeconomic framework. This would facilitate the development of a common medium-term budgetary framework, and would assist the government in formulating an appropriate expenditure policy and mobilizing domestic resources to achieve the goal of a balanced budget. Directors supported the authorities' request for Fund technical assistance to strengthen the tracking of priority social expenditure.

Directors observed that the slowdown in economic growth, together with the HIV/AIDS pandemic, is expected to lead to a deterioration in Botswana's fiscal and external position even under optimistic assumptions. Against this background, Directors stressed the need to expedite reforms to strengthen tax administration by establishing an autonomous revenue authority with strong audit and enforcement functions, and a unit to monitor large taxpayers.

On the expenditure side, Directors encouraged the authorities to refine the fiscal rule, which earmarks diamond revenue to development expenditure by taking into account the changing composition of revenue and expenditure. Moreover, Directors underscored the need for a prompt reassessment of expenditure priorities to contain the rapid growth in government outlays. They urged the authorities to advance the expanded coverage of user fees on tertiary education and increases in fees for certain services of ministries and government departments, and to adjust utility charges as needed, while maintaining safety nets to protect access to public services by the poor and vulnerable groups.

Directors considered that the recent devaluation of the pula to partly reverse the real effective appreciation registered in recent years has resulted in a level of the exchange rate that is broadly appropriate but that needs to be supported by appropriately tight fiscal and monetary policies. In the medium term, Directors recommended considering more frequent reviews of the relative weights in the composition of the currency basket, to better reflect Botswana's trade pattern. Directors encouraged the authorities to continue implementing structural reforms to maintain external competitiveness and promote economic diversification. They supported the regional efforts to improve access to export markets; these efforts will need to be complemented with steps to privatize public enterprises, outsource certain government services, continue to remove impediments to private sector development, and promote reforms that could help Botswana benefit from business opportunities offered through regional cooperation initiatives.

Directors welcomed the recent moderation in inflation, but felt that a more ambitious inflation target was needed to sustain the current exchange rate policy. They observed that the authorities' cautious interest rate policy is appropriate given the uncertain fiscal situation. Directors encouraged the authorities to improve the coordination of fiscal and monetary policies in order to reduce pressures on interest rates and foster private sector activities.

Directors concurred with the prominence given to financial sector reform in the NDP 9. The recent launching of an offshore center, the partial privatization of the civil servants' pension scheme, and the introduction of government bonds entail both opportunity for financial deepening as well as risks. Directors stressed that the increased risks associated with these reforms should be addressed through enhanced supervision, and they supported the authorities' request for Fund technical assistance in this area.

Directors welcomed the authorities' decision to review existing anti-money laundering legislation to determine if a free-standing anti-money laundering law is needed. They recommended that oversight of non-bank financial institutions be reinforced to reduce risks to stability and deter money-laundering.

Directors welcomed the progress made in improving statistical information, partly through Botswana's participation in the General Data Dissemination System (GDDS). However, further efforts are required to improve the timeliness and accuracy of macroeconomic data, better harmonize data, and broaden its coverage. Directors supported the provision of Fund technical assistance to strengthen the Central Statistics Office, which should be given adequate resources and a clear mandate to disseminate timely macroeconomic and social data.

It is expected that the next Article IV consultation with Botswana will be held on the standard 12-month cycle.


Selected Economic and Financial Indicators, 1999-2003


1999

2000

2001

2002

2003


Output and Prices (change in percent) 1/

Real GDP 1/

6.6

8.4

2.3

5.5

5.4

of which: Private nonmining GDP

3.4

3.1

4.5

5.6

5.2

Consumer prices (period average)

7.8

8.5

6.6

8.0

9.3

Investment and savings (percent of GDP) 1/

Gross investment

19.9

19.0

24.7

24.5

25.5

Public

11.8

11.8

11.7

11.1

11.2

Private

8.2

7.2

13.0

13.4

14.3

Gross domestic savings

31.2

29.9

36.2

35.8

34.1

Public

5.8

6.0

9.5

7.8

7.9

Private

25.4

23.9

26.7

28.0

26.2

Central government finance 2/ (percent of GDP)

Total revenue and grants

49.7

50.9

40.8

41.9

46.1

Total expenditure and net lending

43.3

41.6

43.9

45.9

46.8

Overall balance (excluding grants)

5.9

9.2

-3.3

-4.3

-0.8

Overall balance (including grants)

6.4

9.3

-3.1

-4.1

-0.7

Primary balance

6.8

9.6

-2.8

-3.8

-0.5

Total public debt

10.3

8.9

8.0

8.7

14.7

Money and credit 3/

Money and quasi money (end year; percentage change)

26.3

1.4

31.2

-1.1

12.6

Bank of Botswana lending rate (end year; in percent)

13.3

14.3

14.3

15.3

14.3

External sector (millions of U.S. dollar) 3/

External sector

Trade balance

785.6

904.5

713.8

763.3

997.7

Current account balance

619.0

546.7

600.7

616.7

812.7

Gross official reserves

6,229.2

6,299.6

5,926.7

5,501.8

5,281.7

Botswana pula per U.S. dollar (period average)

4.6

5.1

5.8

6.3

4.9

Real effective exchange rate (depreciation -)

5.9

3.7

8.8

2.4

8.3


Sources: Data provided by the Botswana authorities; and IMF Staff estimates.

1/ National accounts year beginning July 1; figures for 2002 and 2003 are estimates

2/ Fiscal year beginning April 1.

3/ Calendar year.

 
 

1 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. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.




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