## 1. The COVID-19 Pandemic ## Source details **Canonical URL:** [1. The COVID-19 Pandemic](https://www.imf.org/-/media/files/publications/cr/2021/english/1bwaea2021001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2021/english/1bwaea2021001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2021/english/1bwaea2021001.pdf.json) --- ### Pre-COVID context - Structural challenges and declining buffers when the pandemic struck. - Key long-term achievements: - Extreme poverty rate declined by about 40 percentage points to 16 percent over four decades. - Per capita income has quadrupled. - Secondary school enrollment increased from 20 percent to above 80 percent. - Recent vulnerabilities prior to the pandemic: - Persistently lower-than-anticipated diamond revenue (including through declining prices over 2016-20) and declining SACU transfers. - Eroding reserves by about US$½ billion per year on average since 2014. - Reduced competitiveness and slowed structural transformation toward an export- and private-sector led growth model (NDP11, Vision 2036). - Anemic job creation relative to young and more educated labor force entrants. - Climate change shocks (severe droughts) adversely affected rural populations. ### Impact of the pandemic and the policy response - Health and containment: - First COVID-19 cases in late March 2020. - Early measures: State of Emergency, 6-week nationwide lockdown, partial lockdowns, travel restrictions, mandatory mask wearing, social distancing, bans on social events, targeted testing and contact tracing. - Outcomes as of end-September 2020: 3,172 cases (about 0.1 percent of the population) and 16 deaths. - Cases accelerated since November 2020: about 44,000 cases and deaths exceeded 670 mid-April 2021. - South African variant detected; phased lifting of travel restrictions in November; State of Emergency extended for another 6 months (approved end-March). - Real economy: - GDP contraction: -11 percent y-o-y in H1 2020 and -24 percent in Q2 2020; Q4 2020: -4.1 percent. - Annual GDP growth in 2020: -7.9 percent. - Drivers: reliance on diamond, tourism and “contact-intensive” services. - Domestic consumption supported recovery in H2 2020, buoyed by public wage increases in September and relaxation of mobility restrictions. - Labor market and poverty: - Unemployment rate: 24.5 percent in 2020Q4 (from 22.2 percent in 2019Q4). - Youth unemployment: increased from 28.8 percent to 32.4 percent. - World Bank estimate: extreme poverty rate (US$1.9/day in 2011 PPP) increased to 16 percent in 2020 from 12.6 percent in 2019; poverty projected to remain above 2019 figure until 2022. - Inflation: - Inflation fell to 1.9 percent in 2020 from 2.8 percent in 2019; Bank of Botswana objective: 3 to 6 percent. - External sector: - Current account deficit in 2020: 10.1 percent of GDP. - Diamonds net exports declined by 40 percent (in US$). - Non-diamond imports declined by 5 percent. - Exports of services declined by 51 percent (led by tourism). - Reserves fell by US$1.2 billion to 7.3 months of imports at end-November 2020. - Crawl rate moved from -1.5 to -2.9 percent in May 2020; REER depreciated by 3.5 percent y-o-y in December 2020. - Fiscal response: - Initial economic COVID-relief package: P4.7 billion (2.6 percent of GDP). - Supplementary recurrent budget to Ministry of Health and Wellness: P1 billion. - Loan facility for firms: P1.3 billion. - Total fiscal package reported: 6,980 million pula. - Fiscal FY2020 deficit expected about 11 percent of GDP. - Public debt estimated to increase to about 23.5 percent of GDP in FY2020 (below 40 percent debt ceiling). - Parliament approved doubling domestic borrowing limit from 15 to 30 billion. - Government Investment Account balance: P5.6 billion in November 2020, down from P15,7 billion a year earlier. - Monetary policy and credit: - BoB reduced policy rate by 100 basis points to 3.75 percent since April 2020 and reduced reserve requirement ratio. - Repo maturity expanded to 92 days and eligible collateral broadened. - Credit growth: +5.3 percent in December 2020. - Share of credit to households in banks’ balance sheets: 65.4 percent in November 2020 (from 63.7 in December 2019). - About 70 percent of this credit is non-collateralized and carries higher interest rates. - Financial sector: - Commercial banks remain adequately capitalized and liquid; NPLs declined and provisioning improved. - BoB reduced capital adequacy ratio from 15 percent to 12.5 percent (most banks remain above 15 percent). - Loan relief measures: discretionary loan repayment holiday affected loans accounting for 11.4 percent of aggregate commercial banks’ loans and advances (P7.3 billion) as at end-June 2020; restructured loans P5.8 billion (9.1 percent of total credit). - NBFIs introduced temporary relief measures (restructuring/rescheduling, life premium and retirement contribution deferrals, product discounts, interest rate reductions, quicker claims processing). ### Outlook and risks - Vaccination plan and costs: - Plans to vaccinate 75 percent of the adult population by end-2021. - Upfront payment to COVAX to acquire 940,800 vaccines under a two-dose regime (enough to cover about 20 percent of the population). - Agreements reached for 1.9 million doses (enough to cover the entire adult population). - Vaccination initiative expected to cost a minimum of 1/3 percent of GDP. - Growth projections: - Real GDP contraction in 2020: -7.9 percent (estimated). - Real GDP growth projected in 2021: 8.3 percent. - Recovery assumptions: normalization of diamond production to pre-crisis levels, entry into production of Khoemacau copper mine, some containment measures but no nationwide lockdowns, international tourism resuming in H2 2021 as vaccination ramps up. - Output expected to remain below pre-pandemic forecasted levels through the projection period. - Inflation forecast: - Staff forecasts average inflation of 4.8 percent in 2021 (from 1.9 percent in 2020), within BoB objective of 3-6 percent. - Drivers: rebound in oil prices, planned increase in VAT rate, fuel levy, electricity tariffs, sugar tax, rentals, and sustained domestic consumption. - Pressures expected to linger through H1 2022 and ease thereafter. - External and fiscal near-term outlook: - Current account deficit expected to narrow to -4.5 percent of GDP in 2021 and -3.3 percent of GDP in 2022. - Reserves expected to stabilize in 2021 and improve thereafter. - Fiscal deficit expected to narrow as cyclical downturn in revenue fades, COVID-related spending is phased out, and revenue and expenditure consolidation measures are implemented. - Public debt as a share of GDP expected to continue to increase in the next two years before declining in the medium term. - Key risks (tilted to the downside): - Near term: prolonged pandemic, uneven recovery, low real interest rates and excess liquidity fueling household credit, contingent liabilities from SOEs and guaranteed loans, corporate deterioration in hospitality sectors. - Medium term: weaker-than-expected diamond revenue due to shifts in consumer preferences and competition from synthetic diamonds. - Upside: faster vaccine rollout, accelerated implementation of the ERTP. ### Authorities’ views - Broad agreement with staff’s outlook and risks assessment; authorities more sanguine on diamond outlook based on positive outcome of first three “sights” by De Beers. - BoB sees elevated financial stability risks if Botswana does not exit the AML/CFT Grey-listing. - Authorities concurred that implementation of planned fiscal consolidation and the ERTP are critical to preserve macroeconomic stability and create sustained, high, job-rich, and diversified growth. ### Policies to entrench recovery and facilitate transformation — Fiscal policy - MTFF aims to support recovery and lay foundation for higher growth potential while ensuring fiscal sustainability. - Revenue measures planned in FY2021 to create space for transformative investment: - Increase VAT rate by 2 percentage points, fuel levy, sugar levy, tax on plastic bags and withholding taxes, estimated to yield about 1 percent of GDP. - Tax amnesty to increase revenue collection by about ½ percent of GDP. - Expenditure measures: - Contain the wage bill (No inflation adjustment and savings on vacancies). - Cuts in non-priority spending and “efficiency gains” in grants, subventions and transfers to local government. - Structural fiscal reforms for remainder of NDP11: - Better targeting of social spending. - Restructuring of parastatals. - Strengthening of the public investment management framework. ### Fiscal consolidation, targeting, and fiscal framework reforms - Baseline pace and size of consolidation judged appropriate to gradually reduce the deficit and rebuild buffers. - Plan aims to achieve a balanced primary budget by 2026 and keep debt below 30 percent of GDP. - Targeted pandemic support should be state-contingent or conditional to reduce moral hazard. - Recommended additional financing measures if needed: - Revenue-side: increase property taxes, reduce VAT exemptions while compensating vulnerable, implement planned tax amnesty, expedite promulgation of tax bills, accelerate e-filing. - Expenditure-side: extend wage freeze to FY2022, means-testing of scholarships, cost recovery in some public services. - Policy note: threshold for income tax liability raised from P36,000 to P48,000 per annum effective 2021/2022 tax year (reaches formal workers only). - Strengthening fiscal framework recommendations: - Revamp fiscal rule; implement medium-term budgeting covering full 3-year horizon; migrate to GFSM 2014; improve fiscal risk management and SOE risk assessment. ### Emerging fiscal risks, SOE/PPP management, and civil service reform - PPPs require appropriate legal and institutional frameworks and increased capacity at PPP unit in MFED. - Parastatals and loan guarantees: contingent liabilities about 5 percent of GDP (parastatals) and 0.5 percent of GDP (loan guarantees). - Recommendations: rationalize parastatals, merge overlapping mandates, restructure/privatize loss-making SOEs, enhance governance, compile SOE financial data, publish financial statements regularly. - Civil service reform: align wages with productivity; monitor salary increases in parastatal sector. ### Financing strategy and debt management - Diversifying financing: stepped up domestic issuance; negotiating budget support with World Bank and AfDB; exploring syndicated loans for FY2022–23. - Recommendations: - Regular issuance of medium- and long-term maturities in domestic market to build yield curve. - Tailor currency composition of external borrowing to revenue composition to hedge exchange rate risk. ### Monetary policy and exchange rate policy - Monetary policy should remain accommodative in the near term; staff advises BoB to keep the monetary policy rate unchanged given large negative output gap and inflation within objective range. - Liquidity management: - Use reserve requirement as buffer; conduct regular OMO at fixed-rate full-allotment; replace Bank rate with BoB certificate rate as main instrument; develop unsecured interbank and REPO markets. - Exchange rate assessment: - External position moderately weaker than