## 1bwaea2020002

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### Outlook and Risks
- Growth projections and drivers:
  - GDP growth is projected to rebound to 4.4 percent in 2020.
  - Growth is expected to pick up further in 2021 with the start of the Khoemacau copper mine; an earlier line states "5.6 percent in 2021 as the diamond industry recovers somewhat, and a new copper mine comes on stream."
  - Growth will moderate to around 4 percent over the medium term.
- Inflation and labor market:
  - Inflation averaged 2.8 percent in 2019.
  - Unemployment increased to 20.7 percent (Background).
  - Botswana faces about 30,000 new entrants into the job market every year versus approximately 22,000 jobs created annually over 2014-18.
- External balances and buffers:
  - Current account turned into a deficit, estimated at -4.3 percent of GDP in 2019.
  - Foreign exchange reserves dropped to about 10 months of imports (35 percent of GDP) at end-September 2019.
- Downside risks (transmission largely via lower mineral revenue or SACU transfers):
  - Faster-than-anticipated slowdown in key trading partners (China, United States, South Africa).
  - Trade policy uncertainty and global growth shocks.
  - Widespread and prolonged disruptions from the coronavirus could lower growth and mining revenue through slower tourism activity and demand for diamonds.
  - Climate shocks that would weigh on agricultural output and tourism; climate shocks threaten the outlook over the medium to longer term.
  - Shifts in consumer preferences toward synthetic diamonds could force sharp domestic spending adjustments with macroeconomic and social stability effects.

### Fiscal Policy: stance, risks, and composition
- Recent fiscal deterioration:
  - Overall deficit widened to 4.6 percent of GDP in FY2018 and is projected to increase to 5.8 percent of GDP in FY2019.
  - Deterioration driven by lower mining revenue and SACU transfers (-3.5 percent of GDP), underperformance of VAT, larger-than-expected increase in the wage bill, and one-off expenditures (e.g., drought relief), partially offset by under-execution of capital spending.
  - Gross public debt expected to remain broadly stable at about 19 percent of GDP.
- Staff baseline fiscal path:
  - Baseline assumes a gradual fiscal consolidation starting in 2020.
  - Fiscal deficit expected to narrow to about 3 percent of GDP in 2020.
  - Fiscal deficit to gradually return to 0.5 percent of GDP by FY2024, amid increased efficiency gains and reprioritization of capital projects.
  - Higher mining and SACU revenue, which account for 60 percent of Botswana’s revenue, will help reduce the fiscal deficit in FY2020 by 2¾ percent of GDP.
- Assessment of size and pace:
  - Size and pace of the authorities’ planned adjustment are broadly appropriate given low debt, gross financing needs, and reserves at 35 percent of GDP (250 percent of the ARA metric).
  - Critical that consolidation starts in FY2020 to help address external imbalances and gradually rebuild buffers consistent with intergenerational equity.
- Need for additional measures and composition guidance:
  - Additional revenue and expenditure measures beyond those currently planned are needed to achieve the authorities’ plans while protecting efficient capital and social spending.
  - Large and abrupt cuts to capital and social spending would be undesirable given adverse effects on long-term growth and time needed for public management reforms to yield benefits.
  - Expenditure-side recommendations:
    - Introduce means testing of scholarships in tertiary education.
    - Gradually eliminate electricity and fuel subsidies while minimizing the impact on the poor (for example through targeted cash transfers).
    - Freeze hiring by the public sector and better align wage increases with productivity.
  - Revenue-side recommendations:
    - Ensure planned increases in public services fees are progressive.
    - Broaden the tax base and streamline exemptions.
    - Align the VAT rate to the regional average (14-15 percent, compared with 12 percent in Botswana).
    - Increase the progressivity of the personal income tax by adding brackets for higher income earners.
    - Over the medium term, increase the level and coverage of property rates.

### Monetary and Exchange Rate Policies
- Stance and recommendations:
  - The Bank of Botswana (BoB) accommodative monetary policy stance is appropriate.
  - BoB should use the flexibility afforded by its current exchange rate regime to facilitate the economy’s adjustment to the persistent decline in mineral revenue and SACU transfers, and structural transformation.
- Monetary operations and transmission reforms:
  - Revamp monetary operations to enhance policy transmission and deepen domestic financial markets, including:
    - Introducing the 7-day BoBC as the main instrument (replacing the 14-day BoBC).
    - Removing the ceiling on the issuance of BoBCs.
    - Adoption of reserves averaging.
    - Consolidating banks’ current accounts and reserve requirement accounts into a single account and introducing standing facilities.
    - Replacing the Bank rate to enhance signaling effects of policy actions on market rates.
- Household vulnerabilities and macroprudential policy:
  - Key vulnerabilities: high household indebtedness and a high share of unsecured lending.
  - Policy recommendations:
    - BoB should continue close attention to household balance-sheet vulnerabilities when lowering interest rates.
    - Tighten macroprudential policies if necessary by introducing regulatory limits on Debt-To-Income or a limit on unsecured lending.
    - Expedite credit reporting reform and encourage banks to implement programs to gradually reduce the share of unsecured loans.
    - Support with land reform (communal lands and land registry).
- Exchange rate and REER:
  - Current BoB objective: maintain a stable REER against currencies in the basket; exchange rate is moderately overvalued relative to fundamentals.
  - Planned fiscal adjustment would help bring REER broadly in line; ensuing real depreciation should be allowed to play out.
  - Staff recommendation: use flexibility in current exchange rate framework to allow the Pula REER to respond to persistent shocks.

### Enhancing Botswana’s Fiscal Framework
- Key reform priorities:
  - Modify the fiscal rule to achieve intergenerational equity and shelter the economy from the commodity cycle and revenue volatility.
  - Greater revenue mobilization by broadening the tax base and advancing tax reform.
  - Enhance the efficiency of spending.
  - Reform parastatals and strengthen their monitoring and accountability.
  - Revamp the debt management framework.
- Fiscal-rule suggestions and illustrative targets:
  - Set explicit long-run target for the return on assets consistent with intergenerational equity, defined as providing future generations with a return comparable to current generations (equivalent to an annuity of 11 percent of GDP).
  - Complement ceiling on gross debt with a period-by-period floor on assets, based on the ARA metric and buffers needed for smoothing cyclical fluctuations (about 18 percent of GDP).
  - Define an operational target (e.g. a ceiling on recurrent expenditure growth) to ensure consistency between short- and long-run objectives.
  - Illustrative simulation: continuation of fiscal consolidation achieving a surplus of 0.8 percent of GDP starting in 2026 would leave sufficient financial assets to guard against shocks and achieve intergenerational equity.

### Debt Management and Reserves
- Public debt and financing:
  - Gross public debt (central government only) likely to stabilize in FY2019 at around 19 percent of GDP despite a large deficit expected at 5.8 percent of GDP.
  - Pula Fund assets narrowed to 25 percent of GDP in 2018, down from 31 percent of GDP in 2017; BoB exceptional gains in FY2019 noted.
- Medium-term baseline (gradual fiscal consolidation starting in 2020/21):
  - Primary deficit expected to decline gradually to -0.5 percent of GDP in FY2024.
  - Projected public debt in FY2024: narrative cites 14.6 percent of GDP.
  - Gross financing needs projected to be 2.8 percent of GDP in FY2024 (narrative); table entries show some variation.
- Scenario if deficit financed entirely by debt:
  - Public debt would reach about 23 percent of GDP in FY2024 (below the 40 percent statutory limit).
- External debt:
  - External debt hovered around $4 billion (25 percent of GDP) during the last decade.
  - Public external debt declined from 18 to 12 percent of GDP during 2013–2018.
  - More than 80 percent of total external debt has long and medium-term maturities.
  - Gross external financing needs (GEFN) projected to remain below 8 percent of GDP.

### Financial Sector Soundness and Market Development
- Financial soundness:
  - Credit grew by about 6.9 percent year on year at end-October 2019, skewed toward households.
  - Credit to the private sector (annual % change) 2019 7.9.
  - Nonperforming loan (NPL) ratio stabilized at 5.2 percent in Q3 2019 (Nonperforming loans to total gross loans: 2017 5.3; 2018 5.4; Mar-19 5.2; Sep-19 5.2).
  - Capital adequacy ratios stood well above the statutory minimum capital of 15 percent; capital to assets: 2018 9.7; Mar-19 9.6; Jun-19 11.7.
  - Return on assets: 2018 2.8; Mar-19 2.6; Sep-19 1.7.
- Financial-market development recommendations:
  - Develop the secondary market for government securities.
  - Leverage Fintech.
  - Facilitate the attachment of collateral.
  - Improve credit information.
  - Greater domestic borrowing on medium-to-long-term maturities to finance the deficit and deepen bond market liquidity.
- Financial stability actions:
  - Closely monitor liquidity, strengthen liquidity framework, introduce Emergency Liquidity Assistance.
  - Finalize the banking act to enhance crisis resolution framework.
  - Introduce macroprudential limits to contain household indebtedness.
  - Expedite credit reporting reform.
  - Support land reform and bank programs to reduce unsecured lending share.

### Supply-Side Policies and Structural Reform
- Objectives:
  - Improve the business environment.
  - Foster competition and competitiveness.
  - Reduce the government footprint in the economy.
- Key measures:
  - Streamline regulatory framework, reduce cost of doing business, advance e-Government agenda.
  - Rightsize the wage bill, align wages to productivity, reform parastatals, increase contestability of markets (especially network services).
  - Enhance human capital: improve efficiency and quality of basic education via reallocation/prioritization of spending, address fragmented education budget, implement pre-primary and Early Childhood Care and Education, expand teacher training, increase role and quality of vocational training.
  - Promote digital literacy, adaptability, life-long learning; attract FDIs and high-skilled foreign workers; improve ICT infrastructure affordability and availability.
  - Integrate into regional and global value chains (AfCFTA): strengthen export and investment promotion institutions, upgrade trade-supporting infrastructure, promote cross-border investments, coordinate investment and trade policies regionally.
  - Deepen domestic financial sector: land registry reform, collateral registry for movable assets, enhance credit information, assess public development banks, leverage Fintech with investments in digital networks and skills upgrading.
- Parastatals governance:
  - Need regulatory governance framework; recommendations include empowering the Public Enterprises Evaluation and Privatization Agency, merging overlapping parastatals, enhancing financial transparency, professionalizing boards, and setting timelines for restructuring key loss-making enterprises (Air Botswana, Botswana Meat Commission, National Development Bank) and proceeding with privatization plans.
  - Parastatals’ debt-to-GDP ratio stood at 4.5 percent of GDP at end-March 2019, half of which is held by Botswana Power Corporation.

