## cr17250

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### Financial Sector Stability and Development — Background
- As of end-2016, there were 11 commercial banks and 2 small state-owned statutory banks; 4 banks held about 80 percent of the banking system’s assets.
- Botswana’s population: 2.1 million people.
- All commercial banks are foreign-owned, including subsidiaries of pan-African groups.
- Nonbanks account for about one-half of the financial system.

Key statistics (Botswana Financial System Structure, 2016)
- Banks: Assets 88.4 (In billions of Pula), In percent of assets 43.4
- Commercial banks: Number 11, Assets 80.7, In percent of assets 39.6
- Statutory banks: Number 2, Assets 3.9, In percent of assets 1.9
- Building Society: Number 1, Assets 3.8, In percent of assets 1.9
- Non-bank financial institutions: Assets 115.0, In percent of assets 56.6
  - Life Insurance: Number 9, Assets 19.7, In percent of assets 9.7
  - General Insurance: Number 12, Assets 1.9, In percent of assets 0.9
  - Reinsurers: Number 3, Assets 0.3, In percent of assets 0.1
  - Pension Funds: Number 87, Assets 75.1, In percent of assets 36.8
  - Asset Managers: Number 12, Assets 5.5, In percent of assets 2.6
  - Non-Bank Lenders: Number 7, Assets 8.6, In percent of assets 4.2
  - Micro Lenders: Number 20, Assets 3.9, In percent of assets 1.9
  - SACCOs: Number 52, Assets 0.5, In percent of assets 0.2
- Total financial system: Assets 203.8, In percent of assets 100
- Source noted: Bob’s Research Department and NBFIRA.

Additional background findings
- Between 2008 and 2016, pension fund assets grew from 30 percent of GDP to 47 percent of GDP.
- Insurance premiums increased from 3 percent of GDP in 2005 to 13 percent of GDP in 2016.
- Broad money (M2) to GDP rose from 10.6 percent in 2005 to 41.5 percent in 2016.

### Soundness — Findings and indicators
- Banking sector described as adequately capitalized, liquid, and profitable.
- Bank profitability rose owing to higher interest and non-interest income.
- Annual credit growth slowed from 7.1 percent in 2015 to 6.2 percent in 2016.
- Non-performing loans rose slightly to 5.5 percent of total gross loans in March 2017 but remain manageable.
- Household credit share in banks’ loan books: 60 percent at end-2016.
- Funding structure note: Wholesale business deposits were 73 percent of total deposits in December 2016.

### Stability — Risks, supervision, and AML/CFT
- Data gaps and incomplete information on cross-border capital flows and growing interconnectedness with non-bank financial sector noted as potential risks.
- Recommendation: close cooperation among regulators and proper assessment of macro-financial risks associated with banks’ large exposures, including consolidated supervision.
- Authorities plan to reform AML/CFT supervision and preventive measures following an assessment highlighting shortcomings and recommendations to improve compliance with FATF standards.
- Current supervisory responsibilities:
  - BoB: regulatory and supervisory responsibility for commercial banks, exchange bureaus, one deposit-taking microfinance institution, statutory banks, and the payment system.
  - NBFIRA: supervises nonbank financial institutions (insurance industry, pension funds, stock exchange, fund managers, other investment advisory service providers, micro-lending businesses).
- Noted supervisory gaps: SACCOs accept deposits but are not subject to prudential regulation and are not supervised by either BoB or NBFIRA.

### Supervisory reforms and monitoring
- BoB implementing Basel II capital standards (implemented in January 2016) and plans to adopt Pillar 2 requirements addressing risks not covered by Pillar 1; Pillar 2 planned to enter in force in 2018 and implementation completion planned by end-2017.
- Suggested actions:
  - Annual on-site supervisions for each institution deemed systemic.
  - Design a dedicated stress test exercise targeting household sector exposures (shocks: lower income, higher unemployment, higher interest rates).
  - Improve capacity at NBFIRA for risk-based supervision of nonbank financial institutions, enhance data collection, and enable technological innovation.

### Macroprudential function and crisis resolution
- Recommendation to assign a clear macroprudential mandate to one institution (e.g., BoB) to establish macroprudential measures (example: limits on debt service-to-income ratios) for the whole financial sector in coordination with other supervisors.
- Suggested infrastructure and legal improvements:
  - Set up a credit report database and an on-line collateral registry for immovable and movable assets.
  - Strengthen legislation and staffing for crisis preparedness.
  - Revise the Bank of Botswana Act and the Banking Act to improve emergency liquidity assistance capabilities, corrective action framework, and bank resolution powers.
  - Accelerate implementation of the Financial Stability Council and the Memorandum of Understanding among BOB, MFED, and NBFIRA regarding responsibilities for bank resolution.
  - Entrust the BoB with sufficient legal powers to resolve banks in distress.
- Noted limitation of existing powers: currently limited to issuing directives, temporary management, applying to court for winding up or judicial management; powers deemed insufficient for effective resolution.

### Development and financial hub prospects
- Financial institutions and markets have developed rapidly since 2000; banks, Botswana Stock Exchange, and institutional investors expanded.
- Policy options to develop a regional financial sector hub (if pursued) could include:
  - Improve electronic connectivity, real-time market data, order routing, and ability to clear and settle trades in foreign markets.
  - Adopt the Principles for Financial Market Infrastructures (CPSS-IOSCO).
  - Modernize national payments system by implementing the new Oversight Policy Framework and addressing prudential/supervisory gaps for non-bank financial institutions.
  - Strengthen the clearing house to facilitate risk management in derivatives, net offsetting positions, and collection of collateral in event of defaults.

### Financial inclusion and payments infrastructure
- Botswana performs relatively well on access to finance and mobile banking but scope for further progress exists.
- Recommendations to improve inclusion:
  - Implement recommendations of the Botswana Financial Inclusion Roadmap—Making Access Possible Plan (MAP) 2015.
  - Coordinate supervisory efforts between BoB and NBFIRA to extend services to SMEs and underserved areas.
  - Improve payments system, set up credit bureaus, and adopt sound regulatory framework for mobile money.

### Financial Sector — Summary
- Rapid evolution of financial system; near-term risks are small due to well-capitalized and liquid banking system and sizable international reserves.
- Authorities plan actions to strengthen financial supervision, crisis resolution, and AML/CFT.
- Reforms to foster financial deepening and inclusion are recommended to complement private sector expansion and employment creation.

_References cited in this content unit include Financial Sector Development Strategy (2012-2018), Bank of Botswana, 2012; Research Bulletin, NBFIRA, Volume 1, 2016/17, 2017; Botswana Financial Inclusion Roadmap (2015–2021), FinMark, 2015; Regional Economic Outlook, 2016, Financial Development and Sustainable Growth, April; Sahay and others, 2015 IMF Staff Discussion Note._

---

### Reforms to Mobilize Domestic Revenues — Revenue dependence and key statistics
- Non-mineral tax revenue-to-GDP ratio has been around 20 percent since 2007.
- Domestic revenue mobilization—essentially PIT, CIT, and VAT revenues—has fallen to less than 10 percent of GDP.
- SACU revenue plus mineral revenue (taxes, royalties and dividends) has exceeded 63 percent of total government revenue during the past five years.
- More than 70 percent of the tax collected in Botswana comes from large taxpayers.