fundamentals; exchange rate assessed moderately overvalued (8½ percent). - Pass-through of NEER to inflation estimated below 0.4 for first two quarters and below 0.5 over a year. - Near-term scope for real depreciation limited by expected pick-up in inflation in 2021–22. - As inflation abates and fiscal consolidation progresses, a steeper crawl will be needed. ### Financial stability safeguards - Risks: corporate vulnerabilities on uneven recovery; NPLs could rise after debt moratorium expiry; household indebtedness concentrated in unsecured loans; wholesale funding concentration increases liquidity risk. - Staff recommendations: - Continue targeted, time-bound support to viable firms with sufficient skin in the game. - Maintain reduced CAR at 12.5 percent and reassess regularly. - Deploy tighter macroprudential policies if excessive household credit growth occurs (e.g., lower DTI and DSTI limits; limits on unsecured loans). - Enhance reporting, regular stress-testing, avoid forbearance in recording NPLs. - Expedite preparation of banking act and operationalize deposit insurance mechanism. ### Structural policies and diversification (ERTP) - Parliament approved ERTP in October 2020 to reduce COVID-19 scars, accelerate structural transformation, and increase job creation and inclusiveness. - ERTP focus: traditional sectors (cattle, tourism, mining), import substitution and MSME support, digitalization, human capital, R&D, reduce government footprint, improve business environment and governance. - Diversification policy design recommendations: - Reduce reliance on import substitution and protectionist policies if not time bound. - Condition government support on productivity gains and performance; promote technological and quality upgrades and innovation. - Promote targeted higher education and vocational training, internships, and exchanges. - Reduce information frictions and facilitate market access; promote regional integration and value chains. - Attract FDI and knowledge transfer; strengthen mandates of export and investment promotion agencies. ### Digital economy, climate policy, and financial inclusion (sections 35–46) - Digital economy: - Plans to invest 1½ percent of GDP (about 22 percent of total development expenditure) in the digital sector during 2021–23. - Expected benefits: resilience, expanded access to global markets, improved public service delivery, job creation. - Climate and green transition: - Parliament approved Botswana climate change policy in April 2021. - Measures: promote renewable energy via Integrated Resource Plan; reduce subsidies to fossil fuels; increase fossil fuel fees. - Full implementation expected to reduce carbon dependence, enhance energy generation, promote exports, and support climate resilience. - Financial development and inclusion: - Strategy to deepen financial markets, revise regulatory framework, strengthen supervision, upgrade infrastructure and leverage FINTECH. - Despite large domestic savings, credit to private sector remains low and concentrated on households and non-tradable sectors. - Measures to deepen domestic bond market: issue longer benchmark maturities, allow government securities as HQLA, formal market making agreements, encourage longer maturity issuance by public and private entities. - Data, AML/CFT, and COVID-19 Relief Fund governance: - Move to GFSM 2014; improve classification of current and capital expenditures; accelerate collection of financial accounts of extra-budgetary entities. - Progress on AML/CFT noted; remaining strategic deficiencies to address to mitigate correspondent banking risks. - COVID-19 Relief Fund Order enacted to improve transparency; publication of COVID-related procurements and contracts is lagging. ### Staff appraisal — priorities - Immediate priority: secure and ensure successful vaccine rollout to control pandemic and prevent health system overwhelm. - Next priority: enhance resilience to shocks and lay foundation for sustained, high, and job-rich growth. - Fiscal consolidation, civil service reform, parastatal rationalization, and strengthening fiscal framework are critical. ### Financial programming, DSA, and gross financing needs - Key DSA findings: - Gross financing needs: 9.4 (FY2019); 14.6 (FY2020); 7.7 (FY2021); 5.0 (average over medium term). - Public debt: 19.2 percent of GDP (FY2019); 23.5 percent of GDP (FY2020); projected peak 29 percent of GDP (FY2022); 26.4 percent of GDP (FY2025). - Government Investment Account: 18.4 percent of GDP (end-2019); 3.7 percent of GDP (end-2020). - Fiscal deficit: 11 percent of GDP (FY2020); 4.4 percent of GDP (FY2021); 4 percent of GDP (average 2021–23); 0.5 percent of GDP (medium term). - Real GDP growth projections (selected): -4.1 (2020 baseline); 7.8 (2021); 6.0 (2022); 4.6 (2023); 4.0 (2024); 4.0 (2025). - Inflation (GDP deflator): -0.6 (2020); 7.7 (2021); 6.4 (2022); 5.1 (2023); 4.6 (2024); 3.9 (2025). - Effective interest rate (percent): 3.3 (2020); 3.2 (2021); 3.6 (2022); 3.9 (2023); 4.1 (2024); 4.1 (2025). - Share of fiscal revenue in foreign currency: about 60 percent. - Stress test outcomes: - Growth shock: debt peaks at 35.2 percent of GDP in FY2022 (one-standard deviation growth shock). - Primary balance shock: debt elevated but below debt ceiling through 2025. - Combined macro-fiscal shock: public debt would surpass debt ceiling of 40 percent of GDP and stabilize at about 40.4 percent of GDP in 2025. - Contingent liabilities shock: debt rises to about 29 percent of GDP in 2025 (vs baseline 26.4 percent). ### DIGNAR-19 scenarios (Annex V) - Model: DIGNAR-19 dynamic general equilibrium model calibrated to Botswana. - Downside (prolonged pandemic) assumptions and simulated impacts: - Employment: 2 and 1 percent drop in 2021 and 2022. - Domestic demand growth: fall of 1.7 and 0.4 percentage points in 2021 and 2022. - Government health-related expenditures: increase by 0.5 percentage points of GDP in 2021 and 2022. - Non-diamond exports: decline by 1.5 and 0.5 percentage points of GDP in 2021 and 2022. - SACU transfers: assumed 2 percentage points of GDP lower in 2023. - Diamond exports: growth rate assumed 13.9 percentage points lower than baseline in 2021. - Diamond prices: more muted recovery, reaching 1,662 Pula per carat by 2025; assumed constant in real terms in downside. - Simulated impacts: - GDP growth 5¼ percentage points lower than baseline in 2021 and 1¼ percentage points lower in 2022. - Absent consolidation, public debt would reach 35 percent of GDP by 2025. - Upside (quicker vaccine rollout, faster reforms) assumptions and simulated impacts: - Non-diamond exports increase to 8.5 percent of GDP in 2021. - SACU transfers: 1 and 1.5 percentage point of GDP higher in 2022 and 2023. - Diamond exports growth rate: 3 and 3.5 percentage points higher in 2021 and 2022. - Public investment efficiency: increase to regional average of 74 percent by 2025. - Product market reform: annual TFP growth increase by 1 percentage point by 2025. - Simulated impacts: - GDP growth 0.6 percentage points higher than baseline in 2021 and 1 percentage point higher in 2022. - By 2025, overall growth 1.6 percentage points above baseline; government debt declines below pre-pandemic level by 2025. ### Annex I — External Stability Assessment (key messages) - External position in 2020 moderately weaker than implied by fundamentals and desirable policies. - Current account: from surplus in 2016 to -6 percent in 2019 and -10 percent of GDP in 2020; expected to improve to -3.3 percent of GDP in 2021 and to 2.5 percent of GDP over the medium term. - Financial account: deficit increased by 2 percent of GDP in 2020, driven by net portfolio investment abroad and outward pension fund investment. - Net foreign assets: 31.6 percent of GDP in 2020 (less than half 2009 level). - International reserves: about US$4.9 billion (US$1.2 billion lower than previous year), equivalent to 30 percent of GDP or 7.3 months of imports. - Exchange rate: - BoB crawl adjusted from -1.5 to -2.9 percent in May 2020. - REER depreciated about 3.5 percent y-o-y in December 2020. - EBA-lite results: - CA gap = -2.6 percent of GDP. - CA norm = -0.2 percent of GDP in 2020. - Estimated trade-balance elasticity to REER = -0.31. - Implication: REER would need to depreciate by 8.5 percent for CA deficit to reach norm; EBA-lite REER approach implies almost 15.2 percent depreciation. - Reserve adequacy: - Botswana’s reserves are 184 percent of the ARA metric. - IMF metric adequate reserves: 14 to 16 percent of GDP (100–150 percent of ARA); estimated level for 2020 is 29.5 percent of GDP. - Using 25 percent export weight raises adequacy range to 18–25 percent of GDP. - Policy recommendations: - Implement planned fiscal consolidation. - Advance structural reforms for competitiveness and diversification. - Use flexibility in crawling arrangement; consider greater exchange rate flexibility. - Maintain liquidity buffer in Liquidity Portfolio (nine months rule; replenishment if below three months). - Consider higher export weight in adequacy metrics given heavy diamond reliance. ### Authorities’ perspectives (Introduction) - Authorities broadly concur with staff recommendations and aim to hasten recovery and accelerate structural reforms via ERTP. - ERTP short-term aim: restore activity and incomes; longer-term objective: transform to high income, digital and knowledge economy in line with Vision 2036. - Authorities’ fiscal stance: - Aim to shrink fiscal deficit from 11 percent of GDP in 2020 to 4.4 percent of GDP in 2021. - Revenue measures estimated to yield about 1 percent of GDP; tax amnesty expected to raise about 0.5 percent of GDP. - Parliament approved increase in domestic bond-issuance program from P15 billion to P30 billion in 2020. - Monetary and exchange rate policies: - Accommodative stance while preserving price stability. - BoB policy changes and operational reforms underway; larger downward crawl adopted in 2020 and 2021. - Financial sector: - Banking system remains sound; BoB monitoring household indebtedness and non-bank credit; macroprudential tools available if needed. - Structural reforms and digitalization: - Invest 1½ percent of GDP in digital sector during 2021–23. - Climate change policy approved April 2021; renewables and fossil fuel fee reforms planned. - Engagement: - Authorities welcome continued Fund advice and technical assistance to advance transformation agenda. *IMF staff report (1bwaea2021001).