## 1. Import Restrictions and Implications for Development ## Source details **Canonical URL:** [1. Import Restrictions and Implications for Development](https://www.imf.org/-/media/files/publications/cr/2022/english/1bwaea2022002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1bwaea2022002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1bwaea2022002.pdf.json) --- ### Context: strong recovery with low fiscal buffers - Real GDP: contracted by 8.7 percent in 2020; rebounded by 11.4 percent in 2021, mainly reflecting a strong increase in diamond demand and government support. - Fiscal relief and health response: - Fiscal relief package: 2.6 percent of GDP for households and businesses. - Comprehensive vaccination campaign; over 95 percent of the eligible population fully vaccinated as of May 2022. - Monetary and financial conditions: - Bank of Botswana (BoB) reduced the policy rate to its lowest level on record and eased regulatory limits on private lending. - BoB replaced the Bank Rate with the seven-day BoB certificate (BoBC) rate as the new monetary policy rate. - Labor and poverty: - Unemployment: 26.0 percent overall; youth unemployment: 34.4 percent in 2021 (up from 24.5 and 32.4 percent in 2020). - Poverty rate estimated at 13.1 percent (from 12 percent pre-pandemic, based on USD1.9/day in 2011 PPP terms). - Structural vulnerability: - Low fiscal buffers and reliance on mining increase urgency of economic diversification. ### Recent economic developments (highlights) - Vaccination and schooling: - State of Emergency: April 2020 to September 2021; only 22 days of schooling lost due to lockdowns because of double-shift system and remote learning programs. - Additional allocation: P2 billion in the 2022 budget for vaccine rollout and booster shots; government plans a vaccine manufacturing plant. - Inflation: - Annual CPI inflation: averaged 6.7 percent in 2021 and 10.5 percent during January-May 2022. - Core inflation: averaged 5.9 percent in 2021 and 6.5 percent in Q1 2022. - Fiscal outcomes: - Fiscal deficit narrowed to 2.7 percent of GDP in FY2021–22 from 11.1 percent of GDP in FY2020–21. - Non-mining/non-SACU revenue rose by 1½ percent of GDP compared to FY2020–21. - Government Investment Account (GIA): increased to 5.7 percent of GDP from 3 percent in FY2020–21; pre-pandemic average was 18 percent of GDP. - Monetary policy actions: - BoB raised the Monetary Policy Rate (MOPR) in late-April and June 2022 by a cumulative 101 basis points. - Seven-day BoBC rate replaced the Bank Rate effective April 28 2022. - Financial sector: - Commercial bank credit growth: 5.1 percent in 2021 (from 4.5 percent in 2020). - Non-performing loans (NPLs): 4.2 percent of total loans at end-2021. - Household debt: 23.4 percent of GDP; share of credit to households: 65½ percent. - Liquidity conditions tightened and funding costs rising, particularly for smaller banks. - External sector: - Current account deficit: narrowed to ½ percent of GDP from 8.7 percent in 2020. - Reserves at end-2021: USD 4.8 billion (6 months of imports or 205 percent of the standard ARA metric), after SDR allocation of USD 189 million. - BoB maintained downward crawl rate at 2.9 percent throughout 2021; REER broadly unchanged. ### Outlook and risks - Growth projections: - Growth expected to moderate to 4¼ percent in 2022 and settle at 4 percent from 2023 (staff steady-state potential growth estimate: 4 percent based on 1995–2021 sample). - Inflation projections: - Inflation projected at 11 percent in 2022 and 5.8 percent in 2023. - Fiscal consolidation and external position: - Expenditures projected to fall by 2¼ percent of GDP through FY2022–24 owing to lower wage bill (-1½ percent of GDP) and less transfers and subventions (-¾ percent of GDP). - Consolidation and higher SACU transfers will narrow the deficit; reserves projected to increase moderately over the medium term. - Key risks: - Commodity price path: abrupt slowdown in China or protracted war in Ukraine could lower diamond demand; prolonged sanctions against Russia could increase demand for Botswana’s diamonds. - Other external shocks: more lethal COVID-19 variants, faster tightening in advanced economies, and climate shocks could hamper tourism, trigger capital flow volatility, exert pressure on reserves, and threaten agriculture, mining, and tourism. - Domestic risk: shortfalls in planned fiscal consolidation could erode buffers, requiring sharper adjustment with negative effects on growth. - Upside: successful consolidation and implementation of the Economic Recovery and Transformation Plan (ERTP) could diversify the economy and lift medium-term growth prospects. - Quantitative sensitivities: - Empirical estimate: elasticity of Botswana’s growth to demand from trading partners of 1.8. - Staff estimate of the war in Ukraine’s impact relative to pre-war baseline: -½ ppt in 2022 and -¼ ppt in 2023. ### Authorities’ views - Broad agreement with staff’s outlook and risks assessment. - Noted the war in Ukraine could support demand for synthetic diamonds. - Intend to use digital technologies to improve traceability of diamonds sourced in Botswana. ### Import restrictions and food security (specific) - Authorities’ rationale for import restrictions on food and vegetables: - To reduce food import dependency and support domestic producers. - Cited causes: large annual imports weakened the external position, caused high food reliance on other countries, and discouraged domestic production. - Program objectives: - Create jobs and increase competitiveness of the agricultural sector. - Short-term developments and monitoring: - Food shortages were most apparent during the first few months, but situation has been stabilizing. - Authorities agreed to closely monitor the food situation and adapt if needed. - Restrictions to be reviewed biannually. - Staff view and recommendation: - Caution advised: reliance on import substitution and restrictions to promote industrialization could be counterproductive. - Recent restrictions on selected food and beverage imports have created domestic shortages, increased prices, and reduced consumer welfare. - Over the medium term, moving away from inward-looking policies such as import restrictions is recommended as part of diversification. ### Policies to ensure durable growth and rebuild buffers — macroeconomic and fiscal - Authorities’ stated objectives: - Rein in government spending, align spending with development objectives, and restore fiscal buffers to pre-COVID levels. - Revenue measures: raise fees and service charges; improve tax administration starting FY2022–23. - Expenditure measures: across-the-board annual salary increase of five percent for FY2022–25 agreed with three public service trade unions; contain wage bill by savings on vacancies, allowances, overtime; cut subventions to SOEs through rationalization. - Restructure and rationalize ministries and SOEs; find private sector partners to some SOEs. - Target social spending better; improve public investment management (relying more on PPPs); strengthen accountability and governance. - Social protection and temporary support: - Staff estimates additional support of P500 million in FY2022–23 to help vulnerable households cope with war spillovers; could be partly financed by higher mining revenue and have negligible impact on 2022 fiscal deficit. - Fiscal consolidation path and buffers: - Under baseline medium-term consolidation plan, fiscal position would turn into surplus by 2024 and financial assets in the Pula fund could be replenished by 2031. - Additional buffers of about 3–5 percent of GDP would be needed to deal with negative shocks of the size above the 75th percentile (simulation assumptions: baseline consolidation, nominal return on asset of 9 percent, growth at potential in the long-term, and debt stabilizing at its 2027-level). - Staff recommends using part of higher-than-expected mining revenue to support vulnerable households while saving the rest. - Wage bill and public wage policy: - Average public wage premium estimated at 42 percent (using 2019Q4 Quarterly Multi-Topic Survey and Mincer equation with propensity score matching). - Recommendations: adopt evidence-based pay-setting (independent pay review body); link pay to performance; award grade progression only within competitive promotion and notch increments; rationalize allowances; strengthen human resource management; develop communication strategy for buy-in. - Fiscal rule and MTFF: - Recommend formalizing a new fiscal rule (an expenditure rule combined with a floor on liquid financial assets); include fiscal rule in NDP 12 and give it a strong legal basis. - Revenue diversification: - Domestic revenues cover about 35 percent of government expenditure; need to diversify tax base to reduce dependence on mineral and SACU revenue. - Potential measures: raise property tax rates and coverage (requires accelerating land registration and improving valuation); counter international tax avoidance. - Financing strategy: - Budget support from World Bank, AfDB, and Government of Japan plus domestic bond issuance reduce need to draw down buffers in FY2022–23. - Planned regular issuance of medium- and long-term maturities to build yield curve, support secondary market, and reduce financing costs. - Consider introduction of inflation-linked bonds. ### Fiscal risks, PPPs, and public financial management - Need to enhance capacity and adopt an appropriate legal and institutional framework to safeguard public finances from risks arising from PPPs. - PFM improvements recommended: - Incorporate risk analysis (including climate risks) into the MTFF. - Broaden fiscal statistics to include local government, special funds, and extra-budgetary entities. - Publish audited parastatal financial statements regularly. - Progress on Single Social Registry and Proxy Means Testing to improve targeting of social benefits. ### Monetary policy, financial sector, and macroprudential recommendations - Monetary stance and outlook: - Near-term trade-offs between reducing inflation pressures and supporting recovery. - BoB’s rate increases in April and June 2022 were appropriate; additional tightening will be needed going forward. - Inflation expectations for 2023 have risen above 7 percent. - Real interest rates remain strongly negative despite recent hikes. - Implementation and market development: - Transition from Bank Rate to MOPR welcomed; enhanced communication recommended. - Monitor interbank rates and capital flows closely; lift restrictions on current prime lending rate in due course. - Regular open market operations at fixed-rate full-allotment complemented by fine-tuning operations recommended. - Foster development of unsecured interbank and REPO markets to strengthen monetary