Country-level non-mineral tax revenue-to-GDP averages (2007–2016)
- Botswana: 24.9
- Lesotho: 48.9
- Namibia: 29.0
- South Africa: 24.0
- Swaziland: 26.4

VAT and excise related figures (year indicated in source)
- Botswana (2014): VAT 11.08; Excises 3.99; Imports 0.00; Exports 3.99; Total 10.95; Exports component 0.00; Total 10.95
- Lesotho (2013): VAT 14.32; Excises 8.73; Imports 1.02; Total Imports 9.75; Exports 0.00; Exports component 1.33; Total 1.33
- Namibia (2015): VAT 12.38; Excises 7.71; Imports 0.15; Total Imports 7.89; No Data for Exports fields
- South Africa (2015): VAT 15.12; Excises 7.00; Imports 2.32; Total Imports 9.32; Exports 1.12; Exports component 0.00; Total 1.13
- Swaziland (2012): VAT 5.23; Excises 3.93; Imports 0.00; Total Imports 3.93; Exports 17.12; Exports component 0.00; Total 17.12

- Fiscal year runs from 1st April to 31st March.
- Note: Tax Revenue does not include Social Contributions. "No Data" fields represent missing values.

### Mineral and total revenue (in million Pulas and percent of GDP)
Mineral revenue and Total revenue (million Pulas)
- 2008/09: Mineral revenue 17,003; Total revenue 30,455
- 2009/10: Mineral revenue 17,685; Total revenue 30,023
- 2010/11: Mineral revenue 17,556; Total revenue 31,909
- 2011/12: Mineral revenue 19,710; Total revenue 38,486
- 2012/13: Mineral revenue 26,530; Total revenue 41,658
- 2013/14: Mineral revenue 25,863; Total revenue 48,951
- 2014/15: Mineral revenue 30,123; Total revenue 55,904
- 2015/16: Mineral revenue 30,421; Total revenue 47,420

Corresponding shares (percent of GDP)
- Non-mineral tax revenue: 2008/09 22.9; 2009/10 23.0; 2010/11 19.2; 2011/12 18.8; 2012/13 23.6; 2013/14 19.7; 2014/15 20.3; 2015/16 20.5
- Mineral revenue: 2008/09 13.7; 2009/10 11.8; 2010/11 13.2; 2011/12 15.1; 2012/13 10.8; 2013/14 14.1; 2014/15 14.5; 2015/16 9.7
- Other non-tax revenues: 2008/09 4.4; 2009/10 4.2; 2010/11 2.5; 2011/12 2.8; 2012/13 2.7; 2013/14 3.5; 2014/15 2.9; 2015/16 1.7
- Total revenue as percent of GDP: 2008/09 40.9; 2009/10 39.1; 2010/11 34.9; 2011/12 36.7; 2012/13 37.1; 2013/14 37.3; 2014/15 37.8; 2015/16 32.0

### Risks and strategic objective
- Fiscal sustainability is not a near-term concern, but volatility of revenues outside authorities’ control (mineral revenue and SACU pool) poses medium- to long-term risks.
- Raising tax rates in response to a persistent or permanent shock is not considered an optimal policy.
- Best course: reduce dependence on uncontrollable revenue sources through tax reforms aimed at enhancing domestic resource mobilization and reducing inefficiencies and distortions.

### Publication and data transparency
- Publication and sharing of tax data should be a priority.
- Neither MFED nor BURS websites provide statistics on tax collection details.
- The tax policy unit of the MFED reportedly lacks tax statistics to assist its policy making function.

### Key tax administration reforms recommended
- Proceed with the passage and implementation of the Tax Administration Bill, which modernizes procedures and mandates a tax tribunal.
- Repeal the legislative requirement for universal filing of PIT returns.
- Strengthen capacity at the Large Taxpayers’ Unit (LTU), especially audit and risk functions.
- Concentrate BURS resources on enforcing collection from taxpayer groups that are potentially important revenue sources and adopt measures (e.g., adequate VAT registration threshold, simplified procedures) to reduce compliance costs for small taxpayers.
- Priority actions discussed during the 2017 Article IV consultation:
  - Proceed with passage and implementation of the Tax Administration Bill;
  - Repeal the legislative requirement for universal filing of PIT returns;
  - Strengthen capacity at the LTU, especially audit and risk functions.

Administrative changes and impacts
- VAT registration threshold increase from BWP 500 thousand to BWP 1 million (2015) excluded many small taxpayers and freed BURS resources.
- Introduction of universal filing by PIT taxpayers increased BURS burden with no discernible revenue effect to date.
- More than 70 percent of tax revenue is collected from large taxpayers; urgent LTU needs include filling vacancies, training personnel, and using senior auditors.

### Personal Income Tax (PIT) design reform proposals
- Current system: global income tax with deviations (interest exemption up to BWP 7,800; dividends subject to final withholding of 7.5 percent; capital gains subject to progressive taxation but separate from pooled income).
- Dual income tax model described: tax labor income progressively and capital income at a single proportional rate.
- Compromise proposal:
  - Tax dividends, interest, royalties, rental income, and capital gains with a final withholding tax with a single proportional rate between 10 and 15 percent;
  - Tax labor and business income with the progressive rate schedule;
  - Repeal all or most exemptions, and rate and base reductions currently granted to passive capital income;
  - Release taxpayers with a single source of employment income who have no other type of income except passive capital income from filing annual returns;
  - In the medium-term, introduce a full-fledged dual income tax.
- Existing withholding practices:
  - Dividends: final 7.5 percent withholding tax.
  - Interest: taxed at 10 percent withholding rate as an anticipation of annual progressive taxation.
  - Rental income: subject to a 5 percent withholding tax later creditable against final liability (exceptions for non-business rent payments by individuals).
  - Royalties: pooled with other types of income and taxed annually but not subject to withholding.
  - Capital gains: subject to annual progressive tax but not pooled with other types of income.

### Corporate Income Tax (CIT) concessions and special economic zones
- CIT concessions include well-defined concessions (farmers, Botswana Development Corporation group, Botswana Meat Commission) and undefined concessions via development approval orders (section 52 ITA) or tax agreements (section 54 ITA).
- Development approval orders and agreements:
  - Can take many forms (allowances, accelerated depreciation, rate reductions, tax holidays, permanent exemptions).
  - Create insecurity for investors due to uncertainty about future competitors receiving better deals.
  - Many contain stability clauses preventing renegotiation.
  - Often lack transparency and are rarely publicized; concerns about MFED and National Assembly capacity to appraise and monitor beneficiaries.
- International best practice: tax concessions should be cost-effective and sparingly granted; accelerated depreciation allowances or investment tax credits with loss carry-forward are often more cost-effective than tax holidays or rate reductions.
- Special economic zones: ideally provide high quality infrastructure, expedited customs procedures, and VAT/customs exemption on inputs for exporters; no CIT concessions recommended, but if necessary should be in the form of accelerated depreciation allowances or investment tax credits.
- Recommended actions:
  - Ensure income tax concessions are granted sparingly and only in the form of accelerated depreciation allowances or investment tax credits;
  - If special economic zones are created, avoid CIT concessions but, if deemed necessary, grant them only as accelerated depreciation allowances or investment tax credits.

### Value-Added Tax (VAT) design and exemptions
- Original VAT (2001) aligned with international standards: single positive rate, zero rate applied only to exports and supplies similar to exports.
- Few exceptions originally: zero-rated supplies of sorghum or maize meal; exempt supplies included some financial services, some prescription drugs and health services, education services, and accommodation in a dwelling.
- Recommendation: streamline VAT exemptions to preserve neutrality and revenue productivity.