* ### 1. The COVID-19 Pandemic______________________________________________________________________________ 20 ### 1. The COVID-19 Pandemic ### Pre-COVID context - Botswana faced significant structural challenges and declining buffers when the COVID-19 pandemic struck. - Key long-term social and economic achievements: - Extreme poverty rate declined by about 40 percentage points to 16 percent over four decades. - Per capita income has quadrupled. - Secondary school enrollment increased from 20 percent to above 80 percent. - Recent vulnerabilities prior to the pandemic: - Persistently lower-than-anticipated diamond revenue (including through declining prices over 2016-20) and declining SACU transfers. - Eroding reserves by about US$½ billion per year on average since 2014. - Reduced competitiveness and slowed structural transformation toward an export- and private-sector led growth model (NDP11, Vision 2036). - With growth decelerating, job creation remained anemic relative to young and more educated labor force entrants. - Climate change shocks (severe droughts) adversely affected rural populations and countered poverty and inequality reduction efforts. ### Impact of the pandemic and the policy response - Health and containment: - First COVID-19 cases in late March 2020. - Early measures: State of Emergency, 6-week nationwide lockdown, partial lockdowns, travel restrictions, mandatory mask wearing, social distancing, bans on social events, targeted testing and contact tracing. - Outcomes as of end-September 2020: 3,172 cases (about 0.1 percent of the population) and 16 deaths. - Cases accelerated since November 2020: about 44,000 cases and deaths exceeded 670 mid-April 2021. - South African variant detected; phased lifting of travel restrictions in November, later curfew; State of Emergency extended for another 6 months (approved end-March). - Real economy: - GDP contraction: -11 percent y-o-y in H1 2020 and -24 percent in Q2 2020; Q4 2020: -4.1 percent. - Annual GDP growth in 2020: -7.9 percent. - Drivers: reliance on diamond, tourism and “contact-intensive” services. - Domestic consumption supported recovery in H2 2020, buoyed by public wage increases in September and relaxation of mobility restrictions. - Labor market and poverty: - Unemployment rate: 24.5 percent in 2020Q4 (from 22.2 percent in 2019Q4). - Youth unemployment: increased from 28.8 percent to 32.4 percent. - World Bank estimate: extreme poverty rate (US$1.9/day in 2011 PPP) increased to 16 percent in 2020 from 12.6 percent in 2019. Forecasts suggest poverty rate would remain above the 2019 figure until 2022. - Inflation: - Inflation fell to 1.9 percent in 2020 from 2.8 percent in 2019; Bank of Botswana objective: 3 to 6 percent. - External sector: - Current account deficit in 2020: 10.1 percent of GDP. - Diamonds net exports declined by 40 percent (in US$). - Non-diamond imports declined by 5 percent. - Exports of services declined by 51 percent (led by tourism). - Reserves fell by US$1.2 billion to 7.3 months of imports at end-November 2020. - Crawl rate moved from -1.5 to -2.9 percent in May 2020; REER depreciated by 3.5 percent y-o-y in December 2020. - Fiscal response: - Initial economic COVID-relief package: P4.7 billion (2.6 percent of GDP). - Supplementary recurrent budget to Ministry of Health and Wellness: P1 billion. - Loan facility for firms: P1.3 billion. - Total fiscal package reported: 6,980 million pula (Text Table 1 totals). - Fiscal FY2020 deficit expected about 11 percent of GDP. - Public debt estimated to increase to about 23.5 percent of GDP in FY2020 (below 40 percent debt ceiling). - To finance deficit, parliament approved doubling domestic borrowing limit from 15 to 30 billion. - Government Investment Account balance: P5.6 billion in November 2020, down from P15,7 billion a year earlier. - Monetary policy and credit: - BoB reduced policy rate by 100 basis points to 3.75 percent since April 2020 and reduced reserve requirement ratio. - Repo maturity expanded to 92 days and eligible collateral broadened. - Credit growth: +5.3 percent in December 2020. - Share of credit to households in banks’ balance sheets: 65.4 percent in November 2020 (from 63.7 in December 2019). - About 70 percent of this credit is non-collateralized and carries higher interest rates. - Financial sector: - Commercial banks remain adequately capitalized and liquid; NPLs declined and provisioning improved. - BoB reduced capital adequacy ratio from 15 percent to 12.5 percent (most banks remain above 15 percent). - Loan relief measures: discretionary loan repayment holiday affected loans accounting for 11.4 percent of aggregate commercial banks’ loans and advances (P7.3 billion) as at end-June 2020; restructured loans P5.8 billion (9.1 percent of total credit). - NBFIs introduced temporary relief measures (restructuring/rescheduling, life premium and retirement contribution deferrals, product discounts, interest rate reductions, quicker claims processing) which may reduce short-term profitability but solvency risks remain low. ### Outlook and risks - Vaccination plan and costs: - Botswana plans to vaccinate 75 percent of the adult population by end-2021. - Upfront payment to COVAX to acquire 940,800 vaccines under a two-dose regime (enough to cover about 20 percent of the population). - Agreements reached for 1.9 million doses (enough to cover the entire adult population). - Vaccination initiative expected to cost a minimum of 1/3 percent of GDP. - Growth projections: - Real GDP contraction in 2020: -7.9 percent (estimated). - Real GDP growth projected in 2021: 8.3 percent. - Recovery assumptions: normalization of diamond production to pre-crisis levels, entry into production of Khoemacau copper mine, some containment measures but no nationwide lockdowns, international tourism resuming in H2 2021 as vaccination ramps up. - Output expected to remain below pre-pandemic forecasted levels through the projection period. - Inflation forecast: - Staff forecasts average inflation of 4.8 percent in 2021 (from 1.9 percent in 2020), within BoB objective of 3-6 percent. - Drivers: rebound in oil prices, planned increase in VAT rate, fuel levy, electricity tariffs, sugar tax, rentals, and sustained domestic consumption. - Pressures expected to linger through H1 2022 and ease thereafter. - External and fiscal near-term outlook: - Current account deficit expected to narrow to -4.5 percent of GDP in 2021 and -3.3 percent of GDP in 2022. - Reserves expected to stabilize in 2021 and improve thereafter. - Fiscal deficit expected to narrow as cyclical downturn in revenue fades, COVID-related spending is phased out, and revenue and expenditure consolidation measures are implemented. - Public debt as a share of GDP expected to continue to increase in the next two years before declining in the medium term. - Key risks (tilted to the downside): - Near term: - Pandemic could last longer, affecting employment, domestic demand, diamond exports, tourism receipts, SACU transfers and government expenditure. - Uneven recovery could delay labor market improvements and weaken firms’ balance sheets in hospitality sectors. - Low real interest rates and excess liquidity could fuel increased lending to households, higher inflation, and higher household indebtedness. - Contingent liabilities (SOEs, guaranteed loans) and corporate sector deterioration could increase unemployment, impair banks’ balance sheets, and amplify crisis scars. - Upside: faster vaccine rollout could resume tourism, raise SACU revenue in FY2022, and increase demand for diamond exports. - Medium term: - Weaker-than-expected diamond revenue due to shifts in consumer preferences and greater competition from synthetic diamonds could weaken current account and fiscal balances, pressure external buffers, and increase public debt. - Upside: accelerated implementation of the ERTP could improve potential growth. - Authorities’ views: - Broad agreement with Staff’s outlook and risks assessment; authorities more sanguine on diamond outlook based on positive outcome of first three “sights” by De Beers. - Authorities note high uncertainty and continue close monitoring. - BoB sees elevated financial stability risks if Botswana does not exit the AML/CFT Grey-listing. - Authorities concurred that implementation of planned fiscal consolidation and the ERTP are critical to preserve macroeconomic stability and create sustained, high, job-rich, and diversified growth. ### Policies to entrench the recovery and facilitate transformation A. Macroeconomic policy mix — Fiscal policy - Authorities’ MTFF aims to support recovery and lay foundation for higher growth potential while ensuring fiscal sustainability. - Revenue measures planned in FY2021 to create space for transformative investment: - Increase VAT rate by 2 percentage points, fuel levy, sugar levy, tax on plastic bags and withholding taxes, estimated to yield about 1 percent of GDP. - Tax amnesty to increase revenue collection by about ½ percent of GDP. - Expenditure measures: - Contain the wage bill (No inflation adjustment and savings on vacancies). - Cuts in non-priority spending and “efficiency gains” in grants, subventions and transfers to local government. - Structural fiscal reforms for remainder of NDP11: - Better targeting of social spending. - Restructuring of parastatals. - Strengthening of the public investment management framework. *IMF staff summary of “1. The COVID-19 Pandemic”.* ### 18. Staff welcomes the commitment to fiscal sustainability and recommends that the ### 1bwaea2021001 - 18. Staff welcomes the commitment to fiscal sustainability and recommends that the ### Fiscal consolidation: baseline assessment and objectives - Baseline pace and size of consolidation and shift in spending composition are judged appropriate to gradually reduce the deficit and rebuild buffers. - The plan will help achieve a balanced primary budget by 2026 and keep the debt below 30 percent of GDP. - Fiscal consolidation will allow rebuilding asset positions in the Government Investment Account and the Pula Fund. - Re-orientation of expenditures toward investment and human capital development is expected to: - raise productivity, - create jobs, - help diversify the economy and revenue sources. - Envisaged incentives for training and financial support to transformative sectors will facilitate factor reallocation to new sectors, benefiting future generations and insuring against volatility. ### Targeted pandemic support and conditionality - Need to maintain targeted support to firms and households still affected by the pandemic and make support state-contingent or conditional to reduce moral hazard. - Extension of the State of Emergency and the industry support facility will help households and firms cope with the crisis through end-2021. - Additional support would be required if the pandemic is more protracted than expected and the recovery is uneven. - Recommended additional financing measures if needed: - Revenue-side measures: - increase progressive tax measures such as property taxes, - reduce VAT exemptions while compensating the most vulnerable, - implement the planned tax amnesty to help reduce tax arrears, - expedite promulgation of tax bills and continue tax administration reforms, including accelerating e-filing. - Expenditure-side measures: - extend the wage freeze to FY2022, - means-testing of scholarships to tertiary education, - cost recovery in some public services (e.g. electricity and water tariffs). - Policy note: the threshold for income tax liability will be raised from P36,000 to P48,000 per annum with effect from the 2021/2022 tax year (measure reaches formal workers only). ### Strengthening the fiscal framework - Recommendations to better anchor fiscal policy and increase credibility: - i) Revamp the fiscal rule in line with past Article IV recommendations to benefit future generations while allowing countercyclical policy. - ii) Implement medium-term budgeting covering the full 3-year time horizon; reform