### Supply-side analytical boxes and diagnostics
- Box 1 — Climate Change in Botswana:
  - Botswana declared 2018/19 a "severe drought year".
  - Long-term projections: Botswana ranks in the top-3 countries in sub-Saharan Africa in expected average temperature increase, ranging over 2.9-3.8 degrees Celsius by 2100.
  - In three out of four IPCC scenarios (RCP 4.5, 6.0 and 8.5), Botswana ranks in the top 2 countries in sub-Saharan Africa in expected average decrease in annual rainfall (4.7-9.5 millimeters).
  - Limpopo catchment expected to decline by 26 percent (36 percent) and cause maize yield to decline by over 20 percent (35 percent) by 2100 under stringent GHG mitigation scenarios of global warming contained to 1.5 degrees (2.0 degrees) Celsius, according to ASSAR analysis.
  - Recommended priorities: advancing economic diversification, making infrastructure more resilient to climate shocks, increasing access to financing and cost-effective insurance, and enhancing social safety nets and policy buffers.
- Box 2 — Monetary Policy and Monetary Transmission:
  - Botswana’s crawling peg: a 1 percent increase in the policy rate increases lending rates by 0.87 percent in the long term.
  - A 1 percent increase in the NPL ratio increases lending rates by 0.39 percent.
  - Speed of adjustment to equilibrium is relatively fast: 2 quarters.
  - Pass-through to deposit rates is lower (within 0.6-0.7 percent depending on deposit category).
  - Policy recommendations: develop the interbank market, enhance liquidity forecasts, increase bond issuance especially for medium-term maturities, simplify interest rate structure.
- Box 4 — Transitioning to a Knowledge-Based Economy:
  - Tertiary education improved from 8.2 percent in 2006/07 to 18.2 percent in 2017/18.
  - About 50 percent of the population are internet users; 80 percent covered by at least a 3G mobile network.
  - Internet speed has stagnated for almost a decade.
- Box 5 — Accelerating Convergence:
  - Export diversification and sophistication are key; countries get richer by producing a more diverse range of technologically dynamic and sophisticated goods and services.
  - Countries have used vertical, horizontal, FDI-driven, and regional integration strategies with mixed success.

### Key analytical findings and scenarios
- Illustrative fiscal shock experiment (Box 3):
  - Permanent decline in government diamond proceeds of 4 percent of GDP simulated.
  - Scenarios:
    - Scenario 1: Tax rates and government expenditure policies remain at pre-shock levels.
    - Scenario 2: Government increases non-tradable spending while maintaining tax rates; added expenditure financed through a reduction in buffers.
    - Scenario 3: Government expands both non-tradable spending and the wage bill and finances it through buffers.
  - Main findings:
    - Sustained public spending increases on non-tradables and the wage bill cause the real exchange rate to appreciate relative to no intervention, shifting resources toward services and away from manufacturing and lowering growth potential.
    - Increasing the wage bill (scenario 3) significantly amplifies misallocation by crowding out private employment, especially for skilled labor:
      - The share of manufacturing in GDP falls by almost 10 percent.
      - The share of services increases by 11 percent.
      - The drop in GDP is 4 times larger than in the case without intervention (compared to 1.5 times in scenario 2).
    - The fiscal expansion marginally reduces inequality but reduces aggregate welfare (inequality falls by about 1 point relative to the case without intervention).
    - A better alternative would be to intervene only through targeted cash transfers (scenario 1 with cash transfers).

### Statistics, AML/CFT, and Governance
- Statistics:
  - Data provision is broadly adequate for surveillance; authorities have improved statistics with AFRITAC South and IMF support.
  - Staff urges move to GFSM 2014, improve classification of current and capital expenditures, and accelerate collection of financial accounts of extra-budgetary entities, including SOEs.
- AML/CFT:
  - FATF grey listing (October 2018) has not led to a loss of correspondent banking relationships for domestic banks.
  - Remaining deficiencies from the 2017 Mutual Evaluation Report should be addressed, including implementing a sound and effective risk-based approach to supervision for offsite surveillance and on-site activities for the BoB and NBFIRA.
- Governance:
  - Botswana’s economic success hinged in part on strong governance.
  - Suggested governance improvements: fiscal governance (revenue mobilization and spending efficiency, timely publication of budget documents, increased financial transparency and monitoring of parastatals), regulatory framework (ease of doing business, trade facilitation), and rule of law (contract enforcement).

### Selected exact statistics and projections (as reported)
- Real GDP (annual percent change): 2019 3.4; 2020 4.4; 2021 4.5; 2022 5.6; 2023 3.8; 2024 3.9; 2025 3.9.
- Consumer prices (average): 2019 2.8; 2020 3.5; 2021 3.5; 2022 4.0; 2023 4.0; 2024 4.0; 2025 4.0.
- Diamond production (millions of carats): 2019 24.0; 2020 25.8; 2021 25.3; 2022 26.0; 2023 26.8; 2024 27.5; 2025 27.5.
- Gross official reserves (end of period, US$ millions): 2019 6,557; 2020 6,557; 2021 6,182; 2022 5,986; 2023 5,994; 2024 6,365; 2025 6,673; 2026 7,032.
- Months of imports of goods and services: 2019 9.4; 2020 9.0; 2021 8.5; 2022 8.5; 2023 8.6; 2024 8.8.
- Current account balance (millions of US$): 2019 -797.
- Overall balance (millions of US$): 2019 -1,431.
- Exports, f.o.b. (millions of US$): 2019 6,534; Diamonds (of which) 2019 4,290.
- Imports, f.o.b. (millions of US$): 2019 -6,803; Diamond imports 2019 -1,689.
- Central government: Total revenue and grants (percent of GDP) 2019 25.5; Total expenditure and net lending (percent of GDP) 2019 31.3; Overall balance (percent of GDP) 2019 -5.8.
- Central government (billions of pula): Total revenue and grants 2019/20 62.8; Total expenditure and net lending 2019/20 64.1; Overall balance 2019/20 -11.9.
- Monetary indicators (end of period):
  - Broad money (M2): 2019 99.2 (annual % change and level series reported).
  - Base Money (annual % change) 2019 9.4; Broad Money (annual % change) 2019 9.4; Credit to the private sector (annual % change) 2019 7.9.

### Model and theoretical framework highlights
- Production structure includes Agricultural goods, Tradables, Non-tradables, and Diamonds (capital-intensive, tradable, price exogenous).
- Households are forward looking, face idiosyncratic income uncertainty, and decide consumption-savings and labor allocation between formal and informal sectors.
- Financial intermediaries convert goods into capital and allow household saving/borrowing.
- Fiscal instruments in model: tax on entrepreneurs’ capital income; taxes on wage earnings; royalties on diamond production; sector-specific and means-tested transfers and subsidies.
- Exchange rate arrangement: Botswana Pula on a crawling peg against a weighted basket comprising the SDR and the South African Rand; as of January 16, 2020: US$1 = P10.72; R1 = P0.74.
- Data notes: national accounts rebased to 2006 in October 2012; a new rebasing exercise ongoing with rebased estimates to be published by December 2020.

*International Monetary Fund staff report for the 2019 Article IV consultation with Botswana, February 21, 2020 (content unit 1bwaea2020002).*

### 5.6 percent in 2021 as the diamond industry recovers somewhat, and a   new copper mine

### 1bwaea2020002 - 5.6 percent in 2021 as the diamond industry recovers somewhat, and a   new copper mine

### Outlook and Risks
- Growth projections:
  - GDP growth is projected to rebound to 4.4 percent in 2020.
  - Growth is expected to pick up further in 2021 with the start of the Khoemacau copper mine.
  - Growth will moderate to around 4 percent over the medium term.
  - Earlier line: "5.6 percent in 2021 as the diamond industry recovers somewhat, and a new copper mine comes on stream." (Text contains both the 5.6 percent phrasing and the subsequent statement that growth moderates to around 4 percent.)
- Inflation and labor market:
  - Inflation averaged 2.8 percent in 2019.
  - Unemployment increased to 20.7 percent (noted in Background).
  - Botswana faces about 30,000 new entrants into the job market every year versus approximately 22,000 jobs created annually over 2014-18.
- Balance of payments and buffers:
  - Current account turned into a deficit, estimated at -4.3 percent of GDP in 2019.
  - Foreign exchange reserves dropped to about 10 months of imports (35 percent of GDP) at end-September 2019.
- Downside risks (main transmission channels largely via lower mineral revenue or SACU transfers):
  - Faster-than-anticipated slowdown in key trading partners (China, United States, South Africa).
  - Trade policy uncertainty and global growth shocks.
  - Widespread and prolonged disruptions from the coronavirus could lower growth and mining revenue through slower tourism activity and demand for diamonds.
  - Climate shocks that would weigh on agricultural output and tourism; climate shocks threaten the outlook over the medium to longer term.
  - Shifts in consumer preferences toward synthetic diamonds could force sharp domestic spending adjustments with macroeconomic and social stability effects.