---

### VAT exemptions, C-efficiency, and policy implications
VAT exemptions and zero-rating
- Just before VAT took effect (July 1, 2002), petrol, diesel oil and illuminating paraffin were added to zero-rated supplies.
- Subsequent zero-rated supplies list additions: several food items, some agricultural inputs, supply of the first 5,000 liters of water per month to residential dwellings.
- Subsequent exempt supplies list additions: several agricultural implements, domestic passenger transportation by road and rail other than transportation of tourists.
- The lists are the First and Second Schedules to the VAT Act.

VAT C-efficiency (VAT C-Efficiency = VAT Revenue/(Total Final Consumption net of VAT Revenue * VAT Rate))
- Botswana C-efficiency trend:
  - Up to 2009, C-efficiency was over 70 percent.
  - Fell to around 60 percent in 2010.
  - Fell further to near 50 percent in 2015.
- Selected Botswana VAT C-efficiency (country, year, VAT C-Efficiency):
  - Botswana 2005 0.76
  - Botswana 2006 0.73
  - Botswana 2007 0.83
  - Botswana 2008 0.89
  - Botswana 2009 0.75
  - Botswana 2010 0.59
  - Botswana 2011 0.61
  - Botswana 2012 0.60
  - Botswana 2013 0.51
  - Botswana 2014 0.53
  - Botswana 2015 0.51
  - Botswana 2016 0.51
- Non-Weighted Average (from Table 5): 0.53
- Possible drivers of decline: policy gap (additional exemptions and zero-rating) and possible compliance gap (reduction in BURS efficiency).

Social policy effectiveness of VAT exemptions and zero-rating
- Key findings:
  - VAT exemptions and zero-ratings are ineffective as social policies (except fuels).
  - Distributional effects: although low-income households spend relatively more on food as a share of income, high-income households spend much more in absolute value; bulk of forgone revenue accrues to high-income households.
  - Recommendation: tax all food and use revenue to compensate low-income families with well-targeted expenditure policies.
- Education and health exemptions:
  - Consumption on private education and private health is extremely concentrated in the highest deciles of income.
  - Recommendation: use effective progressive taxes to fund upgrades to public health and education rather than exempting private services from VAT.
- Fuel zero-rating:
  - Zero-rating automotive fuels does not benefit low-income households; high-income families are responsible for practically all final consumption of fuels and are the sole beneficiaries of the tax expenditure if benefit is shifted forward.
  - Objective of keeping socially sensitive prices low should be reconsidered given distributional outcomes.

Pump prices of petrol and diesel (Prices on June 19, 2017; globalpetrolprices.com)
- Petrol Diesel (snapshot)
  - Botswana 2 0.740.70
  - Lesotho 0.79 0.81
  - Namibia 0.85 0.84
  - South Africa 1.00 0.98
  - Swaziland 0.91 0.90
  - World Average 1.02 0.90
- Note: 34th lower price of petrol and 46th lower price of diesel out of a sample of 170 countries.

Policy recommendations on VAT
- Streamline the lists of zero-rated and exempt supplies in the VAT Act.
- Replace exemptions and zero-rating cases intended as social policies (e.g., food and transportation services) with targeted social transfers.

---

### Property rates: tenure, coverage gaps, and reforms
Land tenure and concessions
- State land: urban areas and national parks.
- Tribal land: about 70 percent of the area of the country.
- Freehold land: about 4 percent of the territory.
- State land concessions:
  - Residential lots conceded for 99 years.
  - Commercial and industrial areas conceded for 50 years.
  - Concessions renewable, transferable to heirs, and negotiable.
  - State may retake land paying compensation to the occupier; occupier receives no compensation if he/she decides to return the land to government or not renew the concession.
- Tribal land:
  - Any citizen has the right to request tribal land.
  - Tribal Land Act of 1968 shifted allocation power to Land Boards; 1993 amendment treated tribal land as an interest of citizens; concession is perpetual though Tribal Board may retake it paying compensation for the building.
- Freehold land: sale to foreigners allowed only if no national wants to buy it and after ministerial approval.

Rationale to expand property rates coverage
- Currently property rates only cover town councils; all properties in tribal land are exempt.
- Exemption creates incentives for large commercial activities and upscale residential development to locate in tribal land near Gaborone and other urban areas where properties are taxable—creating unfair competition.
- Property taxes are the most reliable source of revenue for local governments due to the immobility of the tax base.

Administrative and implementation considerations
- Expansion requires legislation change, property registration, valuation, and training for local administrations.
- According to Ministry of Land Management, Water and Sanitation Services (MLM), all urban properties are registered and registration for tribal land is in course, with 80 percent of the properties already registered.
- Registration processes expected to be completed by end-2017.
- MLM now in charge of property valuation and must revalue urban properties (revaluation long overdue).

Improving billing and collection
- Cooperation between MLM and BURS in preparing property rates bills will increase revenues.
- Local government tax administrations are poorly equipped and local political leaders reluctant to impose burdens on voters.
- BURS has up-to-date information on occupiers of properties; cooperation would improve bill accuracy and reveal potential revenue and collection efficiency.
- Suggestions: compare potential versus actual collections to stimulate collection (e.g., publicizing comparisons of local government efforts and making transfers dependent, among other factors, on collection effort).

Recommended actions to increase efficiency and collection
- Accelerate plans to register and reevaluate properties to broaden tax base and geographic coverage.
- Attribute to MLM and BURS the responsibility for preparation of the property rates bills.

---

### Unemployment and labor market diagnosis — Background and constraints
Macroeconomic and social context
- Since 1991, real GDP growth in Botswana has averaged nearly 5 percent while the unemployment rate has remained persistently high (averaging 18 percent of the labor force).
- Income inequality is high, with a Gini index of nearly 60.
- Youth unemployment averaged 31 percent during 1992–2016.
- Econometric analysis: Okun’s coefficient is not significantly different from zero, indicating limited inclusiveness of growth.

Supply-side labor constraints
- Lack of skills and skill mismatches are major constraints.
- Education indicators:
  - Net primary enrolment rates rose from 80 percent in 2000 to 93 percent in 2014.
  - Secondary-level enrolment is 61 percent.
  - Most students abandon school by senior secondary level; shortfalls greater in rural populations.
- Policy responses and limitations:
  - Education & Training Sector Strategic Plan (2015) aims to improve quality and coverage and strengthen match between qualifications and labor market requirements; plan broad and data constraints prevented specific quantitative targets.
  - Human Resources Development Council (HRDC) created in 2013; not yet fully operational due to delays in establishing Labor Market Observatory and national education and skills development database.
- Skill mismatch evidence: Stepanyan and others (2013) found a strong correlation between skill mismatches and unemployment in nine small-middle income countries including Botswana.

Demand-side labor constraints
- Small domestic market, shortages of electricity and water, and barriers to set up and fund businesses have resulted in high costs and lack of profitable investment opportunities, deterring entry of new businesses and employment creation.

Foreign worker permit regime
- Process for requesting an employment permit is unclear, overcomplicated, and occupation-specific.
- Officials and immigration board members have significant autonomy, making the process uncertain; complaints about time to approve permits.
- Recent amendments to immigration bill to facilitate permanent residency for foreign entrepreneurs are a first step; a better-defined process needed for all types of workers.

### Public sector wages and labor supply
- Public sector is main employer, accounting for over 50 percent of total employment.
- Public sector wage levels higher than in non-mining private sector and act as a reservation wage that constrains supply of skilled labor to private sector.
- Mining accounts for just 6 percent of formal employment; mining activities are capital-intensive.