budget communication; establish differing levels of authority to discuss the budget pre-Parliament; restructure the budget on a unitary definition—fully integrating recurrent and development budgets; analyze fiscal policy and the budget from a risk perspective, including assessing baseline credibility and SOE risks. - iii) Improve accounting and reporting by accelerating the new chart of accounts, migrating to GFSM 2014 and increasing coverage of fiscal statistics. - iv) Strengthen fiscal risks management given uncertain outlook and mounting contingent liability risks. ### Emerging fiscal risks and SOE/PPP management - PPPs: - Further reliance on PPPs to finance infrastructure needs appropriate legal and institutional frameworks to limit sizable contingent liabilities. - Increase capacity at the PPP unit at the MFED to safeguard public finances and manage a growing PPP portfolio. - Parastatals and loan guarantees: - COVID-19 could exacerbate contingent liabilities associated with parastatals (about 5 percent of GDP) and loan guarantees to the private sector (0.5 percent of GDP). - Need to expedite plans to rationalize parastatals, merge overlapping mandates, restructure/privatize loss-making SOEs, and enhance governance. - Recommendations: design effective intragovernmental coordination mechanisms; define clear ownership and financial oversight functions; compile timely and comprehensive financial data on SOE performance; build capacity to assess SOEs’ performance; regularly publish financial statements and evaluation reports in a timely manner. ### Civil service and wage bill management - Civil service reform is key for medium-term fiscal consolidation. - The 2019 two-year wage increase agreement with civil service unions exceeded productivity gains and inflation and exerted significant strains on government resources; it may have widened public-private compensation gaps. - Staff recommendations: - Careful monitoring of salary increases in the parastatal sector. - Design civil service reform to better align public sector wages to productivity over the medium term to ensure the wage bill remains under control. ### Financing strategy and debt management - Authorities are diversifying financing sources: stepped up domestic issuance to finance the FY2020 deficit; negotiating budget support with the World Bank and the AfDB; exploring syndicated loans to finance the deficit in FY2022–23. - Need for a more active debt management strategy comparing returns on assets and cost of issuing debt in domestic and foreign markets. - Specific recommendations: - Regular issuance of medium- and long-term maturities in the domestic market to build the yield curve and support secondary market development—success depends on enhancing domestic bond market efficiency and liquidity and coordinating issuance plans across public sector entities. - Tailor currency composition of external borrowing to the composition of revenue to hedge against exchange rate risk. ### Authorities’ views on fiscal policy - Authorities reiterated commitment to fiscal sustainability and broadly agreed with staff’s assessment and advice. - Short-term objective: deficit below 4 percent of GDP. - If downside risks materialize, authorities envisage reprioritizing spending and increasing some fees. - Authorities requested TA to redesign and calibrate a fiscal rule in the context of the National Development Plan. - To achieve planned consolidation, authorities see scope for higher revenue mobilization through broadening the tax base, introduction of new taxes, and tax administration reforms; pending tax bills are being finalized and will be presented to parliament in the July session; revenue authority intends to use electronic billing machines to reduce tax evasion. - Parastatal sector reforms are a top priority. - Note: authorities are considering the feasibility of introducing a carbon tax. ### Monetary policy and exchange rate policy - Monetary policy should remain accommodative in the near term. - Further reductions in interest rates risk tipping inflation outside the BoB objective range and fueling credit to households with attendant financial stability risks. - Rapid increase in the policy rate could compromise the fragile recovery. - Given the large negative output gap and as long as expected inflation remains within BoB’s objective range, staff advises BoB to keep the monetary policy rate unchanged. - BoB should monitor second-round effects of supply shocks and administrative price changes on inflation expectations, and developments in credit and demand. - Liquidity management: - Set the reserve requirement as a buffer against autonomous liquidity fluctuations. - Conduct regular OMO at fixed-rate full-allotment and complement with fine-tuning operations to smooth volatility. - Replace the Bank rate with the BoB certificate rate as the main monetary policy instrument to enhance transmission. - Pursue development of unsecured interbank and REPO markets to strengthen transmission. - Exchange rate assessment: - External position moderately weaker than suggested by fundamentals and desirable policies; exchange rate assessed to be moderately overvalued (8½ percent). - Under staff baseline, current account balance expected to improve but remain weaker than the norm in the near term, exerting pressure on international reserves. - Medium-term narrowing of the gap and gradual reserves accumulation contingent on favorable diamonds projections. - Flexibility within current exchange rate regime should continue to be used to gradually reduce real overvaluation while avoiding de-anchoring inflation expectations. - Pass-through of nominal effective exchange rates to inflation is estimated to be lower than 0.4 for the first two quarters and below 0.5 over a year. - Expected pick-up in inflation in 2021–22 limits near-term scope for real depreciation via crawl rate changes while maintaining inflation within the 3–6 percent objective range and anchored expectations. - As inflation pressures abate and with fiscal consolidation progress, a steeper crawl will be needed to address residual overvaluation. ### Authorities’ views on monetary and exchange rate policy - Authorities broadly agree with staff recommendations; BoB will monitor inflation expectations and strengthen communication. - Authorities appreciated upcoming TA on monetary policy implementation and possible transition to the BoBC rate as the monetary policy rate. - On exchange rates, authorities noted the role of a stable REER in anchoring investors’ expectations and expressed concerns about impacts of greater exchange rate flexibility on capital flows and financial deepening, stressing the importance of structural reforms and fiscal adjustment. ### Financial stability safeguards - Major government interventions mitigated immediate macro-financial risks, but risks remain: - Uneven recovery could increase corporate vulnerabilities; expiration of the debt moratorium could raise NPLs. - Structural banking vulnerabilities: household indebtedness with large share of unsecured loans; concentration on wholesale funding increases liquidity risks and funding costs; greater domestic borrowing increases sovereign-financial nexus. - Staff recommendations: - Continue targeted support to viable firms through liquidity provision and loan restructuring; measures should be time-bound and have sufficient skin in the game (e.g., loans rather than guarantees). - Maintain reduced CAR at 12.5 percent and reassess regularly based on monitoring financial stability risks and credit evolution. - Deploy tighter macroprudential policies if excessive credit growth occurs, especially toward households (examples: lower debt-to-income and debt-service-to-income ratios; limits on unsecured loans). - Enhance reporting, regular stress-testing and financial oversight; avoid forbearance in recording NPLs. - Strengthen crisis preparedness and bank resolution framework by expediting preparation of the banking act and operationalizing deposit insurance mechanism. ### Authorities’ views on household indebtedness - Authorities have a more nuanced view: ratio of credit to households to GDP remains low and credit gap does not show overheating. - Highlighted that a large share of household credit goes to public sector employees via direct payroll deduction lending schemes, who are less vulnerable to income loss. ### Structural policies and diversification - Parliament approved an Economic Recovery and Transformation Plan (ERTP) in October 2020 to reduce COVID-19 scars, accelerate structural transformation, and increase job creation and inclusiveness. - ERTP focus areas include traditional sectors (cattle, tourism, mining), import substitution and MSME support; plans also to: - boost investment in digitalization (including e-government), human capital development and R&D, - reduce government footprint, - enhance the business environment, - strengthen accountability and governance to improve implementation. - Successful implementation requires continuous appraisal of sectoral programs, adaptation to market changes and risks, focus on promising sectors, tackling market and government failures, and addressing bottlenecks cost-efficiently. - Diversification policy design recommendations: - Reduce reliance on import substitution and protectionist policies, especially if not time bound and deterring competition. - Enhance competitiveness: condition government support on productivity gains and performance, promote technological and quality upgrade (e.g., certification), foster innovation, reduce network costs via greater competition, level playing field between public and private companies, enhance SOE efficiency, and use spatial planning/geographic clustering to minimize costs. - Promote targeted higher education and vocational training, internships, and exchanges to reduce skills mismatches. - Reduce information frictions and facilitate market access via platforms, language services, visas, open skies agreements, trade fairs, buyer-seller matching, country image, collective reputation, and relationship-building. - Promote regional integration and regional value chains through reciprocal reduction of non-tariff barriers, coordination of industrial policies and cross-border investment promotion. - Attract FDI and knowledge transfer (advanced technology and management know-how). - Strengthen and clarify mandates of export and investment promotion agencies. *IMF staff report excerpt (Botswana).