transmission. - Financial sector soundness and vulnerabilities: - End-2021 metrics: average return-on-equity of commercial banks: 21.6 percent; NPLs: 4.3 percent of gross loans. - Remaining vulnerabilities: lower CAR and PRR forbearance measures; concentration of household unsecured lending; several state-owned development financial institutions unprofitable. - Staff recommendations: - Close monitoring of risks and provisioning for NPLs. - Review remaining forbearance measures and crisis preparedness; expedite amendment of the Banking Act and operationalize deposit insurance mechanism. - Botswana Financial Sector Assessment Program (FSAP) to commence in June 2022 and anticipated to be completed by end-May 2023. - Progress toward a collateral registry for movable assets planned by 2024; establish land registry; improve valuation. ### Structural reforms and the Reset Agenda - Long-term target: - Transform Botswana into a high-income economy by 2036 requires sustaining average annual growth of 5 to 6 percent and developing new durable growth sources outside mining (examples: fintech-enabled financial services, manufacturing, tourism). - Job creation: - Need to create jobs to reduce unemployment and absorb 35,000 annual labor market entrants. - Recommended reforms: - Enhance accountability, competition, and governance; improve governance to control rent-seeking and corruption. - Avoid reliance on import substitution and restrictions; instead target infrastructure, attract FDI, provide R&D subsidies, support start-ups, reform network and electricity industries, strengthen export and investment promotion institutions, and coordinate policy implementation. - Implement planned visa and work permit reforms to meet business skills needs. - Deepen trade integration including through AfCFTA; note implementation delays on Rules of Origin and tariffs and that Botswana is among 11 countries out of 54 that have not yet ratified the agreement. ### Tourism, poverty, inequality, and labor market - Tourism: - Tourism directly accounted for 4.9 percent of GDP in 2016 (UNWTO); total contribution estimated at 7.6 percent of GDP in 2016 (UNWTO) and 11.6 percent (WTTC). - Tourism provides about 74,000 jobs (18 percent of total formal employment). - International tourist arrivals declined by 80½ percent in 2020 relative to pre-pandemic level; estimated loss in visitor spending of around USD 400 million (WTTC). - Tourism expected to rebound in 2022 and return to the pre-COVID level in 2023. - Socioeconomic challenges: - Net job loss of 46,577 through 2021Q4. - Poverty and inequality worsened following the COVID-19 pandemic. - Near-term priority: provide support to the most vulnerable through targeted government social programs and improve targeting to reduce leakages. ### Climate policy, renewable energy, and digital transition - Climate financing and instruments: - Botswana secured about USD 38 million (0.22 percent of GDP) from multilateral climate funds over the past five years; 37 million provided for restoration of vegetation in communal grazing lands. - Scope exists to mobilize more concessional financing by developing a pipeline of well-designed projects and obtaining accreditation from climate funds. - Staff welcomes licensing of one of the two planned 50 megawatts renewable energy projects; encourages accelerating renewable power generation, reducing fossil fuel subsidies, and introducing carbon taxes. - Botswana secured funding (together with World Bank) to support design and implementation of a carbon tax; no specific implementation timeline yet. - Green bonds, carbon credit markets, insurance and risk-pooling mechanisms, and state-contingent debt instruments highlighted as options. - Digital transition: - Staff supports Smart Botswana Strategy to digitalize public service delivery; National E-Commerce Strategy promotes digital technology in commercial and public spaces. - Progress made in internet penetration and digitalization of education and public services. ### Stress tests, debt outlook, and realism of assumptions - Public debt and financing: - Fiscal surplus under current policies expected to reach 1¾ percent of GDP by the end of the medium term. - Gross financing needs projected to decline from 8.4 percent in FY2021–22 to 4.7 percent in FY2023–24; average about 1.9 percent of GDP over the medium term. - Public debt peaked at 24½ percent of GDP in FY2021–22; projected to decline to 12½ percent in FY2026–27. - Impact of external shocks: - War in Ukraine not expected to have material impact on debt dynamics; estimated small impact given low external debt. - Stress-test outcomes: - Growth shock (lower real GDP growth by one standard deviation ~4 percent for two years): public debt ratio would peak at 30 percent (below 40 percent ceiling); gross financing needs peak below 10 percent of GDP. - Primary balance shock (higher primary deficit by ~2.5 percent of GDP in FY2022–23 and ~1 percent in FY2023–24): debt-to-GDP and financing needs elevated but still peak at relatively low levels. - Combined macro-fiscal shock: debt stabilizes at about 25 percent of GDP in FY2026–27; gross financing need peaks around 10 percent of GDP by FY2022–23 then declines. - Contingent liabilities shock (SOE debt called): debt would rise to about 27 percent of GDP in FY2022–23 (vs. baseline of 24 percent). - Forecast track record: - Historical forecast track record indicates optimistic bias in projections of real GDP growth in 2020 and in past primary balance projections. - Projected 3-year adjustment in cyclically adjusted primary balance is relatively strong; average size of adjustment has percentile rank of 44 percent of historical experience for high-debt market access countries. ### Key selected economic indicators (highlights) - Real GDP: 2018 4.2; 2019 3.0; 2020 -8.7; 2021 11.4; 2022 4.3; 2023 4.0; 2024 4.0; 2025 4.0; 2026 4.0; 2027 4.0 - Consumer prices (average): 2018 3.2; 2019 2.7; 2020 1.9; 2021 6.7; 2022 11.0; 2023 5.8; 2024 4.5; 2025 4.5; 2026 4.5; 2027 4.5 - Overall central government balance (deficit –) as % of GDP: 2018 -5.1; 2019 -8.6; 2020 -11.1; 2021 -2.7; 2022 -1.8; 2023 0.6; 2024 1.8; 2025 1.9; 2026 2.0; 2027 2.0 - Total central government debt (% of GDP): 2018 19.5; 2019 21.5; 2020 24.2; 2021 24.3; 2022 25.0; 2023 24.6; 2024 22.4; 2025 20.3; 2026 18.3; 2027 16.3 - Gross official reserves (end of period, US$ millions): 2018 6,657; 2019 6,172; 2020 4,944; 2021 4,806; 2022 4,968; 2023 5,292; 2024 5,892; 2025 6,639; 2026 7,584; 2027 8,744 - Months of imports of goods and services: 2018 10.4; 2019 10.0; 2020 6.5; 2021 5.9; 2022 6.2; 2023 6.2; 2024 6.7; 2025 7.3; 2026 8.1; 2027 9.3 *Source: 1bwaea2022002 — IMF staff report excerpt on Botswana.* ### 1. Import Restrictions and Implications for Development ____________________________________________ 16 ### 1. Import Restrictions and Implications for Development ### Context: Strong recovery with low fiscal buffers - After contracting by 8.7 percent in 2020, real GDP rebounded by 11.4 percent in 2021, mainly reflecting a strong increase in diamond demand and government support. - The government introduced a comprehensive vaccination campaign and fiscal relief package (2.6 percent of GDP) for households and businesses. - The Bank of Botswana (BoB) reduced the policy rate to its lowest level on record and eased regulatory limits on private lending. - Unemployment (youth unemployment) worsened to 26.0 (34.4) percent in 2021, up from 24.5 (32.4) percent in 2020. - The poverty rate is estimated to have increased to 13.1 percent from 12 percent pre-pandemic (based on USD1.9/day in 2011 PPP terms). - Low fiscal buffers and reliance on mining expose Botswana to external shocks, increasing the urgency of economic diversification. ### Recent economic developments - Vaccination and health response: - Over 95 percent of the eligible population fully vaccinated as of May 2022. - State of Emergency: April 2020 to September 2021; only 22 days of schooling lost due to lockdowns because of double-shift system and remote learning programs. - Additional allocation of P2 billion in the 2022 budget for vaccine rollout and booster shots; government plans a vaccine manufacturing plant. - Inflation: - Annual CPI inflation averaged 6.7 percent in 2021 and 10.5 percent during January-May 2022. - Core inflation averaged 5.9 percent in 2021 and 6.5 percent in the first quarter of 2022. - Fiscal outcomes: - Fiscal deficit narrowed to 2.7 percent of GDP in FY2021–22 from 11.1 percent of GDP in FY2020–21. - Non-mining/non-SACU revenue rose by 1½ percent of GDP compared to FY2020–21 due to VAT rate, fuel levy, and withholding tax on dividends increases and strengthened tax administration. - Government Investment Account (GIA) increased to 5.7 percent of GDP from 3 percent in FY2020–21; pre-pandemic average was 18 percent of GDP. - Monetary policy: - BoB raised the Monetary Policy Rate (MOPR) in late-April and June 2022 by a cumulative 101 basis points. - Seven-day BoB certificate (BoBC) rate replaced the Bank Rate as the new monetary policy rate to strengthen transmission. - Financial sector: - Commercial bank credit grew by 5.1 percent in 2021 from 4.5 percent in 2020. - Non-performing loans (NPLs) remained at 4.2 percent of total loans at end-2021. - Household debt is 23.4 percent of GDP; share of credit to households is 65½ percent. - Liquidity conditions tightened and funding costs, particularly for smaller banks, are increasing. - External sector: - Current account deficit narrowed to ½ percent of GDP from 8.7 percent in 2020. - Reserves at end-2021: USD 4.8 billion (6 months of imports or 205 percent of the standard ARA metric), after SDR allocation of USD 189 million. - BoB maintained the downward crawl rate at 2.9 percent throughout 2021, resulting in a broadly unchanged REER. ### Outlook and risks - Growth projections: - Growth expected to moderate to 4¼ percent in 2022 and settle at 4 percent from 2023 (staff steady-state potential growth estimate: 4 percent based on 1995–2021 sample). - Inflation projections: - Inflation projected at 11 percent in 2022 and 5.8 percent in 2023. - Fiscal consolidation and external position: - Expenditures projected to fall by 2¼ percent of GDP through FY2022–24 owing to lower wage bill (-1½ percent of GDP) and less transfers and subventions (-¾ percent of GDP). - Consolidation and higher SACU transfers will narrow the deficit; reserves projected to increase moderately over the medium term. - Key risks (enumerated): - Commodity price path: abrupt slowdown in China or protracted war in Ukraine could lower diamond demand; prolonged sanctions against Russia could increase demand for Botswana’s diamonds. - Other external shocks: more lethal COVID-19 variants, faster tightening in advanced economies, and