Policy recommendations on education, training, and immigration
- Implement the Education & Training Sector Strategic Plan without further delay; improve data collection and set and publish concrete quantitative targets to monitor progress.
- Strengthen capacity of HRDC to enable regular dialogue between government and private sector on education.
- Unify graduates’ registry with internships database, expand to all education levels, and open to private sector via Labor Market Observatory.
- Use unified registry to establish and update register of scarce skills to assist immigration system.
- Redefine and publish policy on giving and renewing work and residence permits:
  - Adopt/publish clear requirements and criteria.
  - Grant permits within a short time frame and allow for longer durations.
  - Report reasons behind rejections.
  - Expected outcomes: reduce appeal rate, increase private investment, and facilitate transfer of skills to domestic labor force.

### Labor demand: market size and regional integration
- Small domestic market and lack of regional economic integration constrain competitiveness.
- SADC: free trade area protocol established 1996 and ratified 2000 among 15 countries; progress slow due to reluctance to remove tariffs, local content provisions, subsidies, and visa restrictions.
- Complication: SADC countries belong to various regional groups (COMESA, SACU, EAC), creating difficulties in implementing trade policies.

### Infrastructure constraints — electricity and water
Electricity
- Problems with Morupule B: repetitive machine failures due to structural defects in project design.
- Frequent outages forced the country to import almost half of its electricity needs during 2014–15.
- Morupule B expected completion October 2012; by end-2013 only two units in operation; remaining two units completed in 2014.
- Plant ran at about a third of its capacity due to machine failures.
- Steps taken: international expert hired as CEO of Botswana Power Corporation (BPC); Masa 2020 plan to reach financial self-sufficiency by 2022 (measures include downsizing BPC, shifting production to private sector while maintaining distribution, and gradually liberalizing tariffs).

Water
- More than 95 percent of the population has access to improved drinking water sources.
- Country relies heavily on groundwater (60 percent), vulnerable to droughts.
- Water system operational problems: under-dimensioning and insufficient maintenance leading to water losses.
- Sanitation: only 64 percent of the population has access to improved sanitation.
- Projects and funding:
  - Second North-South water carrier to irrigate up to 35,000 hectares expected to be completed by 2022.
  - Other projects considered: Chobe-Zambesi carrier, Lesotho Island water transfer (through South Africa), Botswana/Namibia/South Africa underground.
  - Government and IBRD signed a US$ 145.5 million loan agreement for an emergency water security and efficiency project to help reduce water supply disruptions.

### Cost of doing business and regulatory barriers
- Starting a business: 48 days in Botswana vs. 6 days in Mauritius.
  - Recommendation: introduce a unique identification number for each company and use it as the sole reference; establish a one stop shop to speed starting a business.
- Obtaining construction permits: 17 days in Botswana vs. 10 days in Namibia.
  - Constraint: legislation does not permit classification of construction by risk level; recommendation: amend legislation to introduce risk-based on-site inspection system.
- Accessing credit: no credit registry; credit bureau covers about ½ of adults, collects only negative information, and is not easily accessible to lender.
  - Recommendation: collect positive and negative data in the Creditor Database.
- Trading across borders: time to process documentation is too long; recommendation: reduce documents and establish single electronic window.

Roadmap and implementation
- In 2015 authorities adopted a roadmap for reforming business environment; progress needs acceleration.
- Outstanding reforms: reducing excessive number of licenses and permits (approved) and establishing creditors databases still need implementation.
- Only about one-third of envisaged reforms have been implemented.
- Recommendation: strengthen capacity, ownership, and accountability of implementing entities; submit regular updates on implementation of reforms to Cabinet.

### Priority reform and investment actions (short- to medium-term)
- Ensure consistently improved performance of Morupule B Power Station within internationally accepted operational standards.
- Make Botswana Energy Regulatory Authority fully operational; ensure prices charged by private producers to BPC are in line with marginal costs and avoid abuse of market power.
- Review electricity subsidy structure to rationalize and set rates based on efficiency and commercial criteria; avoid political interference.
  - To protect the poor, replace subsidies on tariffs for residential consumers with a targeted scheme of direct transfers.
  - Pending design and implementation of such scheme, tariff increases for lower-income households should be contained.
- Lower non-revenue water losses by reducing leakages.
- Adopt unique identification number and implement one stop shop.
- Introduce risk-based on-site inspections for construction permits.
- Collect positive and negative data in the Creditor Database.
- Allow lenders to enforce securities out of court through collateral agreement and establish a collateral registry for immovable and movable assets.
- Reduce number of documents required for export and import and establish a single electronic window to lower international trade costs.

_International Monetary Fund — Botswana country report excerpt (cr17250)._

### References _______________________________________________________________________________ 10

### cr17250 - References _______________________________________________________________________________ 10

### Financial Sector Stability and Development — Background
- As of end-2016, there were 11 commercial banks and 2 small state-owned statutory banks; 4 banks held about 80 percent of the banking system’s assets.
- Botswana’s population: 2.1 million people.
- All commercial banks are foreign-owned, including subsidiaries of pan-African groups.
- Nonbanks account for about one-half of the financial system.

Key statistics (Table 1. Botswana Financial System Structure, 2016)
- Banks: Assets 88.4 (In billions of Pula), In percent of assets 43.4
- Commercial banks: Number 11, Assets 80.7, In percent of assets 39.6
- Statutory banks: Number 2, Assets 3.9, In percent of assets 1.9
- Building Society: Number 1, Assets 3.8, In percent of assets 1.9
- Non-bank financial institutions: Assets 115.0, In percent of assets 56.6
  - Life Insurance: Number 9, Assets 19.7, In percent of assets 9.7
  - General Insurance: Number 12, Assets 1.9, In percent of assets 0.9
  - Reinsurers: Number 3, Assets 0.3, In percent of assets 0.1
  - Pension Funds: Number 87, Assets 75.1, In percent of assets 36.8
  - Asset Managers: Number 12, Assets 5.5, In percent of assets 2.6
  - Non-Bank Lenders: Number 7, Assets 8.6, In percent of assets 4.2
  - Micro Lenders: Number 20, Assets 3.9, In percent of assets 1.9
  - SACCOs: Number 52, Assets 0.5, In percent of assets 0.2
- Total financial system: Assets 203.8, In percent of assets 100
- Source noted: Bob’s Research Department and NBFIRA.

Additional background findings
- Between 2008 and 2016, pension fund assets grew from 30 percent of GDP to 47 percent of GDP.
- Insurance premiums increased from 3 percent of GDP in 2005 to 13 percent of GDP in 2016.
- Broad money (M2) to GDP rose from 10.6 percent in 2005 to 41.5 percent in 2016.
- Figure references: Financial Depth and GDP Per Capita; Financial Development Index, 1980–2013; Financial Inclusion, 2016.

### Soundness — Findings and indicators
- Banking sector is described as adequately capitalized, liquid, and profitable.
- Bank profitability rose owing to higher interest and non-interest income.
- Annual credit growth slowed from 7.1 percent in 2015 to 6.2 percent in 2016.
- Non-performing loans rose slightly to 5.5 percent of total gross loans in March 2017 but remain manageable.
- Household credit share in banks’ loan books: 60 percent at end-2016.
- Funding structure note: Wholesale business deposits were 73 percent of total deposits in December 2016.

Comparative indicators (Figure 2)
- Regulatory Capital to RWA, Regulatory Tier 1 Capital to RWA, Nonperforming Loans to Total Gross Loans, Return on Assets, Return on Equity, Liquid Assets to Short-Term Liabilities—comparative positioning across countries including Botswana is reported (figure-based).

