IMF Executive Board Concludes 2007 Article IV Consultation with Botswana

Public Information Notice (PIN) No. 08/13
February 8, 2008

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 2007 Article IV Consultation with Botswana is also available.

On December 7, 2007 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Botswana.1


Sound macroeconomic policies, good governance, and high investment have moved Botswana well into the ranks of middle-income countries. Real GDP growth has averaged 4½ percent for the past four years, a solid performance, but below the expectations of the National Development Plan 9, which ends with fiscal year 2008/09 (April 2008-March 2009). Inflation has fallen close to the average for the South African rand area, and balance of payments and fiscal surpluses have built reserves and reduced Botswana's already low external debt.

Despite impressive progress in raising living standards, the incidence of poverty, unemployment, and HIV/AIDS are still high, although they have all declined recently. Botswana has made substantial progress but still has a considerable way to go to meet all the Millennium Development Goals by 2015.

After a temporary slowdown, growth recovered in 2006/07 to an estimated 5¾ percent, thanks to increased non-mineral as well as mineral activity, especially in tourism and manufacturing. Inflation has fallen substantially since peaking in April 2006 and has stabilized just around the upper limit of the authorities' inflation objective of 4-7 percent. In June, the Bank of Botswana (BoB) lowered its policy interest rate half a percent, to 14½ percent. Money supply (M3) has grown steadily and private sector credit rose 19 percent in July 2007 year-on-year.

The fiscal surplus rose substantially in 2006/07 to 12 percent of GDP, as a result of higher revenues from minerals and the South African Customs Union (SACU) combined with slowed capital spending. Another large surplus is expected in 2007/08. Continued high mineral prices and a decline in imports contributed to a current account surplus of almost 19½ percent of GDP in 2006, and international reserves increased to 25 months of prospective imports of goods and services.

Exchange rates have stabilized in the past year. The pula depreciated significantly in nominal and real effective terms after devaluations in 2004 and 2005 and the shift in 2005 to a crawling peg. The rate of crawl of the pula is set at the difference between the inflation objective and the forecast inflation of Botswana's trading partners. Fiscal restraint, capital account outflows, and tight monetary policy have helped to contain inflationary pressures so that the real effective exchange rate (REER) is now about 10 percent below its peak before the 2004 devaluation.

Over the medium term, continued and prospective development of diamonds, copper, nickel, and coal; large-scale investment in electricity generation; and some promising non-mineral projects should support growth and maintain fiscal and balance of payments surpluses through 2011. But further enhancement of non-mineral growth is necessary to offset the expected sharp decline in diamond production sometime after 2020. Even in a growing economy, it will be difficult for the government to replace the high share of diamond export revenues it currently receives.

Executive Board Assessment

Directors commended Botswana's continued impressive record of sound macroeconomic policies and good governance, which has moved the country into the ranks of middle-income countries. Directors welcomed the recent increase in growth and reduction in inflation, as well as the continued strong balance of payments and fiscal surpluses. They urged the authorities to sustain their recent success at reducing the incidence of poverty, unemployment, and HIV/AIDS, and to continue to strive to meet all the Millennium Development Goals.

Directors observed that, despite this impressive record, Botswana faces the challenges of diversifying the sources of growth and reducing the economy's heavy dependence on diamond production. While a number of promising projects, such as in electricity generation, will contribute to a broadening of the economic base and to growth prospects in the medium term, Directors called for the next National Development Plan to incorporate structural reforms aimed at strengthening further the environment for non-mineral-based activities.

Directors agreed that securing a strong and stable fiscal position and high-quality capital spending will help support growth, as will a further strengthening of non-mineral revenues. They commended the authorities for attaining their principal fiscal goals of maintaining surpluses in the overall and non-investment balances, and limiting public expenditures to less than 40 percent of GDP. At the same time, many Directors advocated a spending ceiling of closer to 30 percent of GDP--still leaving room for the growth of HIV/AIDS-related and capital spending. Many also suggested considering an additional fiscal policy benchmark, based on permanent mineral income estimations, to set the non-mineral primary deficit at a sustainable level.