climate shocks could hamper tourism, trigger capital flow volatility, exert pressure on reserves, and threaten agriculture, mining, and tourism. - Domestic risk: shortfalls in planned fiscal consolidation could erode buffers, requiring sharper adjustment with negative effects on growth. - Upside: successful consolidation and implementation of the Economic Recovery and Transformation Plan (ERTP) could diversify the economy and lift medium-term growth prospects. - Quantitative sensitivities: - Empirical estimate: elasticity of Botswana’s growth to demand from trading partners of 1.8. - Staff estimate of the war in Ukraine’s impact relative to pre-war baseline: -½ ppt in 2022 and -¼ ppt in 2023. ### Authorities’ views - Authorities broadly agreed with staff’s outlook and risks assessment. - They noted the war in Ukraine could support demand for synthetic diamonds. - They intend to use digital technologies to improve traceability of diamonds sourced in Botswana. ### Policies to ensure durable growth and rebuild buffers A. Macroeconomic Policies — Fiscal Policy - Authorities’ objectives: - Rein in government spending, align spending with development objectives, and restore fiscal buffers to pre-COVID levels. - Revenue measures: raise fees and service charges; improve tax administration (review taxation laws, use of ICT, increased tax audits) starting FY2022–23. - Expenditure measures: across-the-board annual salary increase of five percent for FY2022–25 agreed with three public service trade unions; contain wage bill by savings on vacancies, allowances, overtime; cut subventions to SOEs through rationalization. - Restructuring and rationalizing ministries and SOEs; find private sector partners to some SOEs. - Target social spending better, improve public investment management (relying more on PPPs), and strengthen accountability and governance. - Social protection and temporary support: - Staff estimates additional support of P500 million in FY2022–23 to help vulnerable households cope with war spillovers; could be partly financed by higher mining revenue and have negligible impact on 2022 fiscal deficit. - Fiscal consolidation rationale and risks: - Under the baseline medium-term consolidation plan, fiscal position would turn into surplus by 2024 and financial assets in the Pula fund could be replenished by 2031. - Additional buffers of about 3–5 percent of GDP would be needed to deal with negative shocks of the size above the 75th percentile (simulation assumptions: baseline consolidation, nominal return on asset of 9 percent, growth at potential in the long-term, and debt stabilizing at its 2027-level). - Staff recommends using part of higher-than-expected mining revenue to support vulnerable households while saving the rest. - Wage bill and public wage policy: - Containing the wage bill is key; average public wage premium estimated at 42 percent (using 2019Q4 Quarterly Multi-Topic Survey and Mincer equation with propensity score matching). - Recommendations: adopt evidence-based pay-setting (independent pay review body); link pay to performance; award grade progression only within competitive promotion and notch increments; rationalize allowances; strengthen human resource management; develop communication strategy for buy-in. - Fiscal rule and medium-term fiscal framework (MTFF): - Recommend formalizing a new fiscal rule (an expenditure rule combined with a floor on liquid financial assets) to provide long-term income to partially replace depleted mineral assets and build buffers; include fiscal rule in NDP 12 and give it a strong legal basis. - Governance, accountability, and public investment: - Support digitalization of public services, improved public procurement and project implementation, and increased fiscal transparency. - Restructuring ministries should enhance efficiency but oversight and accountability are paramount; audited parastatal financial statements should be published regularly. - Targeted public investment could promote climate resiliency while facilitating private sector growth. - Social benefits targeting: - Progress on Single Social Registry and Proxy Means Testing to improve targeting; social spending is high relative to comparators and large resources also go to the richest, so better targeting needed. - Revenue diversification: - Domestic revenues cover about 35 percent of government expenditure; need to diversify tax base to reduce dependence on mineral and SACU revenue. - Potential measures: raise property tax rates and coverage (requires accelerating land registration and improving valuation); counter international tax avoidance. - Financing strategy: - Budget support from World Bank, AfDB, and Government of Japan plus domestic bond issuance reduce need to draw down buffers in FY2022–23. - Planned regular issuance of medium- and long-term maturities to build yield curve, support secondary market, and reduce financing costs. - Additional efforts needed to enhance efficiency and liquidity of domestic bond market, including a robust medium-term debt strategy. - Introduction of inflation-linked bonds under consideration by authorities. *International Monetary Fund — Botswana chapter* ### 21. Stronger fiscal management is needed to contain risks, including contingent liabilities ### 21. Stronger fiscal management is needed to contain risks, including contingent liabilities ### Fiscal risks, PPPs, and public financial management - The authorities have incorporated fiscal risk analysis into the budget process with technical assistance from the Fund. - Need to enhance capacity and adopt an appropriate legal and institutional framework to safeguard public finances from risks arising from public-private partnerships (PPPs). - PFM systems could be strengthened by: - Incorporating risk analysis (including climate risks) into the MTFF. - Broadening fiscal statistics to include local government, special funds, and extra-budgetary entities. ### Authorities’ views on fiscal policy and social protection - Authorities broadly agreed with staff’s recommendations and emphasized strong commitment to support the most vulnerable and to fiscal consolidation. - The 2022 budget has already increased allocations for social welfare programs; authorities will monitor the inflationary impact of the war in Ukraine on the vulnerable and introduce additional measures through existing safety mechanisms if needed; measures would be temporary and targeted. - On wage policy and public employment: - Recently announced wage settlement is above the budgeted amount but keeps nominal wage increases in line with cumulative inflation over the last decade. - Authorities plan to eliminate half of existing vacancies and implement a skills audit to ensure proper allocation of human resources. - Government restructuring intended to broaden planning without undermining the Ministry of Finance’s expenditure oversight; a three-stage appraisal and selection method for major capital projects will be adopted in planning for NDP12 to address high efficiency gaps in development spending. - Tax policy work (with Fund assistance) includes updating the Income Tax Act to address avoidance opportunities (e.g., transfer pricing) and updating the VAT Act to incorporate taxation of the digital economy. ### Monetary and exchange rate policy — trade-offs and stance - Near-term trade-offs between reducing inflation pressures and supporting the recovery. - Inflation drivers in recent years: public wage bill, administered prices, and global oil prices. - Risks: inflation pressures from food and energy costs could last longer given the war in Ukraine, with risk of expectations becoming unanchored; advanced economies’ monetary policy normalization and the war could weaken global demand and undermine domestic recovery. - BoB actions and staff assessment: - BoB’s rate increases in April and June were appropriate; additional tightening will be needed going forward. - Inflation expectations for 2023 have risen above 7 percent. - Real interest rates remain strongly negative despite recent hikes. - In absence of further tightening, broad-based rise in inflation risks de-anchoring expectations, which would erode households’ purchasing power, worsen poverty, and require sharper tightening later with negative consequences for growth and employment. - Monetary reform: - Transition from the Bank Rate to the MOPR welcomed; enhanced communication recommended. - BoB will need to closely monitor interbank rates and capital flows to assess appropriateness of the MOPR level. - Restrictions on the current prime lending rate (introduced as part of transition) should be lifted in due course as they could undermine financial intermediation and access. - Regular open market operations at fixed-rate full-allotment, complemented by fine-tuning operations, should smooth volatility. - Foster development of unsecured interbank and REPO markets to strengthen monetary policy transmission. - Operational timing and mechanics: - Effective April 28 2022, MOPR replaced the Bank Rate as the anchor policy rate. ### Inflation determinants and outlook - Inflation expectations for 2023: above 7 percent. - BoB expects inflation to return within the 3–6 medium-term objective range in the third quarter of 2023 (authorities’ view). ### External position and reserves - For 2021, the REER and CA gaps are estimated at 1½ percent and -½ percent of GDP, respectively. - Fiscal consolidation and higher diamond exports should strengthen the current account and support reserves accumulation. - Capital outflows have increased in recent years and are likely to remain strong, largely reflecting offshore investing by pension funds. - Net International Investment Position (NIIP) stood at 37.7 percent of GDP in 2021 and is projected to increase over the medium term. - Reserves remained above the ARA metric adequacy levels and are projected to strengthen. - Policy recommendation: maintain the current crawl rate as domestic interest rates rise and continue to allow flexibility within the current exchange rate regime. ### Financial sector policies — soundness and risks - Financial sector appears sound, but risks need management. - End-2021 key metrics: - Average return-on-equity of commercial banks: 21.6 percent. - NPLs: 4.3 percent of gross loans. - Remaining vulnerabilities and policy considerations: - Most COVID-19 crisis-related regulatory forbearance measures removed, but lower Capital Adequacy Ratio (CAR) and Prudential Reserve Requirements (PRR) remain in place. - Returning CAR to 15 from 12.5 percent is unlikely to have a significant effect given banks’ existing adequacy ratios. - Increasing PRR for commercial banks from 2.5 to 5 percent could reduce liquidity and increase funding costs, particularly for smaller banks. - Credit