### Stability — Risks, supervision, and AML/CFT
- Data gaps and incomplete information on cross-border capital flows and growing interconnectedness with non-bank financial sector noted as potential risks.
- Recommendation: close cooperation among regulators and proper assessment of macro-financial risks associated with banks’ large exposures, including consolidated supervision.
- Authorities plan to reform AML/CFT supervision and preventive measures following an assessment highlighting shortcomings and recommendations to improve compliance with FATF standards.
- Current supervisory responsibilities:
  - BoB: regulatory and supervisory responsibility for commercial banks, exchange bureaus, one deposit-taking microfinance institution, statutory banks, and the payment system.
  - NBFIRA: supervises nonbank financial institutions (insurance industry, pension funds, stock exchange, fund managers, other investment advisory service providers, micro-lending businesses).
- Noted supervisory gaps: SACCOs accept deposits but are not subject to prudential regulation and are not supervised by either BoB or NBFIRA.

### Supervisory reforms and monitoring
- BoB implementing Basel II capital standards (implemented in January 2016) and plans to adopt Pillar 2 requirements addressing risks not covered by Pillar 1; Pillar 2 planned to enter in force in 2018 and implementation completion planned by end-2017.
- Suggested actions:
  - Annual on-site supervisions for each institution deemed systemic.
  - Design a dedicated stress test exercise targeting household sector exposures (shocks: lower income, higher unemployment, higher interest rates).
  - Improve capacity at NBFIRA for risk-based supervision of nonbank financial institutions, enhance data collection, and enable technological innovation.

### Macroprudential function and crisis resolution
- Recommendation to assign a clear macroprudential mandate to one institution (e.g., BoB) to establish macroprudential measures (example: limits on debt service-to-income ratios) for the whole financial sector in coordination with other supervisors.
- Suggested infrastructure and legal improvements:
  - Set up a credit report database and an on-line collateral registry for immovable and movable assets.
  - Strengthen legislation and staffing for crisis preparedness.
  - Revise the Bank of Botswana Act and the Banking Act to improve emergency liquidity assistance capabilities, corrective action framework, and bank resolution powers.
  - Accelerate implementation of the Financial Stability Council and the Memorandum of Understanding among BOB, MFED, and NBFIRA regarding responsibilities for bank resolution.
  - Entrust the BoB with sufficient legal powers to resolve banks in distress.
- Noted limitation of existing powers: currently limited to issuing directives, temporary management, applying to court for winding up or judicial management; powers deemed insufficient for effective resolution.

### Development and financial hub prospects
- Financial institutions and markets have developed rapidly since 2000; banks, Botswana Stock Exchange, and institutional investors expanded (Figure 3: Financial Development Index, 1980–2013).
- Policy options to develop a regional financial sector hub (if pursued) could include:
  - Improve electronic connectivity, real-time market data, order routing, and ability to clear and settle trades in foreign markets.
  - Adopt the Principles for Financial Market Infrastructures (CPSS-IOSCO).
  - Modernize national payments system by implementing the new Oversight Policy Framework and addressing prudential/supervisory gaps for non-bank financial institutions.
  - Strengthen the clearing house to facilitate risk management in derivatives, net offsetting positions, and collection of collateral in event of defaults.

### Financial inclusion and payments infrastructure
- Botswana performs relatively well on access to finance and mobile banking but scope for further progress exists.
- Recommendations to improve inclusion:
  - Implement recommendations of the Botswana Financial Inclusion Roadmap—Making Access Possible Plan (MAP) 2015.
  - Coordinate supervisory efforts between BoB and NBFIRA to extend services to SMEs and underserved areas.
  - Improve payments system, set up credit bureaus, and adopt sound regulatory framework for mobile money.
- Figure references: Financial Inclusion, 2016 (indicators include Having an Account, Using Mobile Phone to Make Payments, Borrowed or Saved from Bank, Borrowed or Saved Informally).

### Financial Sector — Summary
- Rapid evolution of financial system; near-term risks are small due to well-capitalized and liquid banking system and sizable international reserves.
- Authorities plan actions to strengthen financial supervision, crisis resolution, and AML/CFT.
- Reforms to foster financial deepening and inclusion are recommended to complement private sector expansion and employment creation.

_References cited in this content unit: Financial Sector Development Strategy (2012-2018), Bank of Botswana, 2012; Research Bulletin, NBFIRA, Volume 1, 2016/17, 2017; Botswana Financial Inclusion Roadmap (2015–2021), FinMark, 2015; Regional Economic Outlook, 2016, Financial Development and Sustainable Growth, April; Sahay and others, 2015 IMF Staff Discussion Note._

### Reforms to Mobilize Domestic Revenues — Background
- Botswana has the second lowest tax to GDP ratio among Southern African Customs Union (SACU) members (Table 1).
- Botswana’s taxation of income and taxation of goods and services are also the lowest in the customs union (Table 2).
- The value-added tax (VAT), the corporate income tax (CIT) standard rates, and the personal income tax (PIT) top marginal rate are the lowest in the customs union (Table 3).

Referenced tables (headings present)
- Table 1. SACU Members—Tax to GDP Ratios
- Table 2. SACU Members—Comparison of Revenues (percentage of GDP)
- Table 3. SACU Members—Comparison of Tax Rates
- Additional tables in the chapter: Government Revenues; VAT C-Efficiency in Middle Income Countries; SACU Members—Pump Prices of Petrol and Diesel.

### Addressing the Unemployment Challenge — Structure and figures
- Document contains sections:
  - A. Background
  - B. Labor Market: Diagnosis of Constraints and Policy Options
- Figures listed for this section:
  - Figure 1. Income Inequality GINI index
  - Figure 2. Unemployment Rate and GDP Growth (1991–2016)
  - Figure 3. Employment Rate and GDP Growth (1992–2016)
  - Figure 4. Skill Mismatch and Unemployment
  - Figure 5. Distribution of VA and Employment
- Table listed: Table 1. Okun’s Law

_Final source: cr17250 - References _______________________________________________________________________________ 10 (PDF chapter/section)._

### 2.      Government revenue is heavily dependent on mineral revenue and revenue from the

### cr17250 - 2.      Government revenue is heavily dependent on mineral revenue and revenue from the

### Revenue dependence and key statistics
- Non-mineral tax revenue-to-GDP ratio has been around 20 percent since 2007.
- Domestic revenue mobilization—essentially PIT, CIT, and VAT revenues—has fallen to less than 10 percent of GDP.
- SACU revenue plus mineral revenue (taxes, royalties and dividends) has exceeded 63 percent of total government revenue during the past five years.
- More than 70 percent of the tax collected in Botswana comes from large taxpayers.

- Country-level non-mineral tax revenue-to-GDP averages (2007–2016):
  - Botswana: 24.9
  - Lesotho: 48.9
  - Namibia: 29.0
  - South Africa: 24.0
  - Swaziland: 26.4

- VAT and excise related figures (year indicated in source):
  - Botswana (2014): VAT 11.08; Excises 3.99; Imports 0.00; Exports 3.99; Total 10.95; Exports component 0.00; Total 10.95
  - Lesotho (2013): VAT 14.32; Excises 8.73; Imports 1.02; Total Imports 9.75; Exports 0.00; Exports component 1.33; Total 1.33
  - Namibia (2015): VAT 12.38; Excises 7.71; Imports 0.15; Total Imports 7.89; No Data for Exports fields
  - South Africa (2015): VAT 15.12; Excises 7.00; Imports 2.32; Total Imports 9.32; Exports 1.12; Exports component 0.00; Total 1.13
  - Swaziland (2012): VAT 5.23; Excises 3.93; Imports 0.00; Total Imports 3.93; Exports 17.12; Exports component 0.00; Total 17.12

- Fiscal year runs from 1st April to 31st March.
- Note: Tax Revenue does not include Social Contributions. "No Data" fields represent missing values.