### Fiscal Policy: stance, risks, and composition
- Recent fiscal deterioration:
  - Overall deficit widened to 4.6 percent of GDP in FY2018 and is projected to increase to 5.8 percent of GDP in FY2019.
  - Deterioration driven by lower mining revenue and SACU transfers (-3.5 percent of GDP), underperformance of VAT, larger-than-expected increase in the wage bill, and one-off expenditures (e.g., drought relief), partially offset by under-execution of capital spending.
  - Gross public debt expected to remain broadly stable at about 19 percent of GDP.
- Staff baseline fiscal path:
  - Baseline assumes a gradual fiscal consolidation starting in 2020.
  - Fiscal deficit expected to narrow to about 3 percent of GDP in 2020.
  - Fiscal deficit to gradually return to 0.5 percent of GDP by FY2024, amid increased efficiency gains and reprioritization of capital projects.
  - Higher mining and SACU revenue, which account for 60 percent of Botswana’s revenue, will help reduce the fiscal deficit in FY2020 by 2¾ percent of GDP.
- Assessment of size and pace:
  - The size and pace of the authorities’ planned adjustment are broadly appropriate given low debt, gross financing needs, and reserves at 35 percent of GDP (250 percent of the ARA metric).
  - Critical that consolidation starts in FY2020 to help address external imbalances and gradually rebuild buffers consistent with intergenerational equity.
- Need for additional measures and composition guidance:
  - Additional revenue and expenditure measures beyond those currently planned are needed to achieve the authorities’ plans while protecting efficient capital and social spending.
  - Large and abrupt cuts to capital and social spending would be undesirable given adverse effects on long-term growth and time needed for public management reforms to yield benefits.
  - Specific policy suggestions:
    - Expenditure side:
      - Introduce means testing of scholarships in tertiary education.
      - Gradually eliminate electricity and fuel subsidies while minimizing the impact on the poor (for example through targeted cash transfers).
      - Freeze hiring by the public sector and better align wage increases with productivity.
    - Revenue side:
      - Ensure planned increases in public services fees are progressive.
      - Broaden the tax base and streamline exemptions.
      - Align the VAT rate to the regional average (14-15 percent, compared with 12 percent in Botswana).
      - Increase the progressivity of the personal income tax by adding brackets for higher income earners.
      - Over the medium term, increase the level and coverage of property rates.

### Monetary and Exchange Rate Policies
- Stance and recommendations:
  - The Bank of Botswana (BoB) accommodative monetary policy stance is appropriate.
  - The BoB should use the flexibility afforded by its current exchange rate regime to facilitate the economy’s adjustment to the persistent decline in mineral revenue and SACU transfers, and structural transformation.
- Financial market and transmission reforms to strengthen monetary policy:
  - Develop the secondary market for government securities.
  - Leverage Fintech.
  - Facilitate the attachment of collateral.
  - Improve credit information.
- Financial sector soundness and lending:
  - Credit grew by about 6.9 percent year on year at end-October 2019, skewed toward households.
  - Nonperforming loan (NPL) ratio stabilized at 5.2 percent in Q3 2019.
  - Capital adequacy ratios stood well above the statutory minimum capital of 15 percent.
  - Health of the financial system not so far impacted by FATF grey listing (October 2018) despite strategic deficiencies in AML/CFT framework.

### Enhancing Botswana’s Fiscal Framework
- Key reform priorities:
  - Modify the fiscal rule to allow Botswana to achieve its intergenerational equity objective and shelter the economy from the commodity cycle and revenue volatility.
  - Greater revenue mobilization by broadening the tax base and advancing tax reform.
  - Enhance the efficiency of spending.
  - Reform parastatals and strengthen their monitoring and accountability.
  - Revamp the debt management framework.

### Supply-Side Policies and Structural Reform
- Objectives:
  - Further improve the business environment.
  - Foster competition and competitiveness.
  - Reduce the government footprint in the economy.
- Specific notes:
  - Address strategic deficiencies in the Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) framework.
  - Prioritize productive and soft infrastructure to support transformation to a knowledge-based economy.
  - Improve planning and budgeting to identify savings and improve spending efficiency.

_International Monetary Fund staff report for the 2019 Article IV consultation with Botswana, February 21, 2020._

### 15.      The accommodative monetary policy stance is appropriate. After over a year of

### 1bwaea2020002 - 15.      The accommodative monetary policy stance is appropriate. After over a year of

### Monetary policy stance and transmission
- The cut in the BoB policy rate in August was in line with changes in global rates and consistent with the BoB’s objective of maintaining a stable REER.
- The cut was possible because of low core inflation and inflation expectations anchored within the CB target band.
- The lower policy rate will pass through to lending rates, providing a stimulus to economic activity.
- Staff supports revamping BoB’s monetary operations framework to enhance policy transmission and deepen domestic financial markets, including:
  - Introducing the 7-day BoBC as the main instrument (replacing the 14-day BoBC).
  - Removing the ceiling on the issuance of BoBCs.
  - Adoption of reserves averaging.
  - Consolidating banks’ current accounts and reserve requirement accounts into a single account and introducing standing facilities.
  - Replacing the Bank rate to enhance signaling effects of policy actions on market rates.

### Household balance-sheet vulnerabilities and macroprudential policy
- Key vulnerabilities: high household indebtedness and a high share of unsecured lending.
- BoB view: risks are manageable due to factors including direct paycheck collections for unsecured loans, low concentration of unsecured loans, and scope to deepen credit markets.
- Policy recommendations:
  - BoB should continue close attention to household balance-sheet vulnerabilities when lowering interest rates.
  - Tighten macroprudential policies if necessary by introducing regulatory limits on Debt-To-Income or a limit on unsecured lending.
  - Expedite credit reporting reform and encourage banks to implement programs to gradually reduce the share of unsecured loans.
  - Support with land reform (communal lands and land registry).

### Fiscal framework, buffers, and fiscal-rule proposals
- The current framework specifies gross debt limit of 40 percent of GDP, and shares of FX and local currency debt (20 percent of GDP for each).
- The Pula Fund is not governed by strict deposit or withdrawal rules; deposits depend on FX inflows and fiscal surplus, withdrawals finance fiscal deficits — this likely encouraged overreliance on buffers.
- Authorities’ proposed fiscal rule: by end of NDP 11, recurrent budget financed from non-mineral revenues; mineral revenues: 60 percent for investment in physical and human capital and 40 percent saved.
  - Staff concerns: achieving this target would be difficult and likely lead to high volatility in spending on physical and human capital and GDP.
- Suggested amendments to the proposed rule:
  - Set explicit long-run target for the return on assets (financial and non-financial) consistent with intergenerational equity, defined as providing future generations with a return comparable to current generations (equivalent to an annuity of 11 percent of GDP).
  - Complement ceiling on gross debt with a period-by-period floor on assets, based on the ARA metric and buffers needed for smoothing cyclical fluctuations (about 18 percent of GDP).
  - Define an operational target (e.g. a ceiling on recurrent expenditure growth) to ensure consistency between short- and long-run objectives.
- Illustrative simulations show that continuation of fiscal consolidation achieving a surplus of 0.8 percent of GDP starting in 2026 would leave sufficient financial assets to guard against shocks and achieve intergenerational equity.

### Spending efficiency, parastatals, and public sector governance
- Improving spending efficiency can reduce the short-term growth impact of fiscal consolidation and maximize long-term returns on capital and social spending.
- Priorities: strengthen public investment management, better target social spending, move to performance-based budgeting.
- Parastatals:
  - Need regulatory governance framework; current lack may misalign parastatals’ strategies with line ministries.
  - Persistent delays in audited financial statements complicate oversight.
  - Recommendations: empower the Public Enterprises Evaluation and Privatization Agency, merge overlapping parastatals, enhance financial transparency, strengthen governance, ensure accountability, professionalize boards, appoint CEOs and board members by competency, set timelines for restructuring key loss-making enterprises (Air Botswana, Botswana Meat Commission, National Development Bank) and proceed with privatization plans.
- Parastatals’ debt-to-GDP ratio stood at 4.5 percent of GDP at end-March 2019, half of which is held by Botswana Power Corporation.

### Domestic revenue mobilization and tax policy
- Mineral revenue and SACU transfers account for more than 60 percent of total fiscal revenue.
- Tax revenues are significantly below potential due to multiple tax exemptions.
- Need to broaden the tax base (e.g. streamlining VAT exemptions, increasing level and coverage of property rates) and strengthen tax administration.
- Potential fiscal impacts noted in source: removing VAT exemptions on fuel, sugar and private education and health services would increase VAT receipts by 0.3 percent of GDP.
- Revenue measures’ distributional effects should be offset by expanding targeted cash transfers or other social protection programs.
- Tax reform should avoid discouraging foreign investment (caution cited regarding recent large increase in transfer duties for foreigners).

### Debt management and financial-market development
- Need to revamp the medium-term debt management strategy (MTDMS).
- Financing decisions should be based on levels of external and fiscal buffers, the financial opportunity cost of issuing debt versus drawing down buffers, a dynamic forward-looking strategy based on budget forecasts, and on-lending and redemptions.
- Debt strategy should be part of deeper financial-market development to provide domestic investment instruments and enhance liquidity in the bond market.
- Recommendations: greater domestic borrowing on medium-to-long-term maturities to finance the deficit.

### Exchange rate policy and REER
- Current BoB objective: maintain a stable REER against currencies in the basket; achieved price stability but slowed economic adjustment.
- Exchange rate is moderately overvalued relative to fundamentals and desired policies (Annex II referenced).
- Planned fiscal adjustment would help bring REER broadly in line; ensuing real depreciation should be allowed to play out.
- Risks: external downside shocks (e.g. elevated trade tensions, faster-than-anticipated slowdown in China) could exert depreciation pressure; keeping REER constant in such events would require maintaining real interest rates higher than otherwise, limiting monetary policy’s countercyclical role.
- Staff recommendation: use flexibility in current exchange rate framework to allow the Pula REER to respond to persistent shocks.
- Authorities broadly concurred and saw scope to allow for greater flexibility within existing framework.

### Financial stability and liquidity
- Short-term financial stability risks appear low, but vulnerabilities exist:
  - Over-reliance on wholesale funding.
  - Concentration in banks’ lending portfolios.
  - High household indebtedness and share of unsecured lending (medium-term growth and private consumption risks).
- Recommendations:
  - Closely monitor liquidity, strengthen liquidity framework, introduce Emergency Liquidity Assistance.
  - Finalize the banking act to enhance crisis resolution framework.
  - Introduce macroprudential limits to contain household indebtedness.
  - Expedite credit reporting reform.
  - Support land reform and bank programs to reduce unsecured lending share.