to households dominates bank lending and is mostly concentrated in unsecured lending, creating a strong sovereign-banks nexus given household reliance on government-related income. - Several state-owned development financial institutions are not profitable. - Staff recommendations: - Close monitoring of risks and recording and provisioning for NPLs. - Review remaining forbearance measures and implications of removing them. - Enhance crisis preparedness and resolution frameworks; expedite amendment of the Banking Act and operationalize the deposit insurance mechanism. - These topics to be explored in the Botswana Financial Sector Assessment Program (FSAP) commencing in June 2022 and anticipated to be completed by end-May 2023. - Financial deepening: - Domestic securities market underdeveloped; banks historically invested in short-maturity BoBCs. - Progress toward a collateral registry for movable assets (planned 2024 deadline) with additional measures needed: establishment of a land registry and improving valuation. - Fintech and payments: - BoB plans to assess fintech impact on national payments system and monetary transmission (including through digital currency). - Establishing a national switch could promote financial inclusion by reducing costs and time for mobile transactions. - Authorities keep regulatory forbearance measures in place and will monitor closely; commitment to expanding fintech, modernizing national payments system, and improving interoperability and collateral availability. ### Structural policies and the “Reset Agenda” - Government priorities: public service reforms, digitalization, and value chain development (initial sectoral focuses on minerals, tourism, food, and education). - To transform Botswana into a high-income economy by 2036 requires sustaining average annual growth of 5 to 6 percent and developing new durable growth sources outside mining (examples: financial services via fintech, manufacturing, tourism). - Job creation challenge: - Need to create jobs to reduce unemployment and absorb 35,000 annual labor market entrants. - Recommended complementary reforms: - Enhancing accountability, competition, and governance with performance targets and export focus; improve governance to control rent-seeking and corruption. - Avoid reliance on import substitution and restrictions to promote industrialization; recent restrictions on selected food and beverage imports have created domestic shortages, increased prices, and reduced consumer welfare. - Instead, target infrastructure, attract FDI, provide R&D subsidies, support start-ups, reform network and electricity industries, strengthen export and investment promotion institutions, and coordinate policy implementation. - Implement planned visa and work permit reforms to meet business skills needs. - Deepen trade integration including through AfCFTA; note implementation delays on Rules of Origin and tariffs and that Botswana is among 11 countries out of 54 that have not yet ratified the agreement. ### Tourism, poverty, inequality, and labor market impacts - Travel and tourism sector accounts for a high share of export earnings and employment and needs a clear post-pandemic strategy; supporting eco-tourism is warranted. - COVID-19 crisis impact: - Stalled poverty reduction and inequality remains high. - Net job loss of 46,577 through 2021Q4. - Authorities plan to increase social spending and strengthen social protection efficiency and targeting; diversification is needed to accelerate job creation and ensure gains are broadly shared. ### Climate policy, renewable energy, and digital transition - Botswana Climate Change Policy prioritizes adaptation and mitigation to support food security, job creation and protection of carbon sinks. - Staff welcomes licensing of one of the two planned 50 megawatts of renewable energy projects and encourages accelerating plans to increase renewable power generation, reduce fossil fuel subsidies, and introduce carbon taxes. - Developing a pipeline of projects and improving PFM measures could help unlock more resources from climate funds; climate financing could be mobilized through green bonds and setting up carbon credit markets. - Together with the World Bank, Botswana has secured funding to support design and implementation of a carbon tax; no specific implementation timeline established yet. Government is updating its Nationally Determined Contribution in line with the Paris Climate Agreement. - Digital transition: - Staff supports Smart Botswana Strategy to digitalize public service delivery (e.g., aggregated data portal from all ministries), leverage smart technologies for food security, and digitalize education. - National E-Commerce Strategy promotes digital technology in commercial and public spaces; significant progress made in internet penetration. *Source: 1bwaea2022002 — IMF staff report excerpt on Botswana.* ### 39. The authorities view restrictions on imports of food and vegetables as a necessary ### 1bwaea2022002 - 39. The authorities view restrictions on imports of food and vegetables as a necessary ### Import restrictions and food security - Authorities view restrictions on imports of food and vegetables as a necessary step to reduce food import dependency and support domestic producers. - Rationale cited: - Large annual imports of food have weakened the external position. - Large annual imports have caused high food reliance on other countries. - Large annual imports have discouraged domestic production. - Program objectives related to agriculture and citizen empowerment: - Create jobs and increase competitiveness of the agricultural sector. - Short-term situation: - Food shortages were most apparent during the first few months, but situation has been stabilizing. - Authorities agreed they would closely monitor the food situation and adapt if needed. - The restrictions will be reviewed biannually. ### Anti-corruption and transparency (Other surveillance issues) - Staff commends Botswana’s decision to prioritize the fight against corruption. - Remaining gaps and recommendations: - Address conflict of interests when public officials hold private businesses. - Introduce a system to detect and prevent conflict of interests for public officials in line with international best practices. - Implement a strong institutional framework and good practices and processes. - Publish the execution and audit reports of the COVID-19 Relief Fund Order and all related procurement contracts, including beneficial owner information of companies awarded public contracts. ### Data, statistics, and AML/CFT developments - Data provision is broadly adequate for surveillance. - Statistical improvements noted: - Rebasing national accounts estimates to 2016. - Constructing supply and use tables. - Compiling monetary statistics for other financial corporations. - Staff urges: - Move quickly to GFSM 2014. - Close data gaps on government financial statistics, including classification of current and capital expenditures, local government, special funds, and extra-budgetary entities (including SOEs). - AML/CFT progress: - The Financial Action Task Force removed Botswana from its list of jurisdictions under increased monitoring (the “grey list”) in October 2021. - Removal could further boost confidence, attract capital inflows, and support economic activity. - Authorities amended the Financial Intelligence Act, including to reinforce provisions on beneficial ownership information. - Staff encourages continued efforts to strengthen the effectiveness of the AML/CFT regime, including consolidated supervision, DNFBPs monitoring, and enforcement/sanctions. ### Staff appraisal — macroeconomic performance and outlook - Recovery and drivers: - Botswana’s economy is one of the few in sub-Saharan Africa where output has recovered to its pre-COVID level. - Recovery underpinned by careful management of mineral resources and a track record of very strong policies and policy frameworks. - Medium-term outlook and sources of support: - Recovery expected to continue through the medium term, but there is significant uncertainty. - Growth will be supported by higher prices and demand for diamonds, increased copper production, less COVID-19 mobility restrictions, and more international tourist arrivals. - Strong fiscal adjustment will strengthen buffers, particularly those held by the government. - Downside risks: - Strength of commodity markets. - China’s growth. - Pace of tightening of monetary policy in advanced economies. - Climate shocks. - Socioeconomic challenges: - Unemployment has risen close to historic highs. - Poverty and inequality have worsened following the COVID-19 pandemic. - With inflation above the central bank’s objective range, providing support to the most vulnerable through the government social programs remains a priority in the near term. - Improving the targeting of social programs will reduce leakages. - Over the medium term, sustained reduction in poverty and inequality will require further progress on diversification and digitalization reforms as well as moving away from inward-looking policies such as import restrictions. ### Fiscal policy and public finances - Importance of fiscal consolidation: - Implementing the planned medium-term fiscal consolidation is critical to rebuild buffers and financial assets for future generations. - The consolidation plan will achieve fiscal surplus over the medium term and rebuild the Government Investment Account to shield the economy against shocks and build an asset base. - Institutional and reform requirements for success: - Adopt a public wage formation framework. - Anchor fiscal policy in a credible medium-term fiscal framework. - Formalize a new fiscal rule in National Development Plan 12. - Proceed with joint ventures of identified SOEs with private sectors and efforts to close the tax gap. - Increase transparency and accountability in spending to help catalyze public support for fiscal reform and revenue collection. - Improve public investment efficiency and the quality of public procurement to help create fiscal space. - Significant risks to the consolidation plan noted. ### Monetary policy and financial sector - Inflation and policy response: - Bringing inflation back within the Bank of Botswana’s objective range will require additional monetary tightening. - In the absence of further tightening, the broad-based rise in inflation risks de-anchoring inflation expectations and requiring even sharper tightening later with negative effects on growth. - Monetary policy implementation: - The newly created monetary policy rate will over time enhance monetary policy transmission and implementation. - Strengthened monitoring and communication would help limit risks of volatility in interbank rates