### Mineral and total revenue (in million Pulas and percent of GDP)
- Mineral revenue and Total revenue, selected fiscal years (in million Pulas):
  - 2008/09: Mineral revenue 17,003; Total revenue 30,455
  - 2009/10: Mineral revenue 17,685; Total revenue 30,023
  - 2010/11: Mineral revenue 17,556; Total revenue 31,909
  - 2011/12: Mineral revenue 19,710; Total revenue 38,486
  - 2012/13: Mineral revenue 26,530; Total revenue 41,658
  - 2013/14: Mineral revenue 25,863; Total revenue 48,951
  - 2014/15: Mineral revenue 30,123; Total revenue 55,904
  - 2015/16: Mineral revenue 30,421; Total revenue 47,420

- Corresponding shares in percentage of GDP:
  - Non-mineral tax revenue: 2008/09 22.9; 2009/10 23.0; 2010/11 19.2; 2011/12 18.8; 2012/13 23.6; 2013/14 19.7; 2014/15 20.3; 2015/16 20.5
  - Mineral revenue: 2008/09 13.7; 2009/10 11.8; 2010/11 13.2; 2011/12 15.1; 2012/13 10.8; 2013/14 14.1; 2014/15 14.5; 2015/16 9.7
  - Other non-tax revenues: 2008/09 4.4; 2009/10 4.2; 2010/11 2.5; 2011/12 2.8; 2012/13 2.7; 2013/14 3.5; 2014/15 2.9; 2015/16 1.7
  - Total revenue as percent of GDP: 2008/09 40.9; 2009/10 39.1; 2010/11 34.9; 2011/12 36.7; 2012/13 37.1; 2013/14 37.3; 2014/15 37.8; 2015/16 32.0

### Risks and strategic objective
- Fiscal sustainability is not a near-term concern, but the volatility of revenues outside authorities’ control (mineral revenue and SACU pool) poses medium- to long-term risks.
- Raising tax rates in response to a persistent or permanent shock is not considered an optimal policy.
- Best course: reduce dependence on uncontrollable revenue sources through tax reforms aimed at enhancing domestic resource mobilization and reducing inefficiencies and distortions.

### Publication and data transparency
- Publication and sharing of tax data should be a priority.
- Neither the Ministry of Finance and Economic Development (MFED) nor the Botswana Unified Revenue Service (BURS) websites provide statistics on tax collection details.
- The tax policy unit of the MFED reportedly lacks tax statistics to assist its policy making function.

### Key tax administration reforms recommended
- Proceed with the passage and implementation of the Tax Administration Bill, which modernizes procedures and mandates a tax tribunal.
- Repeal the legislative requirement for universal filing of PIT returns.
- Strengthen capacity at the Large Taxpayers’ Unit (LTU), especially audit and risk functions.
- Concentrate BURS resources on enforcing collection from taxpayer groups that are potentially important revenue sources and adopt measures (e.g., adequate VAT registration threshold, simplified procedures) to reduce compliance costs for small taxpayers.
- Priority actions discussed during the 2017 Article IV consultation:
  - Proceed with passage and implementation of the Tax Administration Bill;
  - Repeal the legislative requirement for universal filing of PIT returns;
  - Strengthen capacity at the LTU, especially audit and risk functions.

- Recent administrative changes and impacts:
  - VAT registration threshold increase from BWP 500 thousand to BWP 1 million (2015) excluded many small taxpayers and freed BURS resources.
  - Introduction of universal filing by PIT taxpayers increased BURS burden with no discernible revenue effect to date.
  - A high-quality LTU is essential given that more than 70 percent of tax revenue is collected from large taxpayers; urgent needs include filling vacancies, training personnel, and using senior auditors.

### Personal Income Tax (PIT) design reform proposals
- Botswana currently uses a global income tax with some deviations (examples: interest exemption up to BWP 7,800; dividends subject to final withholding of 7.5 percent; capital gains subject to progressive taxation but separate from pooled income).
- Dual income tax model described: tax labor income progressively and capital income at a single proportional rate.
- Full adoption challenges: separating labor from capital income for business earners given statistical limitations and deficient accounting.
- Compromise proposal: tax all passive capital income at a single rate while taxing labor and business income progressively.
- Specific proposed actions to simplify and improve compliance:
  - Tax dividends, interest, royalties, rental income, and capital gains with a final withholding tax with a single proportional rate between 10 and 15 percent;
  - Tax labor and business income with the progressive rate schedule;
  - Repeal all or most exemptions, and rate and base reductions currently granted to passive capital income;
  - Release taxpayers with a single source of employment income who have no other type of income except passive capital income from filing annual returns;
  - In the medium-term, introduce a full-fledged dual income tax.

- Existing withholding practices described in the text:
  - Dividends: final 7.5 percent withholding tax.
  - Interest: taxed at 10 percent withholding rate as an anticipation of annual progressive taxation.
  - Rental income: subject to a 5 percent withholding tax later creditable against final liability (exceptions for non-business rent payments by individuals).
  - Royalties: pooled with other types of income and taxed annually but not subject to withholding.
  - Capital gains: subject to annual progressive tax but not pooled with other types of income.

### Corporate Income Tax (CIT) concessions and special economic zones
- CIT concessions include well-defined concessions (farmers, Botswana Development Corporation group, Botswana Meat Commission) and undefined concessions via development approval orders (section 52 ITA) or tax agreements (section 54 ITA).
- Development approval orders and agreements:
  - Can take many forms (allowances, accelerated depreciation, rate reductions, tax holidays, permanent exemptions).
  - Create insecurity for investors due to uncertainty about future competitors receiving better deals.
  - Many contain stability clauses preventing renegotiation.
  - Often lack transparency and are rarely publicized; concerns about MFED and National Assembly capacity to appraise and monitor beneficiaries.
- International best practice: tax concessions should be cost-effective and sparingly granted; accelerated depreciation allowances or investment tax credits with loss carry-forward are often more cost-effective than tax holidays or rate reductions.
- Special economic zones: ideally provide high quality infrastructure, expedited customs procedures, and VAT/customs exemption on inputs for exporters; no CIT concessions recommended, but if necessary should be in the form of accelerated depreciation allowances or investment tax credits.
- Recommended actions:
  - Ensure income tax concessions are granted sparingly and only in the form of accelerated depreciation allowances or investment tax credits;
  - If special economic zones are created, avoid CIT concessions but, if deemed necessary, grant them only as accelerated depreciation allowances or investment tax credits.

### Value-Added Tax (VAT) design and exemptions
- Original VAT (2001) aligned with international standards: single positive rate, zero rate applied only to exports and supplies similar to exports.
- Few exceptions: zero-rated supplies of sorghum or maize meal; exempt supplies included some financial services, some prescription drugs and health services, education services, and accommodation in a dwelling.
- Recommendation: streamline VAT exemptions to preserve neutrality and revenue productivity.