* ### 35. Botswana is expected to accelerate its transition to the digital economy. It plans to ### Botswana: Expected acceleration of transition to the digital economy (sections 35–46) ### Digital economy and ICT investment - Botswana plans to invest 1½ percent of GDP (about 22 percent of total development expenditure) in the digital sector during 2021–23. - Expected benefits of digital technologies (as evidenced during the COVID-19 shock in several countries): - enhance resilience and efficiency - expand access to global markets - improve public service delivery - boost transparency and accountability - improve learning - foster creation of new jobs - Digital transition is especially relevant for regional trade integration under AfCFTA, which will likely increase scope for increased trade in services and e-commerce. - Staff welcomes authorities’ efforts to reduce the digital divide (Annex VI). ### Climate change policy and green transition - Parliament approved Botswana climate change policy in April 2021. - Policy measures include: - promoting renewable energy sources by implementing the Integrated Resource Plan - reducing subsidies to the use of fossil fuels - increasing fossil fuel fees - Full implementation of the climate agenda in the ERTP is expected to: - reduce dependence on carbon-intensive energy sources - enhance energy generation capacity - promote exports and private sector activity - enhance climate resilience - support transition to higher income status - Green transition will also support livelihoods of the poor (who typically rely on subsistence agriculture) and benefit the tourism and mining sectors. ### Financial development and inclusion strategy - Authorities are implementing a multipronged strategy consistent with past staff recommendations to: - deepen financial markets - revise the regulatory framework and strengthen supervision - upgrade infrastructure while leveraging FINTECH to increase efficiency and inclusiveness - Context and challenges: - Despite large domestic savings, Botswana’s credit to the private sector remains low compared to other countries at similar levels of development. - Domestic credit is concentrated on households and non-tradable sectors. - Ongoing reforms include National Payment System reforms and finalization of several bills related to the credit information and collateral framework. - Additional measures needed: - Clarify the role of development banks: separate social role from development mandate; enhance supervision, governance, and accountability. - Deepen the domestic bond market via a coordinated approach from public and private issuers, including: - Issuance of a longer benchmark maturity for government debt securities - Eligibility of government securities as high-quality liquid assets - A formal market making agreement for primary dealers - A pricing mechanism and variety of instruments that maximize market demand - Encourage private sector and public sector entities to issue longer maturity securities to reduce maturity mismatches, including banks replacing volatile time deposits with longer-term bank bonds. ### Data, AML/CFT, and COVID-19 Relief Fund governance - Data provision is broadly adequate for surveillance (Informational Annex). - Authorities have continued to improve statistics with support from AFRITAC South and IMF. - Staff urges: - move to GFSM 2014 - improve classification of current and capital expenditures - accelerate collection of financial accounts of extra-budgetary entities, including SOEs - AML/CFT: - Staff welcomes progress toward International Cooperation Review Group recommendations and improved supervision. - Authorities encouraged to address remaining strategic deficiencies to mitigate risks to correspondent banking relationships arising from grey listing. - Recommended additional steps: improve analysis and dissemination of financial intelligence, strengthen terrorist financing investigations, and implement an effective targeted financial sanctions regime. - COVID-19 Relief Fund: - Staff welcomes enactment of the COVID-19 Relief Fund Order to improve transparency and governance; provides institutional mechanism for management and auditing of the Fund. - Publication of COVID-related procurements and contracts is lagging; staff welcomes authorities’ plans to publish execution reports and all COVID-related procurement contracts, including beneficial owner information. ### Staff appraisal — Growth outlook and priorities - The authorities’ decisive pandemic response mitigated social and economic impact; relief package provided timely support to households and businesses via a dedicated Pandemic Relief Fund. - Growth is expected to recover, but uncertainty is high. Risks hinge on: - evolution of the pandemic - availability and deployment of vaccines - diamond revenue - Immediate priority: secure and ensure successful rollout of vaccines to a share of the population large enough to keep the pandemic under control and prevent health systems from being overwhelmed. - Next priority: enhance resilience to shocks and lay foundation for sustained, high, and job-rich growth. ### Fiscal policy and consolidation - Successful implementation of planned fiscal consolidation is critical to achieve fiscal sustainability and rebuild an asset base for future shocks. - Measures planned in the budget are appropriate. - Near-term stance: maintain targeted support to households and illiquid but solvent firms; make support state-contingent or conditional to reduce moral hazard. - Fiscal reforms needed to lock-in consolidation efforts: - civil service reform to align future wage increases with productivity - accelerate plans to rationalize the parastatal sector and improve its governance - strengthen the fiscal framework, including revamping the fiscal rule and enhancing the fiscal risks framework ### Monetary policy and macroeconomic adjustment - Monetary policy should remain accommodative in the near term while monitoring second-round effects of supply shocks on inflation expectations and credit developments. - Recommended actions: - more active liquidity management - transition toward the BoBC rate as the policy rate to enhance monetary transmission - continued use of flexibility within the current crawl arrangement to gradually reduce real overvaluation, help the economy adjust to shocks, and facilitate structural transformation while avoiding de-anchoring inflation expectations ### Financial sector soundness and supervision - Financial sector is sound but authorities should remain vigilant to latent risks and continue reforms to improve financial deepening and inclusiveness. - Policy guidance: - maintain targeted support to solvent but illiquid firms while reducing moral hazard - avoid forbearance in recording NPLs - closely monitor risks through enhanced reporting, regular stress-testing, and financial oversight - tighten macroprudential stance if excessive credit to households materializes - clarify role of development banks and improve their governance and oversight - deepen the domestic bond market via coordinated public and private issuance ### Structural transformation and ERTP implementation - Approval of the Economic Recovery and Transformation Plan (ERTP) lays groundwork to accelerate structural transformation. - ERTP focus areas: promote non-mineral exports, manufacturing, and transformative sectors (including digital, green, and climate adaptation technologies) to diversify the economy. - For success, the strategy should rely less on import substitution and protectionist policies and more on enhancing competitiveness, strengthening institutions, and improving accountability. - Swift implementation of the ERTP is imperative to strengthen resilience and ensure sustained high and job-rich growth. *IMF staff assessment and recommendations presented in sections 35–46 of the Botswana report.* ### 47. Staff recommends that the next Article IV consultation with Botswana be held on the ### 47. Staff recommends that the next Article IV consultation with Botswana be held on the standard 12-month cycle. ### The COVID-19 Pandemic - Cases and deaths have been recently increasing rapidly; Botswana COVID-19 Cumulative Cases (Cases per million population) show catching up with the world average. - Mobility and containment: - Mobility indicators improved from their 2020:Q2 dip (Google Mobility Report, Percent change, 7-day moving average). - Stringency and Policy Indices tightened as the country tightened containment measures. - Sectoral impacts: - Rough Diamond Sales Value (Millions of USD) rebounded. - International Flights (The number of flights, 7-day moving average) remain depressed; tourism activity remains heavily affected. ### Real Sector - GDP and production: - Following a sharp contraction in Q2, GDP is recovering; contribution to Real GDP Growth (Year-on-year growth, percent) shows recovery driven by higher diamond production. - Mining Production Index (NSA, 2013=100) increased, supporting GDP recovery. - Non-mining and demand: - Improvements in non-mining sectors performance except tourism. - Consumption contributed positively to growth, supported by higher public wages. - Inflation: - Lower oil prices weighed on inflation. - Inflation in non-tradeable products accelerated in mid-2020. - Consumer prices (average) series in Table 1: values include 3.1, 2.8, 3.3, 3.2, 2.7, 1.9, 4.8, 5.0, 4.4, 4.4, 4.4, 4.4 (years as presented). ### External Sector - Current account and trade: - The current account deteriorated significantly, especially in 2020:Q2. - Decline mainly owing to substantial decline in diamonds net exports; non-diamond trade balance remained unchanged. - Current account (Percent of GDP) from Table 1: 2.1, 7.7, 5.3, 0.6, -6.0, -10.1, -3.3, -1.9, 1.0, 2.5, 2.5, 2.5. - Financial flows and reserves: - Outward portfolio investment picked up especially in 2020:Q2-Q4, further exacerbating the decline in Botswana’s foreign reserves. - Total Reserves (Billions of US dollars, excluding gold) declined then are expected to improve over the medium term. Table 2 end-of-year reserves (US$ millions): 7,546; 7,189; 7,502; 6,657; 6,172; 4,944; 4,818; 5,178; 5,914; 6,724; 7,504; 8,345. - Assessing Reserve Adequacy (Percent of GDP) and Effective Exchange Rate (Index, 2010 = 100) show moderate depreciation due to a depreciated Pula crawl rate and low inflation rate. ### Fiscal Sector - Fiscal balances and revenue: - The fiscal deficit has widened, reflecting fiscal measures to tackle the pandemic, coupled with lower non-SACU revenues. - Total revenue and grants (Percent of annual GDP) from Table 3b: 31.2, 33.2, 30.9, 27.8, 26.0, 24.0, 27.5, 24.4, 27.3, 27.5, 27.1, 26.7. - Total expenditure and net lending (Percent of GDP) from Table 3b: 35.8, 32.5, 32.0, 32.4, 33.9, 35.0, 32.0, 30.2, 29.2, 28.3, 27.6, 26.6. - Overall balance (deficit –) (Percent of GDP) from Table 1: -4.6, 0.6, -1.1, -4.6, -7.9, -11.0, -4.4, -5.7, -1.9, -0.8, -0.5, 0.1. - Expenditure composition: - Expenditures increasingly dominated by current spending; rising share of public wage bill following the recent salary increase. - Public Wage Bill (Percent of GDP) series (fiscal tables): wages and salaries in Table 3a (Billions of pula): 18.5; 19.2; 21.1; 22.1; 26.3; 28.4; 28.7; 30.6; 32.4; 34.3; 36.3; 38.4. - Fiscal buffers and debt: - Fiscal buffers have been depleted rapidly and debt levels are rising. - Government Debt (Percent of GDP) from Table 1: 23.3; 21.3; 18.1; 18.6; 19.2; 23.5; 25.7; 28.9; 28.5; 27.3; 26.0; 23.7. ### Macro-Financial Linkages - Credit, monetary policy and banking: - Following the onset of the pandemic, credit growth dropped sharply reflecting the slowdown in economic activities and risk aversion of banks. - Bank of Botswana cut policy rate twice by a cumulative of 100 bps in 2020 to support the economy. - Commercial banks increased liquid assets and decelerated credit growth to cope with uncertainties. - Financial soundness: - Banking sector remains well capitalized