and disruptive capital flows. - Lifting the restrictions on the current prime lending rate in due course would contribute to the efficiency of financial intermediation and financial access. ### External sector and exchange rate policy - External position: - The external position is broadly in line with fundamentals and desirable policies. - Fiscal consolidation and higher diamond exports should strengthen the current account and support reserves accumulation. - Exchange rate policy guidance: - Maintaining the current crawl rate would be appropriate as domestic interest rates rise. - Continuing to allow flexibility within the current exchange rate regime should help the economy adjust to shocks and facilitate structural transformation. ### Reset Agenda and structural reform priorities - A successful implementation of the Reset Agenda will enhance Botswana’s resilience and ensure sustained high-job rich growth. - Expected outcomes: - Diversify the economy towards financial services (facilitated by fintech), manufacturing, and tourism. - Transform Botswana into a high-income status as per Vision 2036. - Priority reforms: - Enhance accountability, competition, and governance. - Deepen trade integration. - Accelerate the energy transition. - Caution: - Reliance on import substitution and restrictions to promote industrialization could be counterproductive. *Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1bwaea2022002.pdf* ### 50. Staff recommends that the next Article IV consultation with Botswana be held on the ### 50. Staff recommends that the next Article IV consultation with Botswana be held on the standard 12-month cycle. ### COVID-19 Developments - New infections and deaths have dropped; weekly cases dropped to almost zero in February 2022. - Vaccine rollout is amongst the most rapid in SSA. - Most restrictions have been lifted; mobility has increased. - Domestic travel recovered fully; international travel has yet to recover to its pre-COVID level. ### Real Sector - Real GDP has recovered to the pre-pandemic level, driven by a strong rebound in the mining sector and positive growth rates of other sectors. - Net exports and consumption contributed most strongly to growth. - Youth and overall unemployment continue to climb despite GDP recovery. - Headline CPI breached the BoB’s 3-6 percent objective range. - Sharp increase in tradable inflation driven by higher fuel inflation that has passed through to transport inflation. - Consumer Price Index: Tradable and Non-Tradeable (Percent change, yoy) chart referenced (series include Headline CPI, Non-tradeable, Tradeable, Inflation expectation for this year). ### Fiscal Sector - The fiscal deficit is projected to narrow sharply due to lower expenditure and higher revenue. - Improvement mainly reflects a recovery in diamond revenue, nonmineral income tax and increases in the VAT rate. - With buffers eroding, authorities reined in government spending, reducing the wage bill and subventions. - Increased domestic issuance of government bonds resulted in sharp increases in long-term bond yields. ### Financial Sector - Credit growth has recovered from the pandemic, with faster growth of household credit than business. - The bank rate has fallen to historic low; with inflation rising rapidly, the real rate is negative. - Liquid assets in commercial banks decreased as the government sought to finance the deficit with longer-term government bonds. - The banking sector remains well capitalized with low and stable NPLs and ample provisions. ### External Sector - The current account balance has narrowed sharply, reflecting a substantial increase in diamond net exports. - The financial account has recovered at a slower pace, reflecting weak FDI and continued portfolio outflows. - Terms of trade strengthened on the back of higher diamond prices. - Reserves are projected to improve over the medium term. - The NEER depreciated in line with the crawling peg target while the REER remained broadly unchanged. ### Climate Monitor - Botswana’s emissions have been rising since 1990, and way above the 2030 target. - Botswana has a comparative disadvantage in exports of low carbon technology products. - The risk of climate-related hazards in Botswana has been relatively low, but extreme weather risks are rising with warmer temperatures. - Botswana’s environmental taxes, concentrated on transport, are low compared to the global average. - Botswana spent 2.3 percent of GDP on implicit fuel subsidies, lower than the global average of 6.23 percent. ### Selected Economic Indicators (Highlights from Table 1, 2018–27) - Real GDP: 2018 4.2; 2019 3.0; 2020 -8.7; 2021 11.4; 2022 4.3; 2023 4.0; 2024 4.0; 2025 4.0; 2026 4.0; 2027 4.0 - Mineral GDP: 2018 8.4; 2019 -3.7; 2020 -26.5; 2021 29.9; 2022 5.4; 2023 2.8; 2024 1.8; 2025 1.6; 2026 2.0; 2027 1.9 - Consumer prices (average): 2018 3.2; 2019 2.7; 2020 1.9; 2021 6.7; 2022 11.0; 2023 5.8; 2024 4.5; 2025 4.5; 2026 4.5; 2027 4.5 - Diamond production (millions of carats): 2018 24.5; 2019 23.7; 2020 16.9; 2021 23.2; 2022 24.0; 2023 24.4; 2024 24.7; 2025 25.7; 2026 25.4; 2027 26.6 - Overall central government balance (deficit –) as % of GDP: 2018 -5.1; 2019 -8.6; 2020 -11.1; 2021 -2.7; 2022 -1.8; 2023 0.6; 2024 1.8; 2025 1.9; 2026 2.0; 2027 2.0 - Total central government debt (% of GDP): 2018 19.5; 2019 21.5; 2020 24.2; 2021 24.3; 2022 25.0; 2023 24.6; 2024 22.4; 2025 20.3; 2026 18.3; 2027 16.3 - Gross official reserves (end of period, US$ millions): 2018 6,657; 2019 6,172; 2020 4,944; 2021 4,806; 2022 4,968; 2023 5,292; 2024 5,892; 2025 6,639; 2026 7,584; 2027 8,744 - Months of imports of goods and services: 2018 10.4; 2019 10.0; 2020 6.5; 2021 5.9; 2022 6.2; 2023 6.2; 2024 6.7; 2025 7.3; 2026 8.1; 2027 9.3 ### Balance of Payments (Highlights from Table 2, 2018–27, US$ millions) - Current Account Balance: 2018 67; 2019 -1,155; 2020 -1,292; 2021 -903; 2022 215; 2023 0; 2024 927; 2025 1,095; 2026 1,285; 2027 1,493 - Exports, f.o.b.: 2018 6,594; 2019 5,260; 2020 4,292; 2021 7,345; 2022 8,941; 2023 8,773; 2024 9,806; 2025 10,272; 2026 10,735; 2027 11,236 - Diamonds (exports): 2018 5,923; 2019 4,750; 2020 3,714; 2021 6,621; 2022 7,816; 2023 7,325; 2024 8,144; 2025 8,311; 2026 8,477; 2027 8,647 - Imports, f.o.b.: 2018 -6,108; 2019 -6,326; 2020 -6,262; 2021 -7,967; 2022 -8,554; 2023 -8,367; 2024 -8,813; 2025 -9,119; 2026 -9,417; 2027 -9,739 - Overall Balance (increase reserves +): 2018 338; 2019 -1,594; 2020 -1,947; 2021 -586; 2022 162; 2023 323; 2024 600; 2025 748; 2026 945; 2027 1,159 - Nominal GDP (US$ millions): 2018 17,032; 2019 16,696; 2020 14,930; 2021 17,614; 2022 18,403; 2023 19,423; 2024 20,920; 2025 22,475; 2026 24,295; 2027 26,148 ### Central Government Operations (Highlights from Tables 3a–3c, 2018/19–2027/28) - Total Revenue and Grants (billions of pula): 2018/19 53.5; 2019/20 50.2; 2020/21 46.2; 2021/22 63.1; 2022/23 71.4; 2023/24 79.3; 2024/25 86.1; 2025/26 91.6; 2026/27 96.9; 2027/28 103.2 - Total Expenditure and Net Lending (billions of pula): 2018/19 62.4; 2019/20 65.4; 2020/21 65.8; 2021/22 68.5; 2022/23 75.6; 2023/24 77.8; 2024/25 81.4; 2025/26 85.9; 2026/27 90.7; 2027/28 96.4 - Overall Balance (A) (billions of pula): 2018/19 -8.9; 2019/20 -15.2; 2020/21 -19.6; 2021/22 -5.4; 2022/23 -4.2; 2023/24 1.5; 2024/25 4.8; 2025/26 5.7; 2026/27 6.2; 2027/28 6.8 - Primary Balance (deficit -) (percent of GDP): 2018/19 -4.9; 2019/20 -8.5; 2020/21 -10.9; 2021/22 -2.3; 2022/23 -1.3; 2023/24 1.2; 2024/25 2.3; 2025/26 2.2; 2026/27 2.2; 2027/28 2.2 - Non-Mineral Primary Balance (percent of GDP, fiscal-year basis): 2018/19 -15.5; 2019/20 -16.7; 2020/21 -16.3; 2021/22 -13.9; 2022/23 -14.0; 2023/24 -10.1; 2024/25 -9.4; 2025/26 -9.0; 2026/27 -8.4; 2027/28 -8.0 - GDP (fiscal year; billions of pula): 2018/19 175.2; 2019/20 177.4; 2020/21 177.1; 2021/22 201.6; 2022/23 225.5; 2023/24 245.8; 2024/25 268.4; 2025/26 291.6; 2026/27 316.5; 2027/28 344.0 ### Monetary Survey (Highlights from Table 4, 2018–27) - Net Foreign Assets (bn pula): 2018 80.1; 2019 73.7; 2020 63.0; 2021 65.2; 2022 68.9; 2023 74.7; 2024 84.0; 2025 95.5; 2026 109.7; 2027 127.0 - Net Domestic Assets (bn pula): 2018 -6.2; 2019 6.0; 2020 21.2; 2021 22.7; 2022 24.9; 2023 33.2; 2024 34.3; 2025 32.5; 2026 31.7; 2027 27.6 - Monetary Base (annual % change): 2018 17.5; 2019 5.4; 2020 -7.0; 2021 -42.1; 2022 33.2; 2023 14.3; 2024 9.4; 2025 7.9; 2026 10.1; 2027 9.0 - Broad Money (M2) (annual % change): 2018 8.3; 2019 8.0; 2020 5.9; 2021 5.0; 2022 6.3; 2023 14.3; 2024 9.4; 2025 7.9; 2026 10.1; 2027 9.0 - Credit to the private sector (annual % change): 2018 6.6; 2019 7.1; 2020 5.3; 2021 5.4; 2022 10.2; 2023 10.3; 2024 9.4; 2025 9.8; 2026 9.6; 2027 9.7 - Broad Money (M2) levels (end period, bn pula): 2018 78.5; 2019 84.8; 2020 89.8; 2021 94.3; 2022 100.2; 2023 114.4; 2024 125.2; 2025 135.0; 2026 148.6; 2027 162.0 ### Financial Soundness Indicators (Table 5, selected series, 2015–Mar-22) - Regulatory capital to risk-weighted assets: 2015 20.0; 2016 19.2; 2017 21.9; 2018 17.9; 2019 18.5; 2020 20.0; 2021 17.4; Mar-22 18.1 - Nonperforming loans to total gross loans: 2015 3.7; 2016 4.9; 2017 5.3; 2018 5.4; 2019 4.8; 2020 4.3; 2021 4.2; Mar-22 4.2 - Bank provisions to nonperforming loans: 2015 54.7; 2016 57.1; subsequent years not shown in table extract. - Return on assets: 2015 2.0; 2016 2.3; 2017 1.9; 2018 2.8; 2019 2.3; 2020 1.9; 2021 1.2; Mar-22 2.5 - Liquid assets to total assets: 2015 15.4; 2016 16.3; 2017 13.4; 2018 6.1; 2019 5.8; 2020 14.7; 2021 12.7; Mar-22 12.1 - Foreign currency-denominated liabilities to total liabilities: 2015 13.0; 2016 14.6; 2017 13.9; 2018 14.3; 2019 12.7; 2020 14.9; 2021 22.2; Mar-22 25.7 *Source: Botswana authorities and IMF staff estimates and projections.