### Supply-side reforms and structural transformation
- Urgent need to advance structural reforms to lift medium-term growth and create jobs.
- Constraints identified: large government footprint, past policies that shielded local producers without performance criteria, low productivity, high labor costs, weakening business environment, skills mismatches, lack of technological readiness.
- Recommended measures:
  - Streamline regulatory framework, reduce cost of doing business, advance e-Government agenda.
  - Reduce government footprint: rightsizing the wage bill, align wages to productivity, reform parastatals, increase contestability of markets (especially network services).
  - Enhance human capital: improve efficiency and quality of basic education via reallocation/prioritization of spending, address fragmented education budget, implement pre-primary and Early Childhood Care and Education, expand teacher training, increase role and quality of vocational training.
  - Develop capabilities for the future: promote digital literacy, adaptability, life-long learning; attract FDIs and high-skilled foreign workers; improve ICT infrastructure affordability and availability.
  - Integrate into regional and global value chains (AfCFTA): strengthen export and investment promotion institutions, upgrade trade-supporting infrastructure, promote cross-border investments, coordinate investment and trade policies regionally, target complementary products, use public R&D to build capacities.
- Deepening domestic financial sector: address gaps in collateral availability, information asymmetry, high share of volatile deposits; priorities include land registry reform, collateral registry for movable assets, enhancing credit information, assessing public development banks, and leveraging Fintech with investments in digital networks and skills upgrading.

### Authorities’ views (selected)
- BoB considers household balance-sheet risks manageable and cited mitigating factors (direct paycheck collection, low concentration of unsecured loans, room to deepen credit markets).
- Authorities welcomed alternative fiscal-framework suggestions, noted trade-offs between financial and non-financial assets and between human and physical capital, and requested technical assistance for fiscal-rule calibration.
- Authorities agreed on scope for greater revenue mobilization, the need to analyze decline in tax efficiency rates, and merit in revamping assets and liability management, including greater domestic borrowing on medium-to-long-term maturities.
- Authorities concurred that the exchange rate is moderately overvalued and saw scope for greater flexibility within the existing exchange rate framework.

*Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1bwaea2020002.pdf*

### 34.      The authorities lamented the lack of progress in advancing diversification. They shared

### 34.      The authorities lamented the lack of progress in advancing diversification. They shared

### Other Issues — Statistics, AML/CFT, Governance
- Statistics
  - Data provision is broadly adequate for surveillance.
  - The authorities have continued to improve statistics, with support from AFRITAC South and IMF (Annex V).
  - Staff welcomes recent improvements in external statistics and urges the authorities to:
    - move to GFSM 2014,
    - improve the classification of current and capital expenditures,
    - accelerate the collection of financial accounts of extra-budgetary entities, including SOEs.
- AML/CFT
  - The grey listing has not led to a loss of correspondent banking relationships for domestic banks.
  - Reported effects include delays in outward investment by asset managers and shifts in the management strategy of assets abroad, with attendant effects on costs.
  - Remaining deficiencies identified in the 2017 AML/CFT Mutual Evaluation Report should be addressed, including:
    - implementing a sound and effective risk-based approach to supervision for offsite surveillance and on-site activities for the BoB and NBFIRA.
  - Addressing these deficiencies may require more dedicated human resources.
  - The authorities are developing customized risk-based models and tools for AML/CFT supervision with IMF support; a first pilot exercise was conducted by BoB and NBFIRA to test the tools.
- Governance
  - Botswana’s economic success hinged in part on strong governance.
  - Staff supports recent initiatives related to asset declaration by public officials and customer due diligence (Freedom of Information).
  - While governance standards remain high overall, further improvements could be made in:
    - fiscal governance (revenue mobilization and spending efficiency, timely publication of budget documents, increased financial transparency and monitoring of parastatals),
    - the regulatory framework (ease of doing business, trade facilitation),
    - rule of law (contract enforcement).
  - Better governance could help raise the efficiency of public investment, with significant growth payoffs.

### Staff Appraisal — Outlook, Risks, and Policy Priorities
- Macroeconomic outlook and risks
  - Reserves fell from $8.3 billion in 2014 to $6.6 billion in 2019.
  - Growth is expected to pick up in 2020-21: 4.4 percent and 5.6 percent respectively.
  - Growth is expected to remain around 4 percent over the medium term—insufficient to reduce unemployment and reach high-income status.
  - The outlook is subject to significant downside risks, most of which will affect Botswana through diamond and SACU revenue.
  - Several sectors could be affected by climate change.
- Fiscal stance and recommendations
  - Staff supports the authorities’ objective to return to a fiscal surplus over the medium term.
  - Botswana has some fiscal space that allows a gradual adjustment to the persistent drop in mineral and SACU revenue, but fiscal consolidation must start in FY2020 to rebuild buffers.
  - Recent changes in expenditure composition (e.g., increases in the wage bill at the expense of capital investment) highlight the need to carefully calibrate priorities to:
    - minimize the impact on competitiveness and growth,
    - preserve efficient capital investment,
    - protect the most vulnerable.
- Monetary policy
  - The accommodative monetary policy stance is appropriate.
  - The recent policy rate cut is consistent with maintaining a stable REER.
  - In lowering interest rates, BoB’s continued attention to vulnerabilities in households’ balance sheets will be critical.
  - If downside risks materialize, monetary policy could be loosened further if greater exchange rate flexibility is allowed within the existing framework.
- Structural transformation and growth model
  - Achieving sustained acceleration in growth and job creation requires a fundamental change in the growth model: from mining and government-led to private sector and export-driven.
  - This entails revamping macroeconomic policy frameworks to increase resilience and accelerate supply-side reforms.
- Fiscal framework reforms recommended
  - Define a medium-term anchor and modify the fiscal rule by:
    - setting a long-run target for returns on assets and imposing a floor on assets,
    - defining an operational target such as a ceiling on recurrent expenditure growth.
  - Greater revenue mobilization through broadening the tax base and advancing tax reform.
  - Public financial management reforms to enhance spending efficiency.
  - Reform parastatals and other extra-budgetary entities by enforcing compliance with best governance practices and strengthening monitoring and accountability.
  - Revamp the debt management framework.
- Exchange rate, financial markets, and monetary transmission
  - Greater flexibility within the current exchange rate regime will help adjust to the persistent decline in mineral and trade resources and foster structural transformation.
  - Continue reforms to strengthen monetary transmission and deepen the domestic financial market, including:
    - further developing the secondary market for government securities,
    - leveraging Fintech,
    - facilitating attachment of collateral,
    - improving credit information.
- Supply-side and human capital policies
  - Focus supply-side policies on:
    - improving the business environment,
    - redesigning industrial policies to foster competition and competitiveness,
    - reducing the government footprint in the economy.
  - Transitioning to a knowledge-based economy and high-income status requires:
    - prioritizing investment in human capital,
    - upgrading digital skills and deepening ICT penetration,
    - promoting integration in regional and global value chains.
  - Address strategic deficiencies in the AML/CFT framework.

### Key analytical findings and scenarios
- Box 3 — Illustrative effects of delayed fiscal adjustment to a persistent terms of trade shock
  - Experiment: simulate a permanent decline in government diamond proceeds of 4 percent of GDP.
  - Scenarios analyzed:
    - Scenario 1: Tax rates and government expenditure policies remain at pre-shock levels.
    - Scenario 2: Government increases non-tradable spending while maintaining tax rates; added expenditure financed through a reduction in buffers.
    - Scenario 3: Government expands both non-tradable spending and the wage bill (employment and wages) and finances it through buffers.
  - Main findings:
    - Sustained public spending increases on non-tradables and the wage bill cause the real exchange rate to appreciate relative to no intervention, shifting resources toward services and away from manufacturing and lowering growth potential.
    - Increasing the wage bill (scenario 3) significantly amplifies misallocation by crowding out private employment, especially for skilled labor:
      - The share of manufacturing in GDP falls by almost 10 percent,
      - The share of services increases by 11 percent,
      - The drop in GDP is 4 times larger than in the case without intervention (compared to 1.5 times in scenario 2).
    - The fiscal expansion marginally reduces inequality but reduces aggregate welfare:
      - Inequality falls by about 1 point relative to the case without intervention (remaining close to the pre-shock case).
    - A better alternative would be to intervene only through targeted cash transfers (scenario 1 with cash transfers).

### Boxed evidence and diagnostics
- Box 1 — Climate Change in Botswana
  - Recent droughts challenged economic development; Botswana declared 2018/19 a “severe drought year”.
  - Long-term projections:
    - Botswana ranks in the top-3 countries in sub-Saharan Africa in terms of expected average temperature increase, ranging over 2.9-3.8 degrees Celsius by 2100.
    - In three out of four IPCC scenarios (RCP 4.5, 6.0 and 8.5), Botswana ranks in the top 2 countries in sub-Saharan Africa in terms of expected average decrease in annual rainfall (4.7-9.5 millimeters).
    - Limpopo catchment expected to decline by 26 percent (36 percent) and cause maize yield to decline by over 20 percent (35 percent) by 2100 under stringent GHG mitigation scenarios of global warming contained to 1.5 degrees (2.0 degrees) Celsius, according to ASSAR analysis.
  - Botswana produces only 1 percent of the region’s emissions that account for 2 percent of global total.
  - Authorities’ adaptation measures include:
    - an automatic mechanism to support agriculture delivering subsidized animal feeds, vaccines, and drugs,
    - Climate Change Policy, Climate Change Strategy and Action Plan, Climate Smart Agriculture (CSA) program, and Global Environmental Facility (GEF).
  - Going forward, recommended priorities: advancing economic diversification, making infrastructure more resilient to climate shocks, increasing access to financing and cost-effective insurance, and enhancing social safety nets and policy buffers.
- Box 2 — Monetary Policy and Monetary Transmission in Botswana
  - Botswana’s monetary policy is implemented in the context of a crawling peg; the rate of the crawl is determined based on estimated inflation differentials.
  - Policy rate pass-through to lending rates:
    - A 1 percent increase in the policy rate increases lending rates by 0.87 percent in the long term.
    - A 1 percent increase in the NPL ratio increases lending rates by 0.39 percent.
    - Speed of adjustment to equilibrium is relatively fast: 2 quarters.
  - Pass-through to deposit rates is lower (within 0.6-0.7 percent depending on the category of deposits).
  - An increase in real lending rates reduces credit to the private sector:
    - Effects take 3 quarters to materialize and become significant in the second year.
    - Effects are more immediate and stronger for the corporate sector than for households.
  - Policy recommendations to strengthen transmission:
    - further develop the interbank market,
    - enhance liquidity forecasts,
    - increase bonds issuance especially for medium-term maturities,
    - simplify the interest rate structure to enhance price discovery and the signaling effect of monetary policy.
- Box 4 — Transitioning to a Knowledge-Based Economy
  - Transformation rests on three pillars: knowledge production, knowledge dissemination, and knowledge capitalization.
  - Knowledge production:
    - Tertiary education in Botswana improved from 8.2 percent in 2006/07 to 18.2 percent in 2017/18.
    - Progress has not kept up with rapid development in upper middle-income countries; the distance from upper middle-income countries has widened since 2008.
  - Knowledge dissemination:
    - About 50 percent of the population are internet users,
    - 80 percent of the population are covered by at least a 3G mobile network.
    - Internet speed in Botswana has stagnated for almost a decade, creating a bottleneck for digital adoption.
  - Knowledge capitalization requires investment in education, financing, strategic planning, and private sector engagement.
- Box 5 — Accelerating Convergence: Lessons from Selected Countries’ Experiences
  - Export diversification and sophistication are key to accelerate convergence; countries get richer by producing a more diverse range of technologically dynamic and sophisticated goods and services.
  - Countries have followed varied approaches to export diversification:
    - Vertical diversification (upstream and downstream) aligned with comparative advantage (e.g., salmon in Chile),
    - Horizontal diversification (e.g., electronics in Malaysia),
    - Quality upgrade via FDI-driven models for capability development (e.g., Costa Rica in semiconductors and medical devices),
    - Greater integration in regional and global value chains (e.g., European countries).
  - Many countries used targeted industrial policies to support diversification, with mixed success.