with low NPL and ample provisions. - Selected indicators (Table 5): - Regulatory capital to risk-weighted assets: series include 18.6, 20.0, 19.2, 21.9, 17.9, 18.5, 18.2, 18.5, 19.7, 20.0 (years as presented). - Nonperforming loans to total gross loans: 3.5, 3.7, 4.9, 5.3, 5.4, 4.8, 4.2, 4.6, 4.2, 4.3. - Bank provisions to nonperforming loans: 48.4, 54.7, 57.1, ... (values as presented). ### Social Protection and Labor Assessment - Social assistance effects: - Higher spending on social assistance in Botswana has contributed to poverty reduction but has not had sufficient impact on inequality. - Poverty Gap Reduction (Percent) and Gini Coefficients (2015 vs. 2009) show limited improvement in inequality. - Targeting and coverage: - Botswana’s social assistance spending is higher than most comparators, but coverage is lower across all beneficiaries (except compared to SSA median and Namibia). - Adequacy by Quintile (Percent) and Coverage by Quintile (Percent) indicate the poorest receive the highest share of benefits, but sizable SPL resources are allocated to the richest, sustaining high inequality despite higher SPL spending. - Better targeted SPL policies could further increase its distributional impact. - Sources: IMF FAD Social Protection & Labor – Assessment Tool (SPL-AT). ### Selected Economic Indicators (Table 1 highlights) - Real GDP (annual percent change) sequence: -1.7, 4.3, 2.9, 4.5, 3.0, -7.9, 8.3, 6.4, 4.8, 4.0, 4.0, 4.0 (as presented). - Mineral and nonmineral growth details: Mineral series include -19.6, -3.5, -11.1, 7.6, -4.1, -26.2, 52.9, 17.2, 8.0, 1.7, 1.3, 1.3; Nonmineral series include 1.7, 5.5, 4.8, 4.1, 3.9, -5.9, 4.5, 5.0, 4.4, 4.3, 4.4, 4.4. - Diamond production (millions of carats): 20.8; 20.9; 22.9; 24.4; 23.7; 16.9; 23.5; 25.9; 28.0; 27.8; 27.8; 28.3. - Gross official reserves (end of period, US$ millions): 7,546; 7,189; 7,502; 6,657; 6,172; 4,944; 4,818; 5,178; 5,914; 6,724; 7,504; 8,345. - Months of imports of goods and services (based on imports for following year): 13.1; 13.8; 12.3; 10.4; 10.1; 7.3; 7.3; 7.5; 8.0; 8.7; 9.3; 9.9. ### Balance of Payments (Table 2 highlights) - Current account (US$ millions): 302; 1,203; 926; 119; -1,100; -1,593; -625; -392; 221; 588; 636; 686. - Exports, f.o.b. (US$ millions): 6,283; 7,378; 5,956; 6,595; 5,242; 4,211; 6,789; 7,190; 7,734; 8,264; 8,635; 9,159. - Diamonds (US$ millions): 5,215; 6,498; 5,396; 5,923; 4,742; 3,710; 6,091; 6,260; 6,726; 7,230; 7,549; 8,037. - Imports, f.o.b. (US$ millions): -6,986; -5,901; -5,144; -6,104; -6,324; -6,234; -6,911; -6,641; -6,978; -7,380; -7,751; -8,141. - Trade balance (US$ millions): -703; 1,477; 812; 490; -1,082; -2,022; -122; 549; 756; 884; 884; 1,017. - Overall Balance (increase reserves +) (US$ millions): -777; -357; 313; 425; -1,545; -2,277; -126; 359; 736; 810; 780; 842. - Nominal GDP (US$ millions): 14,445; 15,658; 17,383; 18,664; 18,360; 15,783; 18,915; 20,482; 22,071; 23,551; 25,079; 27,097. ### Central Government Operations (Tables 3a–3c highlights) - Fiscal year totals (Billions of pula, Table 3a): - Total revenue and grants (Billions of pula): 47.4; 57.4; 56.4; 53.5; 50.2; 45.2; 60.0; 59.8; 73.5; 80.2; 85.3; 91.6 (prel./projection columns as presented). - Total expenditure and net lending (Billions of pula): 54.4; 56.3; 58.4; 62.4; 65.4; 65.9; 69.7; 73.8; 78.5; 82.7; 86.9; 91.3. - Overall balance (A) (Billions of pula): -7.0; 1.1; -2.0; -8.9; -15.2; -20.7; -9.7; -14.1; -5.0; -2.4; -1.7; 0.3. - Non-mineral primary balance (memorandum items): - Table 3a (Billions of pula): -21.8; -23.9; -21.3; -27.1; -29.6; -29.6; -29.1; -35.7; -28.5; -28.3; -28.1; -28.2. - Table 3b (Percent of GDP): -14.3; -13.8; -11.7; -14.1; -15.3; -15.7; -13.4; -14.6; -10.6; -9.7; -8.9; -8.2. - Table 3c (Percent of non-mineral GDP): -18.1; -17.6; -14.3; -17.1; -17.7; -18.5; -16.5; -18.3; -13.4; -12.3; -11.2; -10.3. ### Monetary Survey (Table 4 highlights) - Monetary aggregates (end-period, Billions of pula): - Net foreign assets: 91.0; 82.2; 80.9; 80.1; 73.7; 63.0; 63.8; 70.2; 80.8; 92.5; 103.9; 116.1. - Net domestic assets: -28.3; -15.4; -12.3; -6.3; 5.9; 21.2; 29.6; 33.1; 32.0; 30.7; 30.5; 30.5. - Monetary Base: 14.0; 14.5; 12.5; 14.7; 15.5; 14.4; 15.9; 17.6; 19.1; 20.8; 22.7; 24.6. - Broad money (M2): 66.9; 70.5; 72.5; 78.5; 84.8; 89.8; 99.1; 109.3; 119.0; 129.6; 141.0; 153.4. - Money and credit dynamics: - Base Money (annual % change): 18.6; 3.7; -13.7; 17.5; 5.4; -7.0; 10.4; 10.3; 8.9; 8.9; 8.8; 8.8. - Broad Money (annual % change): 19.9; 5.4; 2.7; 8.3; 8.0; 5.9; 10.4; 10.3; 8.9; 8.9; 8.8; 8.8. - Credit to the private sector (annual % change): 9.0; 9.0; 5.3; 6.6; 7.1; 5.3; 7.8; 10.5; 9.2; 8.9; 9.3; 9.3. ### Financial Soundness Indicators (Table 5 highlights) - Capital adequacy and asset quality: - Capital to assets: 9.1; 8.5; 8.4; 8.8; 9.4; 11.9; 8.7; 11.5; 14.4; 11.8 (as presented across the series). - Regulatory capital to risk-weighted assets: 18.6; 20.0; 19.2; 21.9; 17.9; 18.5; 18.2; 18.5; 19.7; 20.0. - Nonperforming loans to total gross loans: 3.5; 3.7; 4.9; 5.3; 5.4; 4.8; 4.2; 4.6; 4.2; 4.3. - Bank provisions to nonperforming loans: 48.4; 54.7; 57.1; ... (values continue as presented). - Profitability and liquidity: - Return on assets: 2.8; 2.0; 2.3; 1.9; 2.8; 2.3; 2.5; 1.7; 1.8; 1.9 (series as presented). - Liquid assets to total assets: 30.2; 15.4; 16.3; 13.4; 6.1; 5.8; 3.6; 5.4; 4.8; 5.3. *Source: IMF staff calculations and Botswana authorities as presented in the content unit.* ### Annex I. External Stability Assessment ### Annex I. External Stability Assessment ### Introduction and headline assessment - Botswana’s external position in 2020 is moderately weaker than implied by medium-term fundamentals and desired policies. - Key near-term actions to narrow the current account gap and stabilize reserves: - Implement planned fiscal consolidation. - Advance structural reforms to strengthen competitiveness and promote diversification. - Use flexibility in the current crawling arrangement to allow the real exchange rate basket to respond more to changes in fundamentals. ### Current account and recent developments - The current account balance: - Declined from a sizable surplus in 2016 to -6 percent in 2019. - Reached -10 percent of GDP in 2020, largely driven by decline in diamond exports related to the COVID-19 pandemic. - Expected to improve to -3.3 percent of GDP in 2021 and to 2.5 percent of GDP over the medium term as diamond production recovers and fiscal consolidation advances. - Trade and services: - Goods exports (percent of GDP) dropped significantly in 2020 due to sharp contraction in diamond production. - Goods imports rose, especially in rough diamonds, fuel, and food. - Services trade balance decreased moderately as reduced tourism exports more than offset lower services imports. - Income and transfers: - Net investment payments and net current transfers (percent of GDP) improved owing to lower dividends distributed to nonresidents and higher SACU revenue receipts. ### Financial account, net foreign assets, and reserves - Financial account: - Financial account deficit increased by 2 percent of GDP in 2020, mostly owing to increased net portfolio investment abroad. - Outward investment by pension funds increased by almost 1 percent of GDP. - Net foreign assets (NFA): - NFA have continuously deteriorated and stood at 31.6 percent of GDP, less than half their 2009 level, reflecting the drawdown of buffers to finance the fiscal expansion. - NFA are expected to further deteriorate over the medium term as the current account remains in deficit until 2023 and the pension fund repatriates foreign assets to finance fiscal deficit. - International reserves: - Reserves stood at about US$4.9 billion (US$1.2 billion lower than the previous year), equivalent to 30 percent of GDP or 7.3 months of imports. - The impact of the current account deterioration on reserves was partially contained by stock market buoyancy and high returns on reserves investments. - Under baseline projections, import coverage is expected to increase moderately in the medium term as diamond production increases and the government improves its fiscal balances. ### Exchange rate and REER assessment - Policy and mechanics: - The Bank of Botswana (BoB) adjusts the nominal value of the pula in line with expected inflation differentials with major trading partners and basket weights (the basket comprises the SDR and the South African rand, with a 45 percent weight for the latter). - In response to COVID-19, BoB increased the crawling rate from -1.5 to -2.9 percent in May 2020. - REER movements and implications: - Botswana’s real effective exchange rate (REER) depreciated about 3.5 percent y-o-y in December 2020. - The REER has depreciated only marginally despite substantial decline in diamond prices, attributed to relatively low capital mobility and the BoB’s operational exchange rate policy. ### External Balance Assessment (EBA)-lite results and REER implications - Methodology: - Assessment employs EBA-lite models for the current account (CA) and REER, estimating CA and REER endogenously relative to a multilateral-consistent benchmark. - Key quantitative results for 2020: - CA gap (CA-EBA lite approach) = -2.6 percent of GDP. - CA norm = -0.2 percent of GDP in 2020. - Estimated elasticity of the trade balance to changes in the REER = -0.31. - Implication: REER would need to depreciate by 8.5 percent for the CA deficit to be reduced to the norm (CA-EBA lite implication). - From the EBA-lite REER approach, the REER would need to depreciate by almost 15.2 percent to reach the CA norm. - Staff judgment: - Staff gives more weight to the CA-EBA lite approach because one-offs driving 2020 imbalances (e.g., diamond shock) can be more directly assessed. ### Adjustments and shocks considered - Staff adjustment to cyclically adjusted CA: +6.2 percent (breakdown and elasticities used): - Adjustment to diamond trade balance = 4.3 percent (estimated shock to diamond trade balance of about 9 percent and elasticity of CA to diamond balance of 0.47). - Adjustment to oil trade balance = 1.2 percent (estimated shock of about 1.5 percent and elasticity of 0.8). - Adjustment to tourism balance = 0.7 percent (estimated temporary tourism shock of 1.3 percent with elasticity of 0.5). - Notes on diamond exports: - About 90 percent of Botswana’s exports correspond to diamond sold at international prices; exchange rate has limited effect on diamond output and sales (demand determined). - Non-diamond current account deficit would be about 21 percent of GDP, suggesting potential Pula overvaluation. ### Reserve adequacy assessment - IMF reserve adequacy metric: - Uses a risk-weighted measure encompassing four vulnerabilities: - Export earnings (to capture terms of trade shocks). - Short-term debt at remaining maturity (short-term debt plus debt service). - Portfolio investments plus medium and long-term debt. - Broad money (proxy for residents’ capital flight). - Weights for Botswana (assumed fixed exchange rate operationally): Short-term Debt 30%, Other Liabilities 20%, Broad Money 10%, Exports 10%. - For commodity exporters, additional buffers suggested; staff considers a weight of 25% for exports appropriate for Botswana given 80 percent