*Source: IMF staff report (WEO, GFS, MFED, Statistics Botswana, IBFD, IMF/FAD and AFRITAC South missions and reports as cited in the chapter).*

### 23.      However, several subsequent exemptions have downgraded the integrity of the VAT.

### cr17250 - 23.      However, several subsequent exemptions have downgraded the integrity of the VAT.

### VAT exemptions, zero-rating, and integrity
- Just before VAT entered in effect (July 1, 2002), an amendment to the VAT Act added petrol, diesel oil and illuminating paraffin to the list of zero-rated supplies.
- Subsequent Acts included in the zero-rated supplies list:
  - several food items,
  - some agricultural inputs,
  - the supply of the first 5,000 liters of water per month to residential dwellings.
- Subsequent Acts included in the list of exempt supplies:
  - several agricultural implements,
  - domestic passenger transportation by road and rail other than transportation of tourists.
- The lists of zero-rated supplies and exempt supplies are the First and Second Schedules to the VAT Act, respectively.

### VAT C-efficiency: levels and trends
- C-efficiency definition: VAT C-Efficiency = VAT Revenue/(Total Final Consumption net of VAT Revenue * VAT Rate).
- Botswana’s VAT C-efficiency performance and trend:
  - Up to 2009, C-efficiency was over 70 percent.
  - It then fell to around 60 percent in 2010.
  - It fell further to near 50 percent in 2015.
- Possible drivers of the decline:
  - Policy gap: additional exemptions and zero-rating of items.
  - Compliance gap: a possible increase in the compliance gap (i.e. a reduction in BURS efficiency), although the latter cannot be asserted without further analysis.
- Selected VAT C-efficiency observations from Table 5 (country, year, VAT C-Efficiency):
  - Botswana 2005 0.76
  - Botswana 2006 0.73
  - Botswana 2007 0.83
  - Botswana 2008 0.89
  - Botswana 2009 0.75
  - Botswana 2010 0.59
  - Botswana 2011 0.61
  - Botswana 2012 0.60
  - Botswana 2013 0.51
  - Botswana 2014 0.53
  - Botswana 2015 0.51
  - Botswana 2016 0.51
- Non-Weighted Average (from Table 5): 0.53
- Sources cited for VAT C-efficiency table: Mission database for Botswana 2015 and 2016; IMF/FAD database for all other.

### Social policy effectiveness of VAT exemptions and zero-rating
- Key findings:
  - VAT exemptions and zero-ratings are ineffective as social policies (except in the case of fuels).
  - The implicit assumption behind zero-rating/exemptions (that producers and intermediaries shift the tax benefit forward to consumers, benefiting low-income households) is not necessarily true and often lacks focus.
  - Although low-income households spend relatively more on food as a share of income, high-income households spend much more in absolute value; thus, bulk of forgone revenue accrues to high-income households.
  - Better policy: tax all food and use revenue to compensate low-income families with well-targeted expenditure policies.
- Education and health exemptions:
  - Consumption expenditures on private education and private health are extremely concentrated in the highest deciles of the income distribution.
  - Poor and low-middle class families use free education and health services provided by the government.
  - Recommendation: use effective progressive taxes to fund upgrades to public health and education services rather than exempting private services from VAT.
- Fuel zero-rating:
  - Zero-rating automotive fuels does not benefit low-income households; high-income families are responsible for practically all final consumption of fuels and, assuming benefit is shifted forward, are the sole beneficiaries of the tax expenditure.
  - Objective of keeping socially sensitive prices low should be reconsidered given distributional outcomes.

### Pump prices of petrol and diesel (SACU comparison)
- Table 6 snapshot (Prices on June 19, 2017; Source: globalpetrolprices.com):
  - Petrol Diesel
    - Botswana 2 0.740.70
    - Lesotho 0.79 0.81
    - Namibia 0.85 0.84
    - South Africa 1.00 0.98
    - Swaziland 0.91 0.90
    - World Average 1.02 0.90
  - Note in source: 34th lower price of petrol and 46th lower price of diesel out of a sample of 170 countries.

### Policy recommendations on VAT
- Streamline the lists of zero-rated and exempt supplies in the VAT Act.
- Replace exemptions and zero-rating cases intended to act as social policies (e.g., food and transportation services) with targeted social transfers.

### Property rates: tenure, coverage gaps, and reforms
- Land tenure systems:
  - State land: urban areas and national parks.
  - Tribal land: about 70 percent of the area of the country.
  - Freehold land: about 4 percent of the territory.
- State land concessions:
  - Residential lots conceded for 99 years.
  - Commercial and industrial areas conceded for 50 years.
  - Concessions are renewable, transferable to heirs, and negotiable.
  - State may retake land paying compensation to the occupier; occupier receives no compensation if he/she decides to return the land to government or not renew the concession.
- Tribal land:
  - Any citizen has the right to request tribal land.
  - Tribal Land Act of 1968 shifted allocation power to Land Boards; 1993 amendment treated tribal land as an interest of citizens; concession is perpetual though Tribal Board may retake it paying compensation for the building.
- Freehold land: privately owned; sale to foreigners allowed only if no national wants to buy it and after ministerial approval.
- Rationale to expand property rates coverage:
  - Currently, property rates only cover the town councils; all properties in tribal land are exempt.
  - Exemption creates incentives for large commercial activities and upscale residential development to locate in tribal land near Gaborone and other urban areas where properties are taxable—creating unfair competition.
  - Property taxes are the most reliable source of revenue for local governments due to the immobility of the tax base.
- Administrative and implementation considerations:
  - Expansion requires legislation change, property registration, valuation, and training for local administrations.
  - According to Ministry of Land Management, Water and Sanitation Services (MLM), all urban properties are registered and registration for tribal land is in course, with 80 percent of the properties already registered.
  - It is expected that the registration processes will be completed by end-2017.
  - MLM is now also in charge of property valuation and must revalue urban properties (revaluation long overdue).
- Improving billing and collection:
  - Cooperation between MLM and BURS in preparing property rates bills will increase revenues.
  - Local government tax administrations are poorly equipped and local political leaders reluctant to impose burdens on voters.
  - BURS has up-to-date information on occupiers of properties; cooperation would improve bill accuracy and reveal potential revenue and collection efficiency.
  - Comparison of potential versus actual collections could be used to stimulate collection (e.g., publicizing comparisons of local government efforts and making transfers dependent, among other factors, on collection effort).
- Recommended actions to increase efficiency and collection:
  - Accelerate plans to register and reevaluate properties to broaden tax base and geographic coverage.
  - Attribute to MLM and BURS the responsibility for preparation of the property rates bills.

### Unemployment and labor market diagnosis (background and constraints)
- Macroeconomic and social context:
  - Since 1991, real GDP growth in Botswana has averaged nearly 5 percent while the unemployment rate has remained persistently high (averaging 18 percent of the labor force).
  - Income inequality is high, with a Gini index of nearly 60.
  - Youth unemployment averaged 31 percent during 1992–2016.
- Employment responsiveness:
  - During 1992–2016, correlations between unemployment rate and real GDP growth and between employment growth and real GDP growth have been quite low.
  - Econometric analysis: Okun’s coefficient (responsiveness of unemployment rate to GDP growth) is not significantly different from zero, indicating limited inclusiveness of growth.
- Supply-side labor constraints:
  - Lack of skills in the labor force and skill mismatches are major constraints.
  - Education indicators:
    - Net primary enrolment rates rose from 80 percent in 2000 to 93 percent in 2014.
    - Secondary-level enrolment is 61 percent (although it rose by about 7 percentage points in the past decade).
    - Most students abandon school by the time they reach the senior secondary level.
    - These shortfalls are greater in rural populations.
  - Policy responses and limitations:
    - Education & Training Sector Strategic Plan (2015) aims to improve quality and coverage and strengthen the match between qualifications and labor market requirements; plan was broad and data constraints prevented formulation of specific quantitative targets.
    - Creation of Human Resources Development Council (HRDC) in 2013; HRDC not yet fully operational due to delays in establishing a national labor market information system (Labor Market Observatory) and a national education and skills development database.
  - Skill mismatches documented: Stepanyan and others (2013) found a strong correlation between skill mismatches and unemployment in a study of nine small-middle income countries including Botswana.
- Demand-side labor constraints:
  - Small domestic market, shortages of electricity and water, and barriers to set up and fund businesses have resulted in high costs and lack of profitable investment opportunities, deterring entry of new businesses and employment creation.
- Foreign worker permit regime:
  - The process for requesting an employment permit is unclear, overcomplicated, and occupation-specific.
  - Officials and immigration board members have significant autonomy, making the process uncertain; complaints about time it takes to approve permits.
  - Recent amendments to the immigration bill to facilitate permanent residency for foreign entrepreneurs are a first step; a better-defined process needs implementation for all types of workers.