*Source: IMF staff report excerpt for Botswana (content unit 1bwaea2020002).*

### conclusions from successes and failures (because of selection bias), Rodrick (2004), and Cherif and Hasanov

### 1bwaea2020002 - conclusions from successes and failures (because of selection bias), Rodrick (2004), and Cherif and Hasanov

### Principles for "good/true" industrial policy
- Start by fixing government failures and macroeconomic policies (especially exchange rate overvaluation) that hamper export competitiveness.
- Focus on export orientation rather than import substitution and avoid raising barriers to competition.
- Enforce accountability by:
  - setting clear performance criteria;
  - sunset clauses;
  - clearly defining responsibilities;
  - regularly monitoring and accepting failures (accepting the cost of closing firms if they fail).

### Role of dedicated public institutions and illustrative cases
- Well-designed, high-skilled and sufficiently empowered dedicated public institutions can overcome coordination failures.
- Examples cited:
  - CINDE (Costa Rica): critical role in negotiation with INTEL by improving government reactivity to investor needs (Spar, 1998).
  - Fundación Chile: R&D support and technology diffusion, quality control services, and export promotion assistance (Lebdioui, 2019).
  - Rubber Malaysian Board: played a key role in R&D support and technology diffusion, quality control services, and export promotion assistance (Lebdioui, 2019).

### Botswana — summary findings and diagnostics
- Social and labor outcomes:
  - Botswana has a track record of sound governance and significant increases in income level and living standards across major dimensions including education and life expectancy.
  - Yet, unemployment (especially youth) is persistently high and income inequality remains one of the highest in the world.
- Recent macroeconomic dynamics and drivers:
  - GDP growth decelerated mostly due to lower mining activity.
  - Headline and core inflation remain subdued.
  - Fiscal deficit deterioration in the run up to the election was financed through a drawdown of buffers and did not increase public debt but eroded buffers.
  - Lower diamond exports and SACU transfers weakened the current account balance and contributed to continued erosion of reserves.
- Financial sector linkages and vulnerabilities:
  - Despite improved liquidity and high capital adequacy ratios, credit growth recovery moderated in recent months, especially for the corporate sector, amid rising NPLs.
  - Persistent vulnerabilities in banks’ balance sheets stem from a heavy reliance on volatile corporate deposits and an increasing share of unsecured loans to households.

### Selected exact statistics and projections (as reported)
- Real GDP (annual percent change): 2019 3.4; 2020 4.4; 2021 4.5; 2022 5.6; 2023 3.8; 2024 3.9; 2025 3.9.
- Consumer prices (average): 2019 2.8; 2020 3.5; 2021 3.5; 2022 4.0; 2023 4.0; 2024 4.0; 2025 4.0.
- Diamond production (millions of carats): 2019 24.0; 2020 25.8; 2021 25.3; 2022 26.0; 2023 26.8; 2024 27.5; 2025 27.5.
- Gross official reserves (end of period, US$ millions): 2019 6,557; 2020 6,557; 2021 6,182; 2022 5,986; 2023 5,994; 2024 6,365; 2025 6,673; 2026 7,032.
- Months of imports of goods and services: 2019 9.4; 2020 9.0; 2021 8.5; 2022 8.5; 2023 8.6; 2024 8.8.
- Current account balance (millions of US$): 2019 -797.
- Overall balance (millions of US$): 2019 -1,431.
- Exports, f.o.b. (millions of US$): 2019 6,534; Diamonds (of which) 2019 4,290.
- Imports, f.o.b. (millions of US$): 2019 -6,803; Diamond imports 2019 -1,689.
- Central government: Total revenue and grants (percent of GDP) 2019 25.5; Total expenditure and net lending (percent of GDP) 2019 31.3; Overall balance (percent of GDP) 2019 -5.8.
- Central government (billions of pula): Total revenue and grants 2019/20 62.8; Total expenditure and net lending 2019/20 64.1; Overall balance 2019/20 -11.9 (primary balance and financing details reported in tables).
- Monetary indicators (end of period):
  - Broad money (M2): 2019 99.2 (annual % change and level series reported).
  - Base Money (annual % change) 2019 9.4; Broad Money (annual % change) 2019 9.4; Credit to the private sector (annual % change) 2019 7.9.
- Financial soundness indicators (selected, 2019/Mar-19/Jun-19/Sep-19 snapshots):
  - Nonperforming loans to total gross loans: 2017 5.3; 2018 5.4; Mar-19 5.2; Sep-19 5.2.
  - Capital to assets: 2018 9.7; Mar-19 9.6; Jun-19 11.7.
  - Return on assets: 2018 2.8; Mar-19 2.6; Sep-19 1.7.

### Policy-relevant implications (derived from the text)
- Prioritize correcting macroeconomic and government failures (including exchange rate misalignment) before implementing targeted industrial policies to support export competitiveness.
- Design industrial policies around export orientation, open competition, and strict accountability mechanisms (clear targets, sunset clauses, monitoring, willingness to close failing firms).
- Build or empower dedicated public institutions with technical capacity and incentives to respond rapidly to investor and firm needs (as CINDE, Fundación Chile, and the Rubber Malaysian Board have done).
- For Botswana specifically, protect and rebuild buffers and reserves while addressing structural vulnerabilities in the banking sector (volatile corporate deposits; rising unsecured household lending) and persistent labor market problems (youth unemployment) to ensure inclusive growth.

*Italic: Source — content unit "conclusions from successes and failures (because of selection bias), Rodrick (2004), and Cherif and Hasanov"; Botswana data and analysis as presented in the source PDF.*

### Annex I. Track Record of Economic Policies and Reforms

### Annex I. Track Record of Economic Policies and Reforms

### Maintain economic stability and preserve buffers amidst volatile diamond and SACU revenue

- Objective: Preserve macroeconomic stability
  - Actions/measures:
    - Gradual fiscal consolidation while preserving capital and social spending.
  - Latest developments:
    - Limited progress. The fiscal stance was expansionary, given negative shocks facing the economy during 2019, and the election cycle, but consolidation is expected to resume in FY2020.

- Objective: Mobilize domestic revenue
  - Actions/measures:
    - Tax administration: Pass and implement the pending bills (Tax Administration act, VAT and Income Tax bills).
    - Tax base: Reduce VAT exemptions and offset the impact on poverty by providing cash transfers, increase property taxes and coverage, and repeal exemptions to capital income tax.
  - Latest developments:
    - Limited progress. Most actions have been postponed to after the general election. Some amendments to the Income Tax Act related to Transfer Pricing Rules and Thin Capitalization provisions were introduced.
    - Limited progress. More exemptions have been granted on transfers duty for citizens while increasing them from 5 to 30 percent for non-citizens.

- Objective: Improve efficiency of public spending
  - Actions/measures:
    - Better target social spending and reduce subsidies. Extend the coverage of the social registry and introduce means-testing (e.g. for scholarships in tertiary education).
    - PFM reforms: Improve forecasting capacities, strengthen the medium-term expenditure framework (MTEF), implement the new charts of accounts, appropriately classify recurrent and capital expenditures, better integrate the MTEF in the budget process, and move to performance-based budgeting. Strengthen public investment management.
    - Budget transparency: Publish online budget documents in a timely manner. Integrate special funds into the budget approval process.
  - Latest developments:
    - Limited progress. Despite generous spending on direct transfers, and a relatively good coverage (90 percent of the lowest quintile has access to social assistance), the targeting is not as efficient as compared to other countries. The 2020 budget speech has put high priority on some key aspects of this going forward.
    - Partial progress. Some efforts are being deployed to migrate to GFSM 2014 and implement the new charts of accounts. Budget documents and execution are published although with some delay. The authorities upgraded the Development Projects Management System (DPMS) and it went live on September 2018.
    - Some progress: the budget speech and budget tables were published online for Fy2020.

- Objective: Preserve financial stability
  - Actions/measures:
    - Macroprudential function: Assign a clear macroprudential mandate to the BoB, fill data gaps.
    - Supervision: Establish crisis resolution framework, strengthen risk-based supervision of nonbanks financial institutions.
  - Latest developments:
    - Partial progress. The Financial Stability Committee has been established and is meeting on regular basis. The BoB started collecting and monitoring data on households’ indebtedness and the real estate market. A financial stability report has been published. However, the banking law (including the crisis the resolution framework) has yet to be finalized.
    - Limited progress. The main issue remains with non-bank risk-based supervision and the amendment if the banking law to include the resolution framework. Basel III liquidity requirements will take time.