of exports are commodity (90 percent of goods exports) and lack of futures prices for diamonds. - Adequacy findings: - Botswana’s reserves are 184 percent of the ARA metric. - According to IMF metric, reserves of 14 to 16 percent of GDP (amounting to 100–150 percent of the ARA metric) would be adequate; estimated level for 2020 is 29.5 percent of GDP. - Using a 25 percent weight for exports raises the adequacy range to 18–25 percent of GDP. - For the past twenty years the level of reserves has exceeded the upper bound of the adequacy range. ### Institutional arrangements for reserves - Composition and management: - 85 percent of foreign reserves are kept in the Pula Fund (sovereign wealth fund) and 15 percent in a Liquidity Portfolio (short-term liquidity buffer). - Within the Pula Fund, about one-third is owned by the government and two-thirds by the BoB as at end-2019. - Foreign exchange reserves in excess of daily transaction needs kept in the Liquidity Portfolio (currently set at nine months of imports) are transferred to the BoB’s portion of the Pula Fund. - If the Liquidity Portfolio declines below three months of imports, it receives a transfer from the Pula Fund. ### Policy recommendations and implications - Near- and medium-term policy priorities: - Implement planned fiscal consolidation to reduce deficits and limit further drawdown of buffers. - Advance structural reforms to strengthen competitiveness and promote diversification away from diamond dependence. - Use the flexibility in the crawling exchange rate arrangement to allow the REER to respond more to changes in fundamentals. - Consider greater exchange rate flexibility to help absorb external shocks. - Reserve and risk-management suggestions: - Maintain adequate liquidity buffer in the Liquidity Portfolio (nine months rule; replenishment if below three months). - Recognize higher reserve adequacy needs due to heavy reliance on diamond exports; consider a higher export weight (e.g., 25 percent) in adequacy metrics. *Source: Annex I. External Stability Assessment (IMF staff).* ### 1. The COVID-19 shock is expected to cause a sharp increase in gross financing needs ### 1. The COVID-19 shock is expected to cause a sharp increase in gross financing needs ### Key findings - Gross financing needs are projected to increase to 14.6 percent of GDP in FY2020, compared to 9.4 percent in FY2019, mainly driven by a significant drop in mineral revenue and rise in COVID-19 related spending. - Public debt is projected to increase to 23.5 percent of GDP in FY2020 from 19.2 percent of GDP in FY2019. - The Government Investment Account declined from 18.4 percent of GDP at end-2019 to 3.7 percent of GDP by end-2020. - The fiscal deficit widened to 11 percent of GDP in FY2020 as a result of pandemic-related fall in revenues and increase in spending. ### Medium-term baseline projections and financing composition - Economy projected to expand by 8.3 percent in 2021. - Fiscal deficit expected to narrow to 4.4 percent in FY2021 as one-off spending is unwound and revenues recover. - Under current policies, the deficit is expected to be 4 percent of GDP over 2021–23, on average, and decline to about 0.5 percent of GDP over the medium term. - Gross financing needs projected to decline from 14.6 percent of GDP in FY2020 to 7.7 percent of GDP in FY2021, and to an average of about 5 percent of GDP over the medium term. - Financing sources: drawdown of deposits, medium and long-term domestic debt, and external debt including from multilateral institutions and capital market. - Public debt projected to peak at 29 percent of GDP in FY2022 before declining to 26.4 percent in FY2025. ### Stress test scenarios and outcomes - Growth shock: - Scenario: lower real GDP growth—real GDP growth reduced by one standard deviation (about 4 percent) for two consecutive years. - Outcome: debt levels peak at 35.2 percent of GDP in FY2022, below Botswana’s debt ceiling of 40 percent of GDP and the 50 percent of GDP EM threshold. - Primary balance shock: - Scenario: about half of planned adjustment is not realized, leading to higher primary deficit through 2025 (e.g., lower than anticipated mineral prices). - Outcome: debt level could be elevated but remain below the debt ceiling through 2025. - Combined macro-fiscal shock: - Scenario: most severe—lower growth, higher primary deficit, and associated higher interest rate. - Outcome: public debt would surpass Botswana’s debt ceiling of 40 percent of GDP but remain below the EM threshold of 50 percent, stabilizing at about 40.4 percent of GDP in 2025. Gross financing need would be below the 10 percent of GDP threshold by 2022. - Contingent liabilities shock: - Scenario: large share of contingent liabilities related to SOEs’ debt is called; assumes one standard-deviation shock to growth, associated deterioration of the primary balance, and slight increase in interest rates. - Outcome: debt would rise to about 29 percent of GDP in 2025 (vs baseline of 26.4 percent of GDP). ### Realism of baseline assumptions - Past projections of real GDP growth and primary balance show optimistic bias partly reflecting volatility in the diamond sector and SACU receipts. - Forecast errors in the primary balance reflect the need to improve implementation of the authorities’ fiscal plans. - Under the baseline scenario, the projected 3-year adjustment in the cyclically adjusted primary balance (CAPB) is relatively strong, reflecting unwinding of one-off COVID-spending and output recovery. - The CAPB level is relatively small with a percentile rank of 73 percent compared to the historical experience for high-debt market access countries. ### Mitigating factors and residual risks - Mitigants: - Projected decline in gross financing need as the economy recovers and one-off spending unwinds means gross financing needs and external financial requirements would not pose significant risk to Botswana. - Botswana has a large investment base (NBFIs assets) and a good sovereign rating that could facilitate access to foreign markets at favorable conditions. - High share of public debt held by non-residents is mitigated because most external borrowing is from multilaterals with long maturities and about 60 percent of fiscal revenue are in foreign currency, offering a natural hedge against currency depreciation. - Residual risks: - Dependence on mineral revenue and volatility in SACU receipts. - Implementation shortfalls in fiscal adjustment could raise debt above baseline paths under adverse scenarios. ### Key statistics (selected exact values from the DSA) - Gross financing needs: 9.4 (FY2019); 14.6 (FY2020); 7.7 (FY2021); 5.0 (average over medium term). - Public debt (nominal gross public debt): 19.2 percent of GDP (FY2019); 23.5 percent of GDP (FY2020); projected peak 29 percent of GDP (FY2022); 26.4 percent of GDP (FY2025). - Government Investment Account: 18.4 percent of GDP (end-2019); 3.7 percent of GDP (end-2020). - Fiscal deficit: 11 percent of GDP (FY2020); 4.4 percent of GDP (FY2021); 4 percent of GDP (average 2021–23); 0.5 percent of GDP (medium term). - Economic growth and inflation (selected projection entries): - Real GDP growth: -4.1 (2020 baseline); 7.8 (2021); 6.0 (2022); 4.6 (2023); 4.0 (2024); 4.0 (2025). - Inflation (GDP deflator): -0.6 (2020); 7.7 (2021); 6.4 (2022); 5.1 (2023); 4.6 (2024); 3.9 (2025). - Effective interest rate (in percent): 3.3 (2020); 3.2 (2021); 3.6 (2022); 3.9 (2023); 4.1 (2024); 4.1 (2025). - Share of fiscal revenue in foreign currency: about 60 percent. *Source: IMF staff.* ### Annex V. Estimating the Impact of Risks using the DIGNAR-19 ### Annex V. Estimating the Impact of Risks using the DIGNAR-19 Framework ### Model description - The analysis uses a dynamic general equilibrium model, DIGNAR-19 (Melina and Zanna, 2020), calibrated to the Botswana economy. - Key model features: - financially constrained households; - three sectors of production: diamond, non-diamond traded goods, nontraded goods; - a government with access to various fiscal instruments and borrowing. ### Downside scenario (prolonged COVID-19 pandemic) - Scenario structure: simultaneous shocks of (1) a health shock; (2) a trade shock (fall in non-diamond exports and SACU transfers); and (3) a negative shock to diamond price and diamond export volumes. - Quantified assumptions (as simulated): - employment: 2 and 1 percent drop in 2021 and 2022, respectively; - growth in domestic demand: fall of 1.7 and 0.4 percentage points in 2021 and 2022, respectively; - government health-related expenditures: increase by 0.5 percentage points of GDP in 2021 and 2022; - non-diamond exports: decline by 1.5 and 0.5 percentage points of GDP lower in 2021 and 2022, respectively, relative to the baseline; - SACU transfers: assumed to be 2 percentage points of GDP lower in 2023 relative to the baseline; - diamond exports: growth rate assumed to be 13.9 percentage points lower than in the baseline in 2021; - diamond prices: more muted recovery, reaching 1,662 Pula per carat by 2025; in a note, diamond prices are assumed to remain constant in real terms in the downside scenario. - Simulated impacts: - GDP growth would be 5¼ percentage points lower than the baseline in 2021 and 1¼ percentage points lower in 2022; - Absent fiscal consolidation measures, public debt would reach 35 percent of GDP by 2025, primarily due to higher public health expenditures and lower mineral and SACU revenues. - Contributions to outcomes (as presented in figure panels): - Downside Scenario - Real GDP: contributions of shocks to the difference in real GDP growth from the baseline scenario, in percentage points. - Downside Scenario - Government Debt: contributions of shocks to the difference in Government Debt from the baseline scenario, in percentage points of GDP. ### Upside scenario (quicker vaccine rollout and faster reform implementation) - Scenario structure: combined positive shocks from (1) non-diamond exports improvement; (2) higher diamond export volumes; and (3) rapid and effective product market reform implementation coupled with improved public investment efficiency. - Quantified assumptions (as simulated): - non-diamond exports: increase to 8.5 percent of GDP in 2021; - SACU transfers: 1 and 1.5 percentage point of GDP higher in 2022 and 2023, respectively, relative to the baseline; - diamond exports: growth rate assumed to be 3 and 3.5 percentage points higher in 2021 and 2022, respectively; - public investment efficiency: assumed to gradually increase to the regional average of 74 percent by 2025; - product market reform (TFP): faster implementation presumed to gradually increase annual TFP growth by 1 percentage points by 2025. - Simulated impacts: - GDP growth would be 0.6 percentage points higher than the baseline in 2021 and 1 percentage points higher in 2022; - In the medium term, successful implementation of reforms would lift potential GDP and overall growth would be 1.6 percent points above baseline projections by 2025; - Government debt would decline below the pre-pandemic level by 2025, facilitated primarily by higher external demand, mineral, and SACU revenues. - Contributions to outcomes (as presented in figure panels): - Upside Scenario - Real GDP: contributions of shocks to the difference in real GDP growth from the baseline scenario, in percentage points. - Upside Scenario - Government Debt: contributions of shocks to the difference in Government Debt from the baseline scenario, in percentage points of GDP. *Prepared by Zamid Aligishiev (RES) and Giovanni Melina (RES).