* ### Annex I. External Stability Assessment ### Annex I. External Stability Assessment ### Key findings and outlook - Botswana’s external position is broadly in line with medium-term fundamentals and desired policies in 2021. - Reserves are above the ARA metric adequacy levels. - Over the medium term: - The current account moves into surplus and reserves import coverage increases. - Maintaining this outlook requires: implementation of the planned fiscal consolidation; advancing structural reforms to strengthen competitiveness and promote diversification; and continuing to allow the real exchange rate to respond to changes in fundamentals. ### Current account developments (2020–2021 and near-term outlook) - The current account deficit narrowed sharply in 2021, largely driven by an increase in diamond exports. - Historical and 2021 figures: - Current account deficit was 8.7 percent of GDP in 2020 and narrowed to 0.5 percent of GDP in 2021. - Total goods exports increased by 13 percentage points of GDP in 2021. - Goods imports increased by 3.3 percent of GDP in 2021. - Other exports grew by 25 percent in 2021; other imports grew by 20 percent in 2021. - Services trade balance: deficit of 3.8 percent of GDP in 2021 (from 4.2 percent of GDP in 2020). - Income and transfers balance: declined from 7.9 percent of GDP in 2020 to 6.7 percent of GDP in 2021 (reflecting lower SACU receipts and higher dividends distributed to nonresidents). - Outlook: - The current account balance is expected to move into surplus in 2022. - Average current account expected to be about 4.6 percent of GDP over the medium term, driven by higher diamond production and fiscal consolidation. ### Financial account and net foreign assets (NFA) - Financial account developments: - Financial account deficit narrowed from 4.4 percent of GDP in 2020 to 2.8 percent of GDP in 2021. - FDI remained depressed in 2021. - Portfolio outflows remained fairly strong in 2021, mainly due to offshore investments by pension funds. - Other investment balance fell in 2021 due to increased proceeds repatriated to foreign headquarters. - Net foreign assets: - NFA declined from 36.8 percent of GDP in 2020 to 33.4 percent of GDP in 2021 (reflecting drawdowns to finance the fiscal deficit and strong import growth). - NFA are expected to grow over the medium term in line with smaller fiscal deficits and an improved trade balance. ### Real effective exchange rate (REER) - REER movements: - REER appreciated in 2021 by 3 percent, mainly due to the rebound in diamond prices. - REER had depreciated by about 1 percent on average in 2020 following the decision to increase the crawl depreciation rate from -1.5 to -2.9 percent in May 2020. - Policy framework: - Over the medium term, the REER is projected to remain unchanged. - Policy setting reflects relatively low capital mobility and the Bank of Botswana’s practice of adjusting the pula in line with expected inflation differentials with major trading partners and basket weights. - The currency basket comprises the SDR and the South African rand, with a 45 percent weight for the latter. ### International reserves and import coverage - Level and composition: - Reserves amounted to US$4.8 billion in 2021 (US$138 million lower than 2020). - Equivalent to 27 percent of GDP or 6 months of imports in 2021. - The authorities’ preferred measure (excluding diamond imports for re-exporting) would amount to 9 months at end-2021. - Within the Pula Fund: about four-fifths of reserves are kept in the sovereign wealth fund and one-fifth in a “liquidity” portfolio; within the Pula Fund about 80 percent is owned by the BoB and the remainder by the government in a Government Investment Account in domestic currency. - Outlook: - 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. ### External assessment methodology (EBA-lite) and results - Methodology: - The assessment uses External Balance Assessment (EBA)-lite models for the current account (CA) and REER. - EBA-lite treats CA and REER as endogenous and determined jointly by fundamentals, policy variables, and cyclical conditions, measured relative to a weighted average of other countries. - EBA-lite results for 2021 (model estimates, in percent of GDP): - CA-Actual: -0.5 - Cyclical contributions (from model): 0.0 - COVID-19 adjustor (+) 1/: 0.6 - Additional temporary/statistical factors (+): 0.0 - Natural disasters and conflicts (-): -0.1 - Adjusted CA: 0.2 - CA Norm (from model) 2/: 0.7 - Adjusted CA Norm: 0.7 - CA Gap: -0.5 - of which Relative policy gap: 0.1 - Elasticity (trade balance to REER): -0.34 - REER Gap (in percent): 1.5 - Notes: - 1/ Additional cyclical adjustment to account for the temporary impact of the pandemic on tourism (2.48 percent of GDP). - 2/ Cyclically adjusted, including multilateral consistency adjustments. - Interpretation and staff judgment: - The CA-EBA-lite approach estimates a CA gap equivalent to -½ percent of GDP, with a CA norm of 0.7 percent of GDP in 2021. - Given the estimated elasticity of the trade balance to REER of -0.34, the CA-EBA-lite methodology suggests the REER would need to depreciate by 1.5 percent for the CA deficit to be reduced to the norm. - From the EBA-lite REER approach, the REER would need to depreciate by 14 percent to reach the norm. - Staff gives more weight to the CA-EBA-lite approach because it assesses one-off factors driving imbalances in 2020 and 2021 more directly than the REER approach. ### Reserves adequacy (ARA metric) and vulnerabilities - ARA methodology notes: - The IMF’s reserves adequacy metric for market access countries is a risk-weighted measure combining multiple sources of risk: (i) export earnings; (ii) short-term debt at remaining maturity (short term debt plus debt service); (iii) portfolio investments plus medium and long-term debt; and (iv) broad money. - The weights for risks are computed as financial outflows at the tenth percentile of estimated annual distributions during exchange market pressure episodes. - Separate distributions are estimated for fixed exchange rate regimes or capital controls; Botswana’s operational arrangement is treated closer to a fixed exchange rate for this purpose. - Additional buffers are suggested for commodity exporters; diamond futures prices are unavailable, so staff considers using an elevated exports weight (25 percent) to reflect diamond volatility. - Weights used for a fixed exchange rate (assumed for Botswana): - Short-term Debt: 30% - Other Liabilities: 20% - Broad Money: 10% - Exports: 10% - Adequacy outcomes: - As a result of reserve drawdowns, reserves declined but remain adequate at 205 percent of the standard ARA metric in 2021. - Reserves would represent 139 percent of the adjusted ARA metric if Botswana’s dependence on volatile diamond receipts is reflected by increasing the weight of exports to 25 percent (instead of 10 percent) in the ARA calculation. ### Policy implications and recommendations (from the assessment) - Fiscal policy: - Implement the planned fiscal consolidation to support the external outlook and rebuild buffers. - Structural reforms: - Advance structural reforms to strengthen competitiveness and promote diversification to reduce dependence on diamonds. - Exchange rate policy: - Continue to allow the real exchange rate to respond to fundamentals; consider more flexibility if external shocks warrant it. - Reserve and liquidity management: - Maintain adequate reserves, managing the Pula Fund and liquidity portfolio to preserve short-term buffers. *International Monetary Fund staff calculations and assessments as presented in Annex I. External Stability Assessment.* ### 0.5 percent of GDP by 2024 as mineral revenue continues to recover and consolidation advances. ### 1bwaea2022002 - 0.5 percent of GDP by 2024 as mineral revenue continues to recover and consolidation advances. ### Fiscal outlook and public debt trajectory - Under current policies, the fiscal surplus is expected to reach 1¾ percent of GDP by the end of the medium term. - Gross financing needs: - Projected to decline from 8.4 percent in FY2021–22 to 4.7 percent in FY2023–24. - Projected to average about 1.9 percent of GDP over the medium term. - Financing composition assumption: - Gross financing needs are assumed to be filled by continued issuance of domestic debt (to deepen the domestic bond market) and external debt including from multilateral institutions and bilateral loans. - Public debt trajectory: - Public debt is estimated to have peaked at 24½ percent of GDP in FY2021–22. - Projected to decline to 12½ percent in FY2026–27. ### Impact of external shocks (including the war in Ukraine) - The war in Ukraine is not expected to have a material impact on Botswana’s debt dynamics: - Botswana’s external debt is mostly in the form of bilateral and multilateral loans, reducing sensitivity to global financial market shocks. - The war could weaken short-term growth but could also increase demand and prices for Botswana’s diamond, raising mineral revenue. - On balance, given Botswana’s low debt position, the estimated impact of the war on debt dynamics is small. ### Stress test scenarios and outcomes - Growth shock: - Scenario: lower real GDP growth, reducing real GDP growth by one standard deviation (about 4 percent) for two consecutive years. - Outcome: public debt ratio would peak at 30 percent, still below Botswana’s debt ceiling of 40 percent of GDP; gross financing needs peak at a level lower than 10 percent of GDP. - Primary balance shock: - Scenario: higher primary deficit by about 2.5 percent of GDP in FY2022–23 and by about 1 percent of GDP in FY2023–24 (e.g., lower than anticipated mineral revenue or absence of fiscal consolidation). - Outcome: debt-to-GDP ratio and financing needs could be elevated but still peak at relatively low levels. - Combined macro-fiscal shock: - Scenario: most severe scenario of lower growth, higher primary deficit, and associated higher interest rate. - Outcome: public debt remains below the debt limit of 40 percent of GDP and stabilizes at about 25 percent of GDP in FY2026–27; gross financing need would peak around the 10 percent of GDP threshold by FY2022–23 but decline rapidly and stabilize below 5 percent of GDP. - Contingent liabilities shock: - Scenario: a large share of contingent liabilities related to SOEs’ debt is called; assumes one standard-deviation shock to growth with associated deterioration of the primary balance and a slight increase in interest rates. - Outcome: debt would rise to about 27 percent of GDP in FY2022–23 (vs. baseline of 24 percent of GDP). ### Key baseline statistics (selected from Table AIII.1 and Figures) - Nominal gross public debt (percent of GDP): 2019: 23.8; 2020: 21.5; 2021: 23.9; 2022: 24.6; 2023: 24.2; 2024: 22.0; 2025: 18.6; 2026: 15.5; 2026 (projection end): 12.5. - Public gross financing needs (percent of GDP): 2019: 3.5; 2020: 10.3; 2021: 14.8; 2022: 8.4; 2023: 5.6; 2024: 4.7; 2025: 3.2; 2026: 1.3; 2026 (final projection): 1.25. - Real GDP growth (in percent): 2019: 4.7; 2020: 0.0; 2021: -4.0; 2022: 9.5; 2023: 4.2; 2024: 4.0; 2025: 4.0; 2026: 4.0. - Inflation (GDP deflator, in percent): 2019: 5.3; 2020: 0.3; 2021: 4.4; 2022: 2.5; 2023: 8.1; 2024: 4.8; 2025: 5.2; 2026: 4.5; 2026 (final): 4.4. - Nominal GDP growth (in percent): 2019: 9.9; 2020: 1.3; 2021: -0.2; 2022: 13.8; 2023: 11.7; 2024: 9.1; 2025: 9.2; 2026: 8.6; 2026 (final): 8.5. - Effective interest rate (in percent): 2019: 2.6; 2020: 3.5; 2021: 3.1; 2022: 2.7; 2023: 3.3; 2024: 3.8; 2025: 4.0; 2026: 4.0; 2026 (final): 4.4. - Cumulative change in gross public sector debt (2019–2026): -11.4 (percent of GDP). - Identified debt-creating flows cumulative (2019–2026): -16.5 (percent of GDP). - Primary (noninterest) revenue and grants cumulative (2019–2026): 188.9 (percent of GDP). - Primary (noninterest) expenditure cumulative (2019–2026): 183.7 (percent of GDP). ### Realism of baseline assumptions and forecast track record - Historical forecast track record indicates optimistic bias in projections of real GDP growth in 2020 and in past primary balance projections, reflecting COVID-19 impacts and volatility in diamond revenue and SACU receipts. - Forecast errors in the primary balance imply the need to improve the authorities’ fiscal consolidation plans. - The projected 3-year adjustment in the cyclically adjusted primary balance (CAPB) is relatively strong; the average size of adjustment has a percentile rank of 44 percent of the historical experience for high-debt market access countries (reflecting front-loaded fiscal consolidation and elevated diamond revenue in FY2021–2022). ### Capacity development strategy and TA priorities - Background priorities: - Strengthen fiscal institutions (including spending efficiency and revenue mobilization). - Enhance effectiveness of monetary policy. - Improve financial sector oversight. - Broaden statistical reporting. - Capacity development assessment findings: - Cooperation on TA and training remains strong; authorities have shown ownership and follow-up on recommendations. - Implementation has been relatively good in financial sector, monetary policy, and BOP statistics; more mixed progress in public financial management, national accounts, and fiscal statistics. - Effectiveness of TA has been hampered by staffing shortages, limited absorption capacity, and lack of expertise in drafting regulations. - Greater hands-on support, resident advisors, peer-to-peer exchange, and comparisons with international best practices are recommended to improve TA outcomes. - Planned initiatives and needs: - Authorities aim to subscribe to the IMF’s Special Data Dissemination Standard (SDDS); challenges remain with industrial production index (IPI) and government finance statistics (GFS) compilation. - Botswana is part of the Cyber Risk Regulation and Supervision Capacity Development Initiative, requiring IMF TA. - A resident expert on monetary operations and debt market development has been granted; FSAP consultations to begin in mid-2022. - Detailed TA priorities (selected): - General macroeconomic analysis: refine near-term forecasting tool using a composite index of leading indicators. - Revenue mobilization and administration: training on legal drafting; assist with taxation of the digital economy; roadmap for electronic billing machines (EBMs); training on Double Taxation Avoidance Agreements negotiation and implementation. - Public financial management and fiscal framework: improve coverage and quality of fiscal reporting; strengthen identification, monitoring and management of fiscal risks; assist in designing a new fiscal rule; develop framework for contingent liabilities including PPPs. - Central bank operations: strengthen monetary policy implementation; assist with drafting Central Bank / Macroprudential Oversight Law to ensure autonomy and governance. - Financial supervision and regulation: review LCR NSFR regulation; assist with stress-testing NBFIs; review cybersecurity regulation and undertake cybersecurity risk examination; conduct FSAP; strengthen crisis preparedness and bank resolution framework; design fintech oversight arrangements. - Monetary and macroprudential operations: modernize liquidity management and forecasting; assist with Deposit Protection Fund concept paper and legal drafting; provide training on local currency bond market development; recalibrate stress-testing models for macro-financial scenarios. - Statistics: develop PPI and owner-occupier housing component of the CPI; complete migration to GFSM 2014 and extend coverage to general government; improve BOP and IIP data to BPM6 requirements; extend monetary and financial statistics coverage to other financial corporations. *Source: IMF staff.* ### Annex V. Designing a Fiscal Rule for Botswana ### Annex V. Designing a Fiscal Rule for Botswana ### Background - Botswana’s current 40 percent of GDP gross debt limit does not effectively guide fiscal policy. - Public and publicly guaranteed debt is around 24 percent of GDP in FY2021/22. - Financial assets have declined sharply: - Government Investment Account at the Bank of Botswana: from 45 percent of GDP in 2007/08 to 6 percent of GDP in 2021/22. - Foreign reserves: from 68 percent of GDP to 26 percent of GDP over the same period. - Fiscal balance trajectory: - Surplus of 13 percent of GDP in FY2006/07. - Deficits averaging 6 percent of GDP in the past five years. - Revenue and expenditure patterns: - Total revenues fell from more than 43 percent of GDP in 2007/08 to around 32 percent of GDP in 2021/22. - Around half of the revenue decline is due to falling mineral revenues, compounded with declining non-mineral and South African Customs Union (SACU) revenues. - Expenditure has averaged 37 percent of GDP over the past decade. - Wage bill particularly high at around 14 percent of GDP on average. - Rationale for a fiscal rule: - To benefit future generations, build buffers against shocks, and preserve space for development spending. ### Fiscal Anchor and Operational Rules - Permanent Income Hypothesis (PIH) proposed as a long-term fiscal anchor; operationalized via a medium-term expenditure rule plus a floor on liquid financial assets. - PIH framework: - Converts net financial wealth (existing financial assets + net present value of future resource revenue − public debt) into a constant income stream to finance a permanent non-resource deficit. - Key implementation challenges: uncertainty over parameters (notably future resource revenue) and typically large fiscal adjustments required. - PIH quantitative assumptions and implications: - Diamond production: averaging 22 million carats per year over the next thirty years. - Diamond prices: assumed constant in real Pula terms. - Net present value of Botswana’s diamond wealth: about 210 percent of non-resource GDP in 2021/22 (total wealth of 230 percent of non-resource GDP). - Real interest rate assumption: 5 percent. - If the income stream from financial wealth is constant in pula terms: - Immediate PIH implementation would require the non-mineral deficit to decline to 9.5 percent of non-mining GDP in FY2022/23. - Decline to about 3.5 percent by FY2050/51, before slowly converging towards zero. - Gradual approach to reach PIH norm: - Follow staff baseline over the medium term, then apply an additional adjustment of ¼ percent of non-resource GDP annually over 2027–52. - This brings the primary balance from -8.8 percent of non-resource GDP to -1.1 percent of non-resource GDP by end of the adjustment period. - Advantage: provides more fiscal space in the medium term for development spending supporting diversification and growth. - Trade-off: larger non-mining primary deficits for longer and slower accumulation of financial wealth. ### Adjustment Paths, Expenditure Guidance, and Shock Scenarios - Expenditure-based operationalization: - A well-calibrated expenditure path can deliver the target non-mining primary deficits. - Under the gradual approach, most adjustment is expected during staff baseline consolidation until 2027. - Beyond the medium term, capping real expenditure growth at about 2 percent annually (with non-mining GDP growth assumed at 3 percent per year) would be sufficient to meet the target. - Note: asymptotically expenditure growth cap can be relaxed as non-resource primary balance approaches zero and financial wealth declines, with real expenditure growth converging toward 3 percent. - Caution against permanent adverse shocks: - Example scenario: permanent negative shock on mining revenue equal to a loss of 25 percent of the net present value of future diamond revenue. - Under this shock, almost all financial wealth would be depleted by the transition period. - Sustainable deficit would be only 0.5 percent of non-resource GDP (and declining) beyond 2041. - Required real expenditure growth cap would be about 1 percent over 2027–41. - Stress-testing: - If planned fiscal consolidation stalled after reaching a deficit of 13 percent of non-resource GDP, Botswana would reach negative total wealth within 10 years, lowering future living standards and creating an unsustainable path. ### Buffers and Liquidity Considerations - Volatility and buffer needs: - Over the past ten years, mineral revenues constituted about 40 percent of total revenues (14 percent of non-mining GDP). - Volatility of mining revenues: standard deviation of 3.3 percent of non-resource GDP. - One simple buffer rule: hold a buffer covering one-standard deviation of mining revenues (3.3 percent of non-resource GDP) each year. - A more prudent buffer to cover the duration of an NDP: about 20 percent of non-resource GDP. - Presence of tail risks suggests larger buffers may be warranted. - Buffer composition and financing: - Prefer accumulation of financial assets, keeping part in liquid assets to ensure access to funds when needed. - Accumulating liquid assets does not preclude issuing public debt to support domestic financial market development and liquidity, provided the desired path for net financial assets is maintained. - Some countries can borrow when buffers are required; others struggle to access external financing in times of need—hence the emphasis on accumulated liquid assets. ### Institutions and Implementation Steps - Communication and buy-in: - Clear public communication of fiscal objectives, how the rule will achieve them, and how compliance will be ensured is essential to build support (civil society, private sector) and manage escape clauses in emergencies. - Embed rule in policy frameworks and legislation: - The fiscal rule should be included in each National Development Plan (NDP), especially quantitative objectives, and set out in legislation. - Ideally, legislation would be introduced simultaneously with the next NDP and include transparent escape clauses. - Strengthen fiscal institutions and reporting: - Continue development of a medium-term fiscal framework (MTFF) to provide institutional support to the fiscal rule; anchor annual budgets on the MTFF with explanations for deviations and corrective measures in subsequent budgets. - Ministry of Finance must ensure Ministries, Special Funds, and Extra-Budgetary Institutions adhere to aggregate expenditure ceilings. - Strengthen reporting on state-owned enterprises (SOEs) and revenue forecasting. - Consider creating an independent fiscal council, request external reviews from fiscal experts, or establish an independent fiscal unit within the Office of the Auditor General to improve accountability and oversight. - A potential binding constraint: lack of capacity. - Broaden fiscal coverage and improve data: - Avoid circumvention of the rule by broad fiscal account coverage and corresponding financial supervision. - Accountant General should approve a new Chart of Accounts (informed by the Government Finance Statistic Manual of 2014). - Consolidate Special Funds, below-the-line accounts, and Extra-Budgetary Units into Central Government fiscal accounts. - Improve reliability and availability of fiscal statistics by publishing time series, including financial accounts of local authorities and SOEs, and an annual tax expenditure report. *Prepared by IMF staff as Annex V to the source PDF.