IMF Executive Board Concludes 2012 Article IV Consultation with BotswanaPublic Information Notice (PIN) No. 12/91
August 1, 2012
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.
On July 25, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Botswana on a lapse of time basis. Under the IMF’s lapse of time procedures, the Executive Board completes the Article IV consultations without convening formal discussions.1
Botswana’s economic recovery after the 2008–09 financial crisis was one of the strongest among middle-income countries (MICs), but its growth weakened in the second half of 2011. Real GDP grew by 5.1 percent in 2011 (just below the average for its peer MIC group) compared with 7 percent growth in 2010. The growth deceleration was driven by a significant slowdown in diamond exports during the second half of the year. However, the non-mineral sector registered a brisk growth during the year, despite a significant fiscal withdrawal. Diamond sales for the first quarter of 2012 showed only a very modest recovery.
At the same time, while receding, inflation remains relatively high. Consumer price inflation (year on year) declined from 9.2 percent in December 2011 to 7.7 percent in May 2012, which is higher than the upper end of Bank of Botswana’s medium-term objective range of 3–6 percent. Core inflation (excluding food, fuel and administered prices) has declined slightly in the last few months. Alternative measures, including the trimmed mean, also suggest a downward trend in core inflation.
Notwithstanding the moderation in growth, conditions in financial markets have improved. Private sector credit growth is now approaching pre-crisis level, supported by a strong growth in credit to businesses. Bank’s nonperforming loans fell notably in the second half of 2011 because of a significant improvement in the quality of loans to households. Increased interest and non-interest income, combined with lower provisions for nonperforming loans, contributed to the rebound in banks’ profitability.
The fiscal outcome was better than planned. The overall fiscal deficit in FY2011/12 was about 2 percent of GDP, compared with the budget target of about 6 percent. The non-mineral primary deficit also declined from about 24 percent of non-mineral GDP in FY2010/11 to 17 percent in FY2011/12. The adjustment reflects a sharp decline in government spending mainly due to savings generated in the education budget owing to the increase in the number of students admitted to local tertiary institutions, rationalization of student allowances and improved administration, as well as better prioritization of development spending. Higher-than-expected customs revenue from the Southern Africa Customs Union (SACU) Common Revenue Pool also contributed to the lower deficit.
The overall external position also strengthened in 2011, with annual export growth (in dollar terms) of about 40 percent. Exports grew faster than imports turning the current account deficit into a surplus for the first time in the last three years. Diamond exports benefited from higher diamond prices in the first half of 2011, which more than offset the poor performance of copper and nickel exports. Besides mining, plastic products and textile exports surged in 2011. However, exports of meat and meat products fell compared with 2010 because of the restriction on meat exports to the European Union related to the non-compliance with the EU’s export requirements. The real effective exchange rate lost ground slightly over the last 12 months.
The fragile global economic environment suggests that Botswana’s growth will likely moderate in 2012. Over the medium term, real GDP growth is expected to stabilize at around 4.5 percent, while inflation is expected to converge to the upper band of the Bank of Botswana’s medium-term objective range in 2013. With projected fiscal surpluses in FY2012/13 and beyond, the current account surplus is forecast to stabilize at about 2 percent of GDP. The main near-term risks relate to the highly uncertain external environment, which remains fragile and poses significant downside risks to mineral export demand.
Executive Board Assessment
In concluding the 2012 Article IV Consultation with Botswana, Executive Directors endorsed staff’s appraisal, as follows:
The current fragile global economic environment is likely to delay the pace of recovery in Botswana. Trend growth will likely moderate over the medium term as the historical success over diamond wealth continues to fade.
Against this backdrop, the authorities’ current policy mix of fiscal restraint and an accommodative monetary policy stance is appropriate. In a more adverse global economic scenario, the authorities should allow the automatic stabilizers to operate on the revenue side.
Bolder measures are required to achieve the targeted reduction in the wage bill. Such measures include streamlining the system of non-wage payments, rationalizing the size and structure of government, tightening the link between pay and performance, strengthening payroll systems, and revising the wage scale.
Broadening the tax base should be an integral part of the authorities’ fiscal consolidation strategy. Staff strongly recommends conducting a full-fledged study on tax expenditure to provide a solid foundation for streamlining tax incentives to specific activities that absolutely need it.
The authorities should adopt a fiscal anchor that delinks the fiscal stance from volatile mineral revenue and SACU receipts. Thus, staff reiterates the need to adopt either the non-mineral primary balance or the structural fiscal balance (à la Chile) in the formulation of fiscal policy.
Staff supports the main thrust of the Bank of Botswana’s recent reform in its liquidity management framework. Greater coordination between monetary operations and debt management through enhanced issuance of treasury securities should help to support the needed burden-sharing of sterilization costs.
The authorities should pay close attention to macro-financial linkages. The high level of exposure of the banking system to household debt is a significant source of vulnerability and warrants close monitoring.
There is an urgent need to strengthen the capacity of the non-bank financial institutions’ regulator. The rapid expansion of these institutions has propelled them into a systemically important component of the financial system, while the capacity of the non-bank regulator to supervise these large institutions lags behind. The cross-linkages between the bank and non-bank parts of the financial system constitute potentially an additional risk to the financial system.
Botswana faces long-term development and structural challenges that it needs to address to move the country to a higher level of development. Current redistributive aspects of fiscal policy should be complemented with policies that tackle inequality through fostering effective investment in education and health and enhancing financial inclusion. As one of the largest employers in the economy, the government has an important effect on economy-wide wage settlements and job creation. Thus the reform of the public sector employment policies is critical to enhancing job creation in the broader economy. Fostering deeper institutional and capacity development should be an important part of the government’s reform agenda to support long-term growth.
Staff judges the level of the real effective exchange rate as broadly in line with fundamentals from a medium-term perspective.