* ### Introduction ### Introduction ### Authorities' overall assessment and objectives - Authorities thank staff for "an insightful, helpful, and well-written report" and "broadly concur with the policy recommendations." - Botswana aims to hasten recovery and accelerate structural reforms through the Economic Recovery and Transformation Plan (ERTP) to achieve: - export diversification, - stronger growth, - higher productive employment, - strengthened human capital, government efficiency, and productive infrastructure, - crowding in the private sector and enhancing the role of the financial sector in financing development, - increased integration into global and regional value chains. - ERTP short-term aim: restore economic activity and incomes and mitigate effects of prolonged or recurring pandemic containment measures. - ERTP longer-term objective: strengthen the basis for renewed, sustainable growth and support the transition to a high income, digital and knowledge economy in line with Vision 2036. ### Recent economic developments and outlook - Real GDP contracted by "7.9 percent in 2020", an 11-percentage point drop in the growth rate. - Contraction drivers: reduced global demand (especially for rough diamonds), travel restrictions, containment measures; mining and tourism were hard hit; manufacturing subdued. - GDP forecasts: - rebound to "8.3 percent in 2021", underpinned by a strong recovery in the diamond sector and opening of a new copper mine in May 2021, - moderate to "6.4 percent in 2022" as fiscal consolidation is implemented. - Scarring and output gap: - "Scarring remains significant and output losses high." - Output will remain below pre-pandemic forecast levels over the next four years, with the gap narrowing only slightly to about "6.6 percentage points by 2025." - External buffers: - Foreign reserves remain adequate at "over 10 months of non-diamond import cover." - Authorities intend to rebuild reserves given frequency of shocks. ### Inflation and administered prices - Headline inflation rose to "5.6 percent in April 2021", from "2.5 percent a year earlier", mainly reflecting VAT increases, electricity tariffs, rentals, and other fees. - Core inflation excluding administered prices is expected to remain within target. - Tax and tariff measures have a temporary effect on headline inflation that will fall away in the first quarter of next year. ### Authorities’ response to the pandemic - Adopted a swift, multi-pronged strategy including fiscal support for vulnerable firms and households, and financial sector measures to enable continued credit extension and liquidity support. - Fiscal measures included wage subsidies, loan facilities and guarantees, and increased spending on health and education, implemented through a dedicated Pandemic Relief Fund to support transparency and tracking. - Financial sector measures: - decreased prudential capital adequacy ratio from "15 percent to 12.5 percent", - reduced cost of accessing overnight funding by licensed commercial banks from Bank of Botswana (BoB)’s Credit Facility to the prevailing Bank Rate, - BoB cut the reserve requirement ratio, - commercial banks instituted loan repayment moratoria and forbearance. - Non-bank financial sector measures: restructuring/rescheduling of loan installments and premiums, discounts on insurance products, and interest rate cuts on non-bank lending. - Vaccination strategy: - National Deployment and Vaccination Plan aims at vaccinating "75 percent of the adult population by the end of 2021." - Vaccines secured under various arrangements including COVAX; rollout commenced in April 2021. - Authorities hope to meet the target, subject to timely receipt of supplies. - Social support stance: - Authorities agree with staff that targeted emergency support to affected households and viable firms should be maintained for now. - Ongoing revamping of social welfare and transfers system to ensure targeting to the vulnerable. - Planned removal of COVID-19 support measures will proceed as soon as advisable. ### Fiscal policy stance and measures - Commitment to fiscal and debt sustainability; significant fiscal consolidation measures incorporated into budget for FY2021. - Short-term fiscal target: shrink fiscal deficit from "11 percent of GDP in 2020" to "4.4 percent in 2021" via expenditure controls and revenue mobilization. - Revenue measures estimated to yield about "1 percent of GDP": - broadening the tax base, - increasing VAT, - fuel and sugar levies, - a tax on plastic bags, - withholding tax adjustments. - Tax amnesty expected to increase revenue collection this year by about "0.5 percent of GDP." - Several pending tax bills being finalized with IMF assistance to be presented to Parliament in July 2021. - Revenue Authority plans to introduce electronic billing machines to reduce tax evasion and boost revenue. - Spending-side measures: - contain public wage bill via civil service reform, savings on vacancies, and zero inflation adjustments, - prioritize public investments over recurrent expenditure, - expedite restructuring of parastatals and strengthen public investment management and public procurement efficiency. - Financing and debt management: - Parliament approved increase in domestic bond-issuance program from "P15 billion to P30 billion" in 2020; domestic issuance stepped up to help finance FY2020 deficit and will continue. - Negotiated budget support with World Bank and AfDB; exploring external financing for FY2022–23 deficits. - Updating medium-term debt management strategy to consider range of financing options including capitalizing on investment grade credit rating in international bond markets. ### Monetary and exchange rate policies - Authorities maintain an accommodative monetary policy stance while committed to preserving price stability without undermining recovery. - Monitoring second-round effects of supply shocks and administered price increases. - Reforms to monetary operations to improve transmission: - In 2019, BoB introduced Primary Reserve Requirement Averaging (PRRA) which has been effective. - Effective October 30, 2020, BoB reintroduced the 3-month Treasury Bill in place of the 91-day Bank of Botswana Certificate to support the Government treasury bill market. - Plans to implement additional reforms including changes to the policy rate anchor and interest rate structure. - Exchange rate regime: - Adopted a significantly larger downward rate of crawl in 2020 and 2021 to increase exchange rate flexibility. - Authorities broadly agree with staff assessment and await completion of ongoing IPF analysis which highlights importance of supporting instruments alongside the exchange rate (e.g., capital flow and macroprudential measures) in imperfect developing country markets. ### Financial sector policies and vulnerabilities - Banking system remains sound, adequately capitalized, liquid, and resilient to shocks. - Risks monitored: - corporate vulnerabilities could increase with a slower recovery, - potential rise in NPLs once the debt moratorium ends, - household indebtedness risks, particularly unsecured bank and non-bank credit. - BoB collecting information on household indebtedness and non-bank credit sources (micro-lenders, hire-purchase). - If debt risks exceed acceptable thresholds, BoB stands ready to apply macroprudential instruments guided by the framework adopted by the Financial Stability Council in 2020. - Parastatal sector reforms are a top priority; authorities will consider staff proposals on clarifying the role of development banks. - Bond market development: - Authorities commit to enhancing efficiency and liquidity of the domestic bond market and reducing maturity mismatches. - Agreed importance of measures to deepen the bond market, support increased issuance of government debt, and enable debt issuance by state-owned enterprises and the private sector (including banks). - Focus on ensuring a wide range of bond maturities, a suitable benchmark maturity with adequate liquidity, and an increased variety of instruments. - Existing formal market making agreement for primary dealers and a pricing mechanism; reforms to primary dealer system and technical aspects of the bond market can be considered. - AML/CFT progress: - Significant progress toward compliance with the International Cooperation Review Group recommendations. - Actions include risk assessments for legal persons/arrangements and non-profit organizations, operationalizing online business registration, and legislative amendments. - Remaining strategic deficiencies relate to analysis/dissemination of financial intelligence, terrorist financing investigations, and implementation of an effective targeted financial sanctions regime. - The Financial Intelligence Act is being revised to support the AML/CFT framework. ### Structural reforms and digitalization - Authorities committed to fast-tracking structural reforms to foster diversified and inclusive export-led growth via ERTP. - Four main sectors earmarked for support: agriculture, tourism, the creative industry, and manufacturing. - Tourism allocation: approximately "7 percent of total ERTP expenditure." - ERTP focuses on accelerating investment in digitalization and "productive" infrastructure, reducing government footprint, and enhancing the business environment. - Digital economy investment plan: invest "1½ percent of GDP in this sector during 2021–23." - Digital measures in ERTP: - address digital infrastructure gaps, - automate land registration, - expand biometric identification (e-passports with embedded biometrics), - further rollout of e-government services and promote digital payment infrastructure, - full digitalization of company registration already achieved. - Goals: improve competitiveness of the business climate, integrate into global value chains, upgrade product sophistication, and work around constraints like landlocked status and small market size. - Climate agenda under ERTP: - reduce dependence on carbon-intensive energy and enhance energy generation capacity, - strengthen climate resilience and promote exports and private sector activity, - benefit poor populations reliant on subsistence agriculture and tourism. - In April this year, Parliament approved the Botswana climate change policy promoting renewable energy (through the Integrated Resource Plan), reducing subsidies to fossil fuels, and increasing fossil fuel fees. ### Conclusion and engagement with the Fund - Authorities continue to safeguard macroeconomic stability while positioning the economy for recovery and transforming it into a diversified, high-growth, private-sector led, knowledge-based economy. - Authorities look forward to Directors’ advice and continued Fund engagement and technical assistance to advance the transformation agenda. *IMF—Introduction (1bwaea2021001)* --- _Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1bwaea2021001.pdf_