### Enable an Export-Oriented and Job-Creating Private Sector

- Objective: Improve cost-effectiveness and quality of public services
  - Actions/measures:
    - Public wages and employment: Align wages with productivity. Initiate a civil service reform.
    - Parastatals: Rationalize parastatals, Privatize the ones with large losses. Improve oversight.
  - Latest developments:
    - Limited progress. Both the public sector recruitments, wages continued to increase.
    - Limited progress. Privatization of BMC has been initiated by the number of parastatals continued to increase. Audited financial statements are still not readily available.

- Objective: Improve cost of doing business
  - Actions/measures:
    - Advance the e-government agenda. Adopt electronic filing for all companies. Streamline requirements for licensing, and reforms to improve creditors’ rights.
  - Latest developments:
    - Partial progress. Some regulations have been passed to ease doing business, mainly to streamline and simplify the licensing system. A Unique Identification Number is embedded in the Online Business Registration System and deadlines on the registration services have been in June 2019.

- Objective: Loosen labor market rigidities and strengthen skills
  - Actions/measures:
    - Labor market: Unify the graduates' registry with the jobseeker database and open it to the private sector to reduce skills mismatches.
    - Education: Overcoming coordination problems related to the different ministries involved in vocational training. Improve spending efficiency in education.
  - Latest developments:
    - Partial progress. There is a directive to unify the registry, but little progress has been done.
    - Partial progress. A public expenditure review for basic education has been finalized.

- Objective: Implement market-friendly sectoral reforms
  - Actions/measures:
    - Beef: Remove the Botswana Meat Commission (BMC)'s export monopoly and privatize it. Align prices paid to high quality producers on international prices. Liberalize imports of beef.
    - Tourism: Address supply-related restrictions (e.g. air access, specialized workforce). Eliminate bureaucratic rigidities (e.g. visas and work permits).
  - Latest developments:
    - Partial progress. BMC privatization process has been initiated.
    - Partial progress. Visas and work permits process has reportedly been eased. Air access has been granted to a non-African company.

- Objective: Deepen financial development and foster inclusion
  - Actions/measures:
    - Credit and monetary transmission: Strengthen the creditor database and collateral registry for assets. Increase the volume and frequency of government bonds issuance.
    - Payment system: Improve electronic connectivity in the financial system and strengthen the clearing house to facilitate advanced transactions. Strengthen the regulation on the national payment system. Allow inter-operability across networks and with bank accounts.
  - Latest developments:
    - Partial progress. The credit information sharing legislation is being finalized. The World Bank has produced a report and has also submitted the layman’s draft of the Secured Transactions on Movable Property legislation. Drafting instructions were sent to Attorney General, which once enacted, will allow for the establishment of a Collateral Registry.

*Source: Annex I. Track Record of Economic Policies and Reforms*

### Annex IV. Debt Sustainability Analysis

### Annex IV. Debt Sustainability Analysis

### Public Debt Sustainability — key findings and projections
- Botswana’s gross public debt (central government only) is likely to stabilize in FY2019 at around 19 percent of GDP despite a large deficit expected at 5.8 percent of GDP.
- In recent years the widening deficit was financed mainly through a drawdown of buffers (and exceptional gains from the BoB in FY2019); Pula Fund assets narrowed to 25 percent of GDP in 2018, down from 31 percent of GDP in 2017.
- Composition and risk drivers
  - Public debt dominated by external debt, mostly multilateral; about two-third of total debt is external.
  - Vulnerabilities from the high share of external debt are mitigated by long maturities of multilateral debt and that 60 percent of fiscal revenue are in foreign currency.
- Medium-term baseline scenario (gradual fiscal consolidation starting in 2020/21)
  - Primary deficit is expected to decline gradually to -0.5 percent of GDP in FY2024.
  - Deficit financing assumed to be mostly via withdrawal of deposits and medium- and long-term domestic debt.
  - Projected outcomes in FY2024: public debt 14.6 percent of GDP; gross financing needs 2.8 percent of GDP.
- Debt-if-financed-entirely-by-debt scenario
  - If the deficit were financed entirely through debt (including FY2019), public debt would reach about 23 percent of GDP in FY2024 (below the 40 percent of GDP statutory limit).
- Recent historical and projected headline numbers (Nominal gross public debt, percent of GDP)
  - 2017: 22.4
  - 2018: 18.1
  - 2019: 18.9
  - 2020: 18.7
  - 2021: 16.7
  - 2022: 16.6
  - 2023: 16.1
  - 2024: 15.6 (table top row ends with 14.6 in final column labeled 2024; narrative states 14.6 percent in FY2024)
- Projected public gross financing needs (percent of GDP)
  - 2017: 4.7
  - 2018: 3.1
  - 2019: 7.1
  - 2020: 7.5
  - 2021: 5.9
  - 2022: 3.7
  - 2023: 2.8
  - 2024: 3.8 (table shows 2.8 and 2.8 in later columns; baseline narrative cites 2.8 percent of GDP in FY2024)
- Automatic debt dynamics and macro assumptions (selected)
  - Real GDP growth projections (percent): 3.8, 3.3, 4.2, 3.6, 4.7, 5.1, 3.8, 3.9, 3.9 (2017–2024 sequence).
  - Inflation (GDP deflator, percent): 6.9, 2.6, 1.2, 2.0, 3.5, 5.2, 4.8, 3.8, 4.1 (2017–2024).
  - Effective interest rate (percent): 3.1, 2.7, 3.3, 2.8, 3.8, 3.3, 3.7, 4.1, 4.7 (2017–2024).

### Alternative scenarios (results and implications)
- Historical values scenario (10-year averages)
  - Public debt would remain broadly in line with staff’s baseline, reaching 16.6 percent of GDP over the medium term.
- Constant primary balance scenario (primary balance held at FY2018 level)
  - Gross financing needs would exceed 9 percent of GDP.
  - Public debt would rise to 33.8 percent of GDP in FY2024.
  - Even at that level, Botswana would be classified as a lower scrutiny country, but fiscal consolidation is required for sustainability and intergenerational equity.
- Contingent liabilities shock scenario
  - Assumptions: SOEs default on 50 percent of their total debt with banks (about 2.2 percent of GDP) in FY2018; a one standard-deviation growth shock with associated deterioration of the primary balance; slight increase in interest rates.
  - Simulated outcome: debt-to-GDP would rise to about 19.3 percent of GDP in FY2021 and decline thereafter.
  - Gross financing needs would reach 7.1 percent of GDP in FY2020 but remain manageable given large buffers.

### Public debt dynamics and risks
- Identified debt-creating flows and drivers (selected table excerpts)
  - Change in gross public sector debt (cumulative across projection horizon): -4.2 (final column cumulative change).
  - Primary deficit (2017–2024 sequence in percent of GDP): 2.2, 0.6, 4.1, 5.3, 2.5, 1.8, 0.9, 1.2, 0.2.
  - Primary (noninterest) revenue and grants (percent of GDP, 2017–2024): 35.9, 30.9, 27.7, 25.5, 28.2, 26.9, 26.8, 25.8, 26.3.
  - Primary (noninterest) expenditure (percent of GDP, 2017–2024): 38.1, 31.4, 31.8, 30.8, 30.6, 28.8, 27.7, 27.1, 26.4.

### External Debt Sustainability — key findings and projections
- Level and composition
  - External debt has hovered around 4 billion dollars (25 percent of GDP) during the last decade.
  - During 2013–2018, the stock of public external debt decreased from 18 to 12 percent of GDP.
  - Private sector external debt accounted for about one-third of total external debt in 2013 and increased its share reaching 50 percent of GDP in 2018. (Private sector external debt is mostly loans between fellow enterprises.)
  - More than 80 percent of total external debt has long and medium-term maturities.
- Projections
  - External debt-to-GDP ratio is projected to start decreasing after 2020, driven by continued decreases in public external debt and stable private debt-to-GDP ratios.
  - Gross external financing needs (GEFN) are projected to remain below 8 percent of GDP.
- Stress test sensitivities
  - Current account shock: a widening of the non-interest current account deficit by a one-half standard deviation during 2019–23 would increase external debt to about 38 percent of GDP by 2024.
  - Real interest rate shocks: impact is small due to large share of fixed-rate debt.
  - Exchange rate depreciation: a 30 percent depreciation increases external debt to about 31 percent of GDP.
- External debt and related indicators (selected projections from Table A4.2)
  - Baseline external debt (percent of GDP) sequence 2014–2024 (selected): 22.8, 24.2, 31.7, 24.3, 23.4, 24.9, 25.0, 23.8, 23.1, 21.9, 21.0.
  - Change in external debt (percent of GDP): -5.2, 1.4, 7.5, -7.4, -0.9, 1.5, 0.1, -1.2, -0.7, -1.2, -0.9.
  - Identified external debt-creating flows (percent of GDP): -19.2, -8.3, -10.4, -14.5, -1.5, 1.2, -1.0, -2.5, -2.9, -3.7, -3.9.
  - Gross external financing need (in billions of US dollars, and percent of GDP): -0.8, 0.3, -0.4, 0.1, 0.5, 1.7, 1.3, 1.1, 1.0, 0.9, 0.8 (corresponding percent of GDP series shown in table).
  - Debt-stabilizing non-interest current account (percent of GDP): -1.6 (final column).

### Sensitivity and bound tests (visual summary)
- Bound tests indicate:
  - Under a non-interest current account shock, external debt could reach about 38 percent of GDP by 2024.
  - Under a combined shock and a 30 percent real depreciation, external debt increases are projected to be manageable (about 31–32 percent of GDP under specified shocks).
  - Average projections for key baseline variables shown in figure panels: Nominal external interest rate baseline ~7.8 percent; historical and scenario comparisons for growth and current account shocks are presented in the DSA figures.