* ### Annex VII. Tourism in Botswana: Recent Development and ### Annex VII. Tourism in Botswana: Recent Development and Post-Pandemic Policy Options ### Overview and economic contribution - Tourism is the second largest source of export earnings and a critical sector for employment and poverty reduction. - According to the latest update of Botswana’s latest available tourism satellite accounts (TSA) compiled by UN World Tourism Organization (UNWTO), it directly accounted for 4.9 percent of GDP in 2016. - The total contribution of tourism was estimated at 7.6 percent of GDP in 2016 (UNWTO). The World Travel and Tourism Council (WTTC) TSA estimated a total contribution of tourism to GDP at 11.6 percent in 2016. - Tourism provides about 74,000 jobs directly and indirectly (18 percent of total formal employment). - Tourism brings economic activity to rural areas and communities, and employs a high share of young workers and women. ### Performance indicators (selected) - Internal Tourism Expenditure (P’ billion): UNWTO: 2006: 4.1; 2009: 5.8; 2016: 14.5. WTTC: 2006: 5.9; 2009: 5.6; 2016: 13.0. - Tourism Direct Gross Value Added (P’ billion): UNWTO: 2006: 1.9; 2009: 2.9; 2016: 7.7. WTTC: 2006: 1.8; 2009: 2.8; 2016: 6.5. - Tourism direct contribution to GDP (percent of GDP): UNWTO: 2006: 3.4; 2009: 3.7; 2016: 4.9. WTTC: 2006: 3.1; 2009: 3.8; 2016: 3.8. - Tourism total contribution to GDP (percent of GDP): UNWTO: 2006: 4.2-6.0; 2009: 4.6-6.5; 2016: 7.6. WTTC: 2006: 9.9; 2009: 11.5; 2016: 11.6. - Source: UNWTO, WTTC, Department of Tourism. ### Performance and competitiveness - Tourism has grown steadily over the past decade but at a rate lower than peers with niche tourism (Kenya, Maldives, South Africa, Tanzania, and Uganda). - More than half of leisure tourists come from neighboring states (South Africa, Zambia, Namibia), followed by U.S., Canada, Australia, and Europe; few tourists come from Asia. - World Economic Forum’s Travel and Tourism Development Index (TTDI, 2021): Botswana’s score improved in 2021 compared to 2019 but still lags peers. - Main barriers to tourism growth identified: inadequate product range and diversity (e.g., lack of cultural resources), shortcomings and limited access to air travel and service infrastructure, inadequate local participation and ownership, weakness in tourism planning, lack of international openness (e.g., low availability of air connections to the country), and low qualification of the labor force. ### COVID-19 impact and recovery - International tourist arrivals declined by 80½ percent in 2020 relative to the pre-pandemic level. - Estimated loss in visitor spending of around USD 400 million (WTTC). - The sector’s total contribution to GDP dropped from 10.4 percent of GDP in 2019 to 5.5 percent of GDP in 2020. - Estimated job loss of 17,000 in 2020. - Botswana’s inbound tourism began recovering in late-2020, supported by a high-value, low-volume, nature-based tourism strategy and a large fiscal relief package including the Industry Support Loan Facility of P1.3 billion that benefitted the tourism industry. - Tourism expected to rebound in 2022 and return to the pre-COVID level in 2023. ### Government policy and diversification efforts - The 2020 revised tourism policy aims to broaden the product base (sports, health, religious, MICE, game farming and research) and increase geographic spread outside the Okavango Delta and Chobe National Park areas. - UNWTO and the Ministry of Environment, Natural Resources Conservation and Tourism are collaborating on a National Tourism Strategy and Master plan for 2022–2032. ### Post-pandemic policy options (as identified) - Strengthening Botswana’s health system can enhance its attractiveness in a post-COVID era. As shown by the 2019 TTCI, Botswana’s health and hygiene score is still low (3.3 well below the world median of 5.4) partly driven by HIV-related issues. - Continued support for low-density and eco-sustainable tourism services can help reduce health risks and build a more-resilient and environment-friendly economy. This include improving access to ecotourism sites, providing business development advisory to enhance the quality of services, and increasing its social and local impact. - Increasing specialized training can develop domestic skilled tourism labor and improve service quality. Training institutions focusing on hospitality/tourism with specific knowledge on business management, customer service, marketing, and tourism-related technology are needed. - Leveraging digital technology to shift services onshore and adapt to different customer services can secure a greater share of the value chain and boost tourism earnings. For example, some companies have achieved this by shifting the booking service online to directly interact with consumers rather than through other overseas booking agents. Digitalization can also help facilitate greater access to opportunities to women (e.g., through telework), broadening inclusion. - Diversification of tourism by further broadening product range, geographic focuses, as well as visitor origins (e.g., attracting visitors from Asia). - Continued efforts to enhance the country’s infrastructure (air connections) and address remaining issues raised in World Bank (2012) (e.g., land access and conservation) are needed. - Improving collection and analysis of data on the tourism sector is critical to track its economic impact and inform policy design, including compiling TSAs annually, collecting spending information by various categories of visitors (both domestic and international), financial statistics of tourism companies, and information on employment, ownership, and community engagement, as well as improving the quality of data on tourism exports. *Annex VII. Tourism in Botswana: Recent Development and Post-Pandemic Policy Options — IMF country document content.* ### 5. Addressing climate challenges both on adaptation and mitigation fronts will ### 5. Addressing climate challenges both on adaptation and mitigation fronts will ### Financing from climate funds and concessional sources - Botswana secured about 38 million dollars (0.22 percent of GDP) of financing over the past five year from multilateral climate funds, of which 37 million was provided for restoration of vegetation in communal grazing lands that are particularly impacted by climate change. - The financing secured from multilateral sources as a percent of GDP was broadly in line with sub-Sahara Africa average of 0.17 percent over the last five years, but lower than a number of other countries in the Southern Africa region. - Significant scope exists to mobilize more concessional financing from climate funds, but this will require: - developing a pipeline of well-designed projects incorporated into its National Adaptation Plan; and - obtaining accreditation from climate funds to secure direct financing without an intermediary. - Accreditation requirements include improving fiduciary standards through better public financial management, meeting environmental and social safeguards, and compliance with other climate fund policies such as information disclosure procedures. - Note: Botswana secured funding to support the design and implementation of a carbon tax. However, no specific implementation timeline has been established yet. - Note: The project grant from Green Climate Fund was approved in 2021 to be implemented with the help of Conservation International Foundation. ### Green bonds and private sector instruments - Green bonds are presented as fixed-income instruments with a climate or sustainability component to channel private sector financing for low-carbon technologies, climate resilient infrastructure, and renewable energy production. - Namibia issued green bonds to finance greener building and renewable energy production in March 2022. - Botswana Stock Exchange already have annual sustainability reports and authorities also provide guidance on environmental, social and governance reporting which could facilitate green bond issuance (Tyson, 2021). ### Carbon credit market and forest preservation arrangements - A carbon credit market would allow emissions to be traded by putting a price on carbon and enable government bodies, private sector, and development partners to purchase credits as needed. - Carbon registries are required to monitor and certify carbon emission reductions. - Carbon credit markets can be used to set up arrangements between development partners and local governments to preserve forests. Example: Gabon has a multi-donor $150 million arrangement to receive financing in return for forest preservation. ### Insurance and risk-pooling mechanisms - Insurance can help mitigate risks from natural disasters. - Example collaborations: - UNDP, Global Environment Facility, Government of Ethiopia and Oromia Insurance provided weather-based insurance to vulnerable households in Ethiopia. - Africa Risk Capacity allows for risk pooling among African Union member states and provides insurance for weather-based calamities. ### State-contingent debt instruments - Bonds can be issued with clauses that allow for debt service relief when there is a climate shock; these bonds typically command a higher premium than regular bonds but can free up government resources after natural disasters such as flood, drought, or a storm. - Example: Grenada introduced “hurricane clauses” in its bond which provides it debt service relief if it is hit by a large hurricane. ### Implementation and capacity considerations - Mobilizing additional climate finance will require: - pipeline development for well-designed projects integrated into Botswana’s National Adaptation Plan; - improvements in public financial management and fiduciary frameworks to meet accreditation standards; - adherence to environmental and social safeguards and climate fund information disclosure procedures; - leveraging existing domestic market infrastructure (e.g., Botswana Stock Exchange sustainability reporting) to attract private climate finance such as green bonds. *Source: BOTSWANA — STAFF REPORT FOR THE 2022 ARTICLE IV CONSULTATION — INFORMATIONAL ANNEX* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1bwaea2022002.pdf_