*Source: cr17250 - 23.      However, several subsequent exemptions have downgraded the integrity of the VAT.*

### 9. Lastly, high wages in the

### 9. Lastly, high wages in the

### Public sector wages and labor supply
- Public sector has become the main employer in the economy, accounting for over 50 percent of total employment.
- Wage levels in the public sector are higher than in non-mining private sector activities and are de facto seen as a reservation wage that constrains the supply of skilled labor to the private sector.
- Mining (especially diamonds) has been the main source of growth in Botswana since the early 1990s, yet it accounts for just 6 percent of formal employment.
- Mining activities in Botswana are capital-intensive.

### Skill mismatches and employment structure
- Reference: Skill mismatch analysis (Stepanyan and other (2013); Estevao and Tsounta (2011) methodology noted).
- Figures referenced: Figure 4 (Skill Mismatches and Unemployment) and Figure 5 (Distribution of Value Added and Employment) — distributional evidence underscores limited employment share of mining despite large value added.

### Policy recommendations on education, training, and immigration
- Implement the Education & Training Sector Strategic Plan without further delay, including by improving data collection and setting and publishing concrete targets (including quantitative targets) to monitor progress.
- Strengthen the capacity of the HRDC to achieve a regular and fluid dialogue between the government and the private sector on all levels of the education system.
- Unify the graduates’ registry with the database for internships, expand it to include all levels of education, and open it to the private sector without restrictions. This can be done through the Labor Market Observatory by making it fully operational.
- Use unified registry information to establish and keep an updated register of scarce skills to assist the immigration system.
- Redefine and publish the policy on giving and renewing work and residence permits for foreign workers:
  - Adopt/publish clear requirements and criteria.
  - Grant permits within a short time frame and allow for longer durations.
  - Report the reasons behind rejections.
  - Expected outcomes: reduce appeal rate, increase private investment, and facilitate transfer of skills to the domestic labor force.

### Labor demand: market size and regional integration
- A small domestic market and lack of regional economic integration constrain competitiveness.
- SADC: free trade area protocol established in 1996 and ratified in 2000 among 15 sub-Saharan African countries; progress slow due to reluctance to remove tariffs, local content provisions, subsidies, and visa restrictions.
- Complication: SADC countries belong to various regional groups (COMESA, SACU, EAC), creating difficulties in implementing trade policies.

### Infrastructure constraints — electricity and water
- Electricity:
  - Problems associated with malfunctioning of Morupule B, the major power plant, which experienced repetitive machine failures due to structural defects in project design.
  - Frequent outages forced the country to import almost half of its electricity needs during 2014–15.
  - Morupule B was expected to be completed by October 2012; by end-2013 only two units were in operation; remaining two units were completed in 2014.
  - The plant ran at about a third of its capacity due to machine failures.
  - Steps taken: an international expert hired as CEO of the Botswana Power Corporation (BPC); a plan to improve financial sustainability developed (Masa 2020) with the goal of reaching financial self-sufficiency by 2022. Measures include downsizing BPC, shifting production to the private sector while maintaining distribution, and gradually liberalizing tariffs.
- Water:
  - More than 95 percent of the population has access to improved drinking water sources.
  - The country relies heavily on groundwater (60 percent), leaving it vulnerable to droughts.
  - Water system operational problems: under-dimensioning and insufficient maintenance leading to water losses.
  - Sanitation: only 64 percent of the population has access to improved sanitation.
  - Improvements and projects:
    - Water supply improved as dams received inflows following two years of drought.
    - A second North-South water carrier—to irrigate as much as 35,000 hectares—is expected to be completed by 2022.
    - Other projects under consideration: Chobe-Zambesi carrier (channel water from the Zambezi), the Lesotho Island water transfer (through South Africa), and the Botswana/Namibia/South Africa underground.
    - Government and IBRD signed a US$ 145.5 million loan agreement for an emergency water security and efficiency project to help reduce water supply disruptions.

### Cost of doing business and regulatory barriers
- Main challenges and comparative timelines:
  - Starting a business: it takes 48 days to start a business in Botswana compared to just 6 days in Mauritius.
    - Recommendation: introduce a unique identification number for each company and use it as the only reference for interaction between the company and government agencies; establish a one stop shop to speed up starting a business.
  - Obtaining construction permits: it takes 17 days in Botswana compared to 10 days in Namibia.
    - Constraint: legislation does not permit classification of construction by risk level, so all new constructions require inspection.
    - Recommendation: amend legislation to introduce a risk-based on-site inspection system.
  - Accessing credit: there is no credit registry in Botswana; the credit bureau covers only about ½ of adults, collects only negative information, and is not easily accessible to the lender.
    - Recommendation: collect positive and negative data in the Creditor Database.
  - Trading across borders: time to process documentation is too long and can be usefully shortened.
- Roadmap and implementation:
  - In 2015, authorities adopted a roadmap for reforming Botswana’s business environment, but progress needs to be accelerated.
  - Outstanding reforms: one government principle, reducing the excessive number of licenses and permits (already approved), and establishing creditors databases still need to be implemented.
  - Only about one-third of the reforms envisaged have been implemented.
  - Recommendation: strengthen capacity, ownership, and accountability of implementing entities; submit regular updates on implementation of reforms to Cabinet to increase accountability.

### Priority reform and investment actions (short- to medium-term)
- Ensure a consistently improved performance of the Morupule B Power Station within internationally accepted operational standards.
- Make the Botswana Energy Regulatory Authority fully operational; ensure prices charged by private producers to BPC are in line with marginal costs to avoid rent extraction; take necessary actions to avoid any abuse of market power.
- Review the structure of electricity subsidies with a view to rationalize and set rates based on efficiency grounds and commercial criteria and avoid political interference.
  - To protect the poor, subsidies on tariffs for residential consumers can be usefully replaced by a targeted scheme of direct transfers.
  - Pending the design and implementation of such scheme, tariff increases for lower-income households will need to be contained.
- Lower non-revenue water losses by reducing leakages in the existing infrastructure.
- Adopt the unique identification number and implement the one stop shop.
- Introduce risk-based on-site inspections to speed up the granting of construction permits.
- Collect positive and negative data in the Creditor Database.
- Allow lenders to enforce securities out of court through a collateral agreement and establish a collateral registry for immovable and movable assets.
- Reduce the number of documents required for export and import and establish a single electronic window to lower international trade costs.

*International Monetary Fund — Botswana country report excerpt*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17250.pdf_