*Source: IMF staff.*

### Appendix I. Revamping Botswana’s Fiscal Rule Framework-

### Appendix I. Revamping Botswana’s Fiscal Rule Framework

### Methodology and Background
- Botswana’s current fiscal rule: gross debt ceiling of 40 percent of GDP (with equal 20-20 shares on external and domestic debt).
- Recent fiscal developments motivating reform:
  - Structural decline in fiscal (mineral and SACU) revenues.
  - Deteriorating fiscal balances and growing expenditure bill.
  - Sharp decline in reserve buffers while public debt has remained stable.
  - Volatile revenues associated with commodity cycles and SACU proceeds.
- NDP 11 operational fiscal rule proposal:
  - Recurrent budget financed from non-mineral revenues.
  - Mineral revenues: 60 percent for investment in physical and human capital; 40 percent saved for future generations.
  - Primary concerns: prescribes procyclical investment expenditure and an ad-hoc allocation between savings and investment that may be difficult to achieve given the data.

### Designing a Fiscal Rule for Botswana
- Fiscal rule components:
  - Anchor (long-term target) and medium-term operational rule consistent with anchor.
- Standard commodity-exporter framework: Permanent Income Hypothesis (PIH)
  - Anchor on net wealth (net financial assets plus resource wealth).
  - Operational rule on the non-resource primary balance (NRPB).
  - Caveats of PIH: reliance on accurate long-term commodity price estimates; compatibility issues with very low net financial assets (high net debt); exclusion of physical assets from net wealth; omission of public investment feedback on growth.
- Alternative framework:
  - Anchor on net debt, or gross debt ceiling combined with a floor on financial assets.
  - Target path for (structural) overall or primary balance operationally.
  - Requires explicit anchor for financial assets and a target annuity for intergenerational equity, calibrated to align assets with the ARA metrics and include buffers for cyclical smoothing.

### Framework of Analysis and Main Assumptions
- Policy paths to achieve required annuity in 2050 (three scenarios):
  - Baseline: direct accumulation of financial assets.
  - Infrastructure: lower accumulation of financial assets coupled with higher investments in infrastructure.
  - Infrastructure and TFP: even lower accumulation of financial assets, investments in infrastructure, and structural reforms that raise TFP.
- Key modeling assumptions and setup:
  - Long-term horizons assumed; most variables grow in tandem with GDP (balanced growth path while mineral resources available).
  - Government fiscal operations include savings in financial assets (A_t), investment in physical capital (K^g_t), recurrent expenses proportional to non-mining GDP with time-varying ratio μ_t, debt servicing (D_t), revenues from SACU and mining and non-mining taxes.
  - Public asset laws of motion:
    - Financial assets evolve with return r^A_t.
    - Government infrastructure evolves with depreciation δ_g and investment efficiency ζ_t; in simulations ζ_t is assumed constant and unitary.
  - Government debt assumption:
    - Gross debt kept constant as a share of GDP (conservative assumption; debt peaked around 2011 below 30 percent of GDP and has been on a declining path, and below 20 percent of GDP, since 2017).
    - Government can use external assets to finance deficits or accumulate reserves with a nominal return of 9 percent (calibrated to match recent average returns).
    - Five-year adjustment period with gradual fiscal consolidation: overall balance converges to zero by 2024.
    - After adjustment and given anchor for assets and required savings, and under constant debt, overall deficit is determined each period; adjustments assumed to take place on recurrent spending (via μ_t).
  - Mineral production and prices:
    - Resource exhaustion assumed after a 30-year horizon.
    - Mining production assumed constant in real terms for its lifespan; production halts thereafter.
    - Commodity prices assumed constant in real terms over this period.
    - Mining GDP driven by Y^m,papt_t = Y^m_1 η^{t−1} with η assumed at a nominal rate of 7 percent.
  - Non-mining potential GDP:
    - Production function with TFP z_t, public infrastructure K^g_t (coefficient γ), private capital K_t (coefficient α), human capital H_t; parameters α = 0.3 and γ = 0.1.
    - Public investment can have positive spillover effects on TFP.
  - Shocks and stochastic setup:
    - Mining output and SACU revenue shocks estimated jointly using annual data 1994-2018.
    - Cyclical components modeled as AR(1) after HP filter with smoothing parameter 6.25; mean-zero multivariate normal errors; estimated persistence and variance-covariance used to simulate 10,000 runs.
    - Assumed transmission: a one percent shock to mining production translates into a 0.04 percent shock to non-mining output (in line with the average response of the last 5 years).
  - Alternative scenarios specifics:
    - Infrastructure scenario: lower financial asset savings; all lower savings channeled to public infrastructure investment.
    - Infrastructure and structural reform scenario: same infrastructure investment with structural reforms beginning at year 6, lasting 8 years, increasing non-mining TFP by 0.08 percent per year over the 8-year period.

### Implications for Fiscal Balances and GDP
- Required fiscal stance to reach annuity target in thirty years (after five-year adjustment):
  - Baseline scenario (capital stock ratio to GDP constant, high savings): target overall surplus of 0.8 percent of GDP.
  - Infrastructure scenario (higher public investment): requires higher fiscal surpluses because of capital depreciation, despite positive TFP spillovers.
  - Infrastructure plus TFP reforms: required fiscal surpluses can be much smaller if reforms substantially raise TFP.
- Fiscal impulse effects on non-mining GDP:
  - Assumed that each 1 percent of consolidation (expansion) causes non-mining GDP to contract (expand) by 0.4 percent.
- Opportunity cost of high financial asset accumulation: foregone productive capital that could raise growth, particularly when combined with structural reforms.

### Impact of Shock Realizations and Risk Assessment
- Stochastic simulation outcomes (shocks to mining and SACU revenues only):
  - Necessary long-run asset accumulation and medium-term buffers remain within desired targets with at least 75 percent probability.
  - Simulation of a permanent shock to mining revenues at the highest 80 percentile: smoothing spending adjustments over 3-5 years requires buffers in the range of 2-3 percent of GDP.
  - Under the baseline, probability that asset accumulation falls short of the target required for intergenerational equity is less than 25 percent.
  - Baseline attains the ARA metric including cyclical buffers with at least 75 percent probability.
  - Strategies with lower financial asset accumulation (including higher infrastructure investment paths) leave the economy more exposed to shocks.
- Policy design considerations:
  - Importance of debt management optimization that accounts for borrowing costs versus returns on assets when financing deficits and smoothing shocks.
  - Conservative results assume nominal ceiling for recurrent expenditure of 7 percent binds after transition.
  - VAR estimations (Frankel et al. methodology) indicate fiscal policy has been neutral with respect to the business cycle over the recent decade; some countercyclical policy could be desirable and the proposed framework allows for flexibility.

*Source: Appendix I. Revamping Botswana’s Fiscal Rule Framework*

### 6.      Entrepreneurs also produce diamonds using a capital-intensive technology. Diamonds

### 1bwaea2020002 - 6.      Entrepreneurs also produce diamonds using a capital-intensive technology. Diamonds

### Production structure
- Goods and producers:
  - Agricultural goods — Agricultural workers; inputs: Land, labor, fertilizer; uses: Consumption, and input production of agricultural export.
  - Tradables — Entrepreneurs; inputs: Private sector labor, and capital; uses: Consumption, investment, exports.
  - Non-tradables — Private/public sector workers, Entrepreneurs; technology: Informal technology; use: Consumption.
  - Diamonds — Entrepreneurs; input: Capital; use: Exports.
- Diamonds are tradable and priced in international markets; in the model the price of diamonds is exogenous (Botswana’s influence can be represented by moving the price as necessary).

### Preferences and household decisions
- Households:
  - Live forever and are forward looking.
  - Decide each period how much of disposable income to consume and how much to save or borrow, facing credit constraints.
  - Face idiosyncratic income uncertainty and are risk averse: they seek to avoid large consumption fluctuations over time.
  - Access to a financial intermediary allows accumulation of financial wealth as insurance; households facing more severe shocks can borrow to smooth consumption if they have access to finance.
- Consumption allocation:
  - Households decide how to allocate consumption over two food items (domestic agricultural goods and imported food) and non-food goods (tradables and non-tradables).
- Labor allocation:
  - Workers choose between formal labor market work and informal sector work (output of household enterprises/production, not subject to income taxes) based on income per hour in each sector.

### Financial intermediation and financial sector policies
- Financial intermediaries perform two roles:
  - Convert manufacturing and services goods into capital.
  - Allow households to save and borrow.

### Fiscal policy parameters (model representation)
- The government has access to mineral and non-mineral taxes and transfers to pay public sector workers, finance subsidies, and provide insurance to vulnerable households.
- Policy instruments captured by exogenous parameters:
  - A tax on entrepreneurs’ capital income;
  - A tax on private and public sector workers’ wage earnings;
  - Royalties on diamond production;
  - Sector specific and means-tested transfers and subsidies.

### Idiosyncratic shocks
- Individual productivity is subject to random, household-specific changes over time.
- No aggregate uncertainty; with a large number of households a law of large numbers applies so the distribution of shocks across households within each sector remains constant (the number of unlucky households is always the same).

### Equilibrium and steady state
- At each point in time, prices, wages, and interest rates adjust so that credit, labor, and domestically consumed goods markets clear.
- Given current and future prices and government policies, households maximize the present value of lifetime utility.
- Prices of diamonds and manufacturing goods are exogenously given.
- Steady state: aggregate variables and prices are constant over time; the distribution of wealth, income, and consumption across households is constant, while individual households’ income, wealth, and consumption evolve with idiosyncratic shocks.