On the other hand, some Directors saw merit in maintaining the present fiscal strategy, which is working well and would better ensure that resources are available for infrastructure investments and human capital development. Directors welcomed the sound management of the Pula Fund, while recommending adjustments to its institutional framework to strengthen public savings and promote transparency. In this context, a few Directors referred to the possibility of establishing an explicit sovereign wealth fund independent of the central bank's balance sheet.

Turning to monetary and exchange rate policies, Directors observed that the last devaluation of the pula had provided a boost to exports, but real interest rates had remained high. They therefore supported the early summer 2007 reduction of the nominal interest rate and the slowing of the rate of crawl of the pula exchange rate. A further slowing of the rate of crawl would help reduce inflationary pressures. From a longer-term perspective, Directors noted the difficulties of striking an appropriate balance between the authorities' monetary and exchange rate policy objectives, with most Directors advising the authorities to focus on price stability going forward. Competitiveness concerns could best be addressed by advancing structural reforms and improving the business environment.

Directors endorsed the recent measures to reduce excess liquidity, including improving treasury cash management. They encouraged the authorities to sustain these efforts to ease the burden on the Bank of Botswana.

Directors welcomed the conclusions of the recent Financial Sector Assessment Program that the banking sector is sound and near-term risks are well contained. At the same time, they encouraged the authorities to formulate a comprehensive financial sector reform plan to address the remaining agenda for financial deepening. They looked forward to the full implementation of the nonbank financial institutions regulatory authority in January 2008, the completion of the pension and insurance reform legislation, and the strengthening of the Anti Monetary Laundering and Combating the Financing of Terrorism (AML/CFT) framework through the establishment of the Financial Intelligence Unit.

Directors encouraged the authorities to lay the groundwork for further structural reforms going forward, in order to support non-mineral growth. They called for the privatization of large parastatals within an appropriate regulatory framework, and for further efforts to build human capital, develop the private sector, and enhance Botswana's attractiveness to foreign direct investment.

Directors noted that Botswana's economic statistics are generally adequate for surveillance. They supported the continued upgrading of Botswana's statistical capacity.

Botswana: Selected Economic Indicators
  2003 2004 2005 2006 2007
        Prel. Proj.
  (Annual percentage change)

Production, prices, and money


Real GDP

3.1 9.2 -0.8 5.8 4.3


0.3 18.1 -4.4 5.7 -4.3


5.0 3.3 1.8 5.8 10.4

Consumer prices (end of period)

6.4 7.9 11.3 8.5 7.4

Broad money

17.6 13.9 10.6 67.4 23.6
  (Percent of GDP, unless otherwise specified)

Government operations


Total revenue and grants

38.8 37.5 40.3 42.5 41.1

Total expenditure and net lending

39.0 36.3 31.9 30.7 33.1

Overall balance after grants (cash basis)

-0.2 1.2 8.4 11.8 8.0

Non-mineral primary balance (cash basis, as a percent of non-mineral GDP) 1

-33.6 -27.2 -20.5 -15.3 -17.6
  (Percent of GDP, unless otherwise specified)

External sector


Balance of payments (including official transfers; deficit -)

1.9 -0.6 13.2 16.6 17.2

Current account balance (including official transfers; deficit -)

5.6 2.9 14.4 19.3 20.4

Outstanding medium- and long-term public debt

5.4 4.3 4.1 3.5 2.7

Real effective exchange rate (annual average percentage change) 2

3.3 -5.4 -3.0 -2.6 ...

Gross official reserves (in millions of U.S. dollars)

5,339 5,653 6,278 7,954 9,907

Reserves (in months of prospective imports of goods and services)

17.5 18.3 23.0 25.0 24.4

Sources: Botswana authorities and staff estimates and projections.

1 Excluding mineral revenues, and interest earned and paid.

2 Negative values indicate depreciation.

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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