### Selected institutional and data context (extracts from the report)
- Exchange rate arrangement:
  - The Botswana Pula is on a crawling peg against a weighted basket comprising the SDR and the South African Rand.
  - As of January 16, 2020: US$1 = P10.72; R1 = P0.74.
- IMF/BoB data and statistics notes:
  - National accounts rebasing: base year updated to 2006 in October 2012; 2015 revision included new mines; a new rebasing exercise ongoing with rebased estimates to be published by December 2020.
  - CPI: re-based CPI first published in October 2016 with index reference period September 2016; weights derived from the 2009/10 Botswana Core Welfare Indicator Survey; Multi-Topic Household Survey conducted during 2015-16.
  - Government Finance Statistics: cash-based quarterly and annual budgetary central government data compiled following GFS Manual 2014; since 2018 data available on expenditure by COFOG; no balance sheet data compiled; no data compiled for extrabudgetary institutions, consolidated central government, or consolidated general government.
  - Monetary and Financial Statistics: BoB compiles MFS covering central bank and other depository corporations; BoB seeks to expand coverage to pension funds, insurance companies, and non-money market funds.
  - External sector: annual BOP with quarterly breakdown published; preliminary BOP data disseminated within two months; revised (final) data after nine months; ITRS data unreliable relative to alternative annual balance of payments survey on financial account items.
- Errors and omissions in BOP:
  - Good progress reducing errors and omissions (previously ranging from 50 to 80 percent for reference years 2009–2017), though levels remain large.
  - Main factors to further reduce errors and omissions:
    - Adjust imports from neighbor countries to f.o.b. valuation basis.
    - Fine-tune estimation model for travel services.
    - Increase coverage of current and capital transfers by including data on government grants and TA/investment projects.
    - Cover foreign assets of asset managers, pension funds, and insurance companies.
- Data dissemination and standards:
  - Botswana implemented e-GDDS recommendations and disseminates fourteen of the fifteen data categories on its NSDP.
  - Periodicity and timeliness largely according to metadata, with shortcomings in timeliness of central government gross debt and labor market indicators.
  - Data ROSC published March 27, 2007.

*Source: BOTSWANA — STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX (extracts provided).*

### Introduction

### Introduction

### Overview
- Authorities broadly agree with staff’s assessment of key policy challenges and priorities.
- Botswana has experienced prolonged robust growth supported by prudent macroeconomic management, strong institutions and good governance practices.
- Recent challenges: decline in mining proceeds and SACU revenue, persistent fiscal deficits, declining reserve buffers, difficulty transitioning beyond the upper middle-income status, insufficient employment generation, and limited economic diversification.
- Government priorities since assuming office in November 2019: transform the economy into a diversified private sector led and knowledge-based economy focused on employment generation, particularly for the youth; economic diversification viewed as an important pillar to support graduation to the high-income bracket by 2036.

### Recent Economic Developments and Outlook
- Growth:
  - 4.5 percent in 2018.
  - Estimated 3.6 percent in 2019, owing to decreased diamond production, weaker downstream industries, and effects of a severe drought in 2018 and 2019.
  - Projected 4.4 percent in 2020 and 5.6 percent in 2021, influenced by expected recovery in mining production.
- Risks to the outlook: sluggish external diamond demand, potential adverse impact on global demand from the coronavirus epidemic, and subdued growth in South Africa.
- Inflation:
  - Headline inflation averaged 2.8 percent in 2019, slightly below the Bank of Botswana’s medium term objective range of 3-6 percent.
  - Expected to edge up to 3.5 percent in 2020 as administered prices are revised upwards.
  - Expected to remain within the objective range in the medium term.
- External sector:
  - Current account balance: surplus of 2.1 percent of GDP in 2018 to a deficit of 4.3 percent of GDP in 2019, reflecting a sharp decline in diamond export proceeds and lower SACU receipts.
  - Reserves estimated by the authorities at 14 months of import cover in 2019.
  - Current account expected to rebound into surplus by 2023 against the backdrop of fiscal consolidation, the coming on stream of a new copper mine, and an increase in diamond output.

### Fiscal Policy
- Fiscal stance shifting from expansionary mode to gradual fiscal consolidation focused on rationalizing expenditure, enhancing spending efficiency, and expanding the tax base.
- Fiscal deficits:
  - Estimated fiscal deficit of 5.8 percent of GDP in 2019, up from 4.6 percent in 2018, amid a decline in mineral revenues, lower SACU transfers, and underperformance in tax collection.
  - A lower deficit is expected in 2020 supported by fiscal adjustment.
- Reform measures and priorities:
  - Contain the wage bill, reduce subsidies, and restructure or sell inefficient SOEs.
  - Fiscal consolidation aimed at generating budget surpluses in the medium term, anchored on expenditure control, efficiency measures, SOE reform, and enhanced domestic revenue mobilization.
  - Strengthen tax administration: comprehensive review of the Value Added Tax (VAT) Act, Income Tax Act, and tax administration measures underway; package of bills expected to be submitted to Parliament for approval by July 2020.
  - Authorities prioritize improving efficiency in tax collection before increasing VAT rates; VAT rate review planned at a later date.
  - Short-term adjustments: various government fees and charges that have not been adjusted for over a decade will be adjusted upwards as of April 1, 2020 and annually thereafter.
  - Medium-term measures: enhance capacity of the large taxpayer unit with additional specialist staff and training; promote e-tax filing through public education campaigns.
  - Plan to analyze causes of decline in tax efficiency rates.
- Public sector efficiency and investment:
  - Scrutinize subsidy schemes to improve targeting of social benefits.
  - Conduct audit of expenditures on education and health.
  - Improve appraisal, design and costing of public sector investment projects and reprioritize approved projects.
  - Pilot zero-based budgeting in selected ministries with aim to roll out to all ministries in the medium term.
  - Improve public infrastructure delivery through Public Private Partnership model once the PPP procurement law is promulgated and a new strategy for delivering mega projects is developed.
- Fiscal framework and rules:
  - Authorities will review current fiscal framework, improve operational guidance, and are open to refining proposals for a new fiscal rule to address potential weaknesses such as revenue volatility.
  - Authorities have requested technical assistance in this regard.

### Monetary, Exchange Rate and Financial Sector Policies
- Monetary policy:
  - Primary objective of the Bank of Botswana (BoB) is price stability.
  - Inflation declined from over 15 percent in 2008 to around 3 percent.
  - BoB pursues an accommodative monetary policy stance informed by the medium-term inflation outlook.
  - On August 29, 2019, the Monetary Policy Committee (MPC) cut the Bank Rate by 25 basis points for the first time since October 2017.
  - The Bank stands ready to adjust policy stance as needed under a data driven approach.
- Liquidity management and instruments:
  - On April 30, 2019, BoB replaced its 14-day Bank of Botswana Certificates (BoBCs) with a 7-day BoBC as the main instrument for liquidity management, enabling shorter and simpler forecasting horizons and improving liquidity management.
  - BoB implemented reserve averaging to determine the primary reserve requirement to further improve liquidity management for commercial banks.
- Exchange rate:
  - Crawling band exchange rate framework has contributed to a relatively stable real effective exchange rate and macroeconomic stability.
  - Authorities implemented a 1.5 percent downward crawl of the exchange rate in 2020 and will continue to use flexibility to correct misalignments as they arise.
- Financial sector stability:
  - Financial sector remains safe, sound, and profitable, though high household debt and liquidity in the banking system warrant close monitoring.
  - MPC is carefully monitoring household debt and prepared to act as warranted; Committee believes financial stability risks from household debt are well contained at this time.
  - In 2019, the Financial Stability Council was formed comprising the Central Bank, Non-Bank Financial Institutions Regulatory Authority, Financial Intelligence Agency and the Ministry of Finance & Economic Development; the Council formulated the Macro-Prudential Framework for Botswana.
- Fintech and digitalization:
  - Banks and non-bank financial institutions have embraced automation and Fintech.
  - Financial institutions are adopting risk management strategies to address cybercrime and related financial crimes.
  - BoB is planning work on new laws, regulations, strategies and operations to accommodate changes linked to digitization and financial technologies.

### Structural Reforms
- Economic transformation strategy:
  - Authorities committed to structural reforms to transform the public sector dominated growth model to a diversified, private sector led, knowledge economy.
  - Strategy implemented through strategic interventions supported by investments in critical human and physical capital, development of a vibrant agricultural sector and export promotion.
- Special economic zones and cluster initiatives:
  - Plans underway to provide support infrastructure in special economic zones covering financial services, base metal beneficiation, mining supplies and logistics, coal beneficiation, horticulture, agro-business, and beef and leather production.
  - Cluster development initiative aimed at improving business productivity, value chains and competitiveness.
  - Online business registration system launched in June 2019 to facilitate faster and cheaper business registration.
  - Key legislation enacted including the Trade Act and the Industrial Development Act to support business development.
- Social protection, labor market and human capital:
  - Reduction of poverty and inequality, and strengthening of social protection systems are integral to the economic transformation agenda.
  - Poverty reduction framework will be enhanced; a draft National Poverty Eradication Policy has been completed.
  - A National Social Protection Framework will be developed to harmonize social protection programs and boost efficiencies.
  - Implement labor market reforms and invest in human capital to ameliorate high youth unemployment.
  - Implementation of the National Human Resource Development Plan to commence in 2020.
  - Develop Internship and Apprenticeship Framework and Policy, and further develop the Labor Market Information System to address information gaps and skills mismatch.
- SOE reform:
  - Authorities plan to re-examine the role of SOEs, enhance efficiency, rationalize and align them with the new government service delivery model and transformation agenda.
  - Special Cabinet subcommittee chaired by the Minister of Finance established to undertake comprehensive review of all SOEs.
  - Immediate actions being considered to restructure and improve performance of the Botswana Meat Commission and the National Development Bank.
- AML/CFT reforms:
  - Since the October 2018 assessment by the Financial Action Task Force (FATF), authorities have taken steps to implement required recommendations to accelerate exit from grey listing.
  - Follow up assessment in April 2019 found substantial progress but further actions required.
  - National AML/CFT policy and strategy adopted; risk assessments on legal persons, legal arrangements and non-profit organizations finalized and will soon be shared with banks and other financial institutions.
  - BoB and Non-Bank Financial Institutions Regulatory Authority have risk-based AML/CFT supervisory manuals in place.
  - Authorities committed to implementing outstanding actions prior to the next review at the end of this year.

### Conclusion
- Authorities are undertaking determined efforts to implement far reaching reforms to transform the economy into a diversified, private-sector led, knowledge-based economy.
- Policy intentions: gradual fiscal consolidation, address external vulnerabilities, maintain exchange rate flexibility, deepen structural reforms, and intensify diversification efforts.
- Authorities look forward to continued Fund engagement and technical assistance.

*Source: 1bwaea2020002 - Introduction*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1bwaea2020002.pdf_