## 1bwaea2024006-print-pdf - 2022

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### Context and recent developments
- Severe diamond market downturn driven by weaker global demand for rough diamonds and a sharp increase in inventories; diamond exports had accounted for almost 90 percent of goods exports over the past decade and declined by a third in 2023.
- Diamond sales recovered at the start of 2024, but diamond production is expected to be low in 2024 amid a weak global recovery, pressures from cheaper lab-grown diamonds, and drought in Southern Africa.
- Public buffers materially eroded over two decades: government deposits at the central bank declined from 50 to 4 percent of GDP between 2007 and 2023; FX reserves at the central bank fell from 91 to 25 percent of GDP over the same period.
- Structural constraints: mining is capital-intensive and finite; public investment quality relatively low; youth unemployment about one third; high inequality.
- Policy window: general elections in late-2024 and launch of a new NDP present an opportunity for reforms toward greater private sector participation, a diversified export base, and more efficient public sector.

### Outlook and key projections
- Real GDP growth (Annual percent change): -8.7 (2020), 11.9 (2021), 5.5 (2022), 2.7 (2023), 1.0 (2024), 5.2 (2025), 4.8 (2026), 4.0 (2027), 4.0 (2028), 4.0 (2029).
- Nonmineral real growth (Annual percent change): -3.5 (2020), 7.9 (2021), 4.9 (2022), 2.6 (2023), 5.1 (2024), 4.1 (2025), 4.4 (2026), 4.4 (2027), 4.4 (2028), 4.5 (2029).
- GDP per capita (US dollars): 5,863 (2020), 7,244 (2021), 7,726 (2022), 7,250 (2023), 7,341 (2024), 8,003 (2025), 8,602 (2026), 9,146 (2027), 9,726 (2028), 10,437 (2029).
- Consumer prices (average): 1.9 (2020), 6.7 (2021), 12.2 (2022), 5.1 (2023), 3.8 (2024), 4.5 (2025), 4.5 (2026), 4.5 (2027), 4.5 (2028), 4.5 (2029).
- Diamond production (millions of carats): 16.9 (2020), 22.7 (2021), 24.5 (2022), 25.1 (2023), 21.1 (2024), 23.3 (2025), 25.0 (2026), 25.5 (2027), 26.0 (2028), 26.4 (2029).
- Box finding: Debswana plans to reduce production by 10–20 percent in 2024; rough diamond sales ended 2023 more than 50 percent lower than the previous year.

### Fiscal developments, risks, and recommended calibration
- FY2023 fiscal stance: loosened from a budget balance in FY2022 to an estimated 4.7 percent of GDP deficit in FY2023, driven by contraction in mineral revenues and higher current and capital spending.
- Key fiscal aggregates (percent of GDP):
  - Total revenue and grants: 25.6 (2020), 29.0 (2021), 29.1 (2022), 28.4 (2023), 28.2 (2024), 28.8 (2025), 28.6 (2026), 28.8 (2027), 27.6 (2028), 26.7 (2029).
  - Mineral revenue: 5.3 (2020), 10.6 (2021), 13.3 (2022), 7.4 (2023), 5.8 (2024), 9.5 (2025), 9.9 (2026), 9.8 (2027), 8.9 (2028), 8.4 (2029).
  - Total expenditure and net lending: 36.5 (2020), 31.4 (2021), 29.1 (2022), 33.1 (2023), 34.2 (2024), 30.6 (2025), 29.1 (2026), 28.3 (2027), 27.1 (2028), 26.2 (2029).
  - Overall balance (deficit –): -10.9 (2020), -2.4 (2021), 0.0 (2022), -4.7 (2023), -6.0 (2024), -1.7 (2025), -0.5 (2026), 0.5 (2027), 0.5 (2028), 0.5 (2029).
  - Non-mineral non-SACU balance: -25.3 (2020), -19.5 (2021), -18.8 (2022), -21.3 (2023), -21.3 (2024), -18.2 (2025), -16.7 (2026), -15.9 (2027), -14.7 (2028), -13.8 (2029).
  - Net Debt: 15.3 (2020), 12.8 (2021), 12.6 (2022), 16.9 (2023), 22.2 (2024), 21.6 (2025), 20.2 (2026), 18.2 (2027), 16.2 (2028), 14.6 (2029).
  - Total central government debt: 18.7 (2020), 18.7 (2021), 18.1 (2022), 20.1 (2023), 22.6 (2024), 22.1 (2025), 20.7 (2026), 20.1 (2027), 20.0 (2028), 20.0 (2029).
  - Government deposits with the BoB: 3.4 (2020), 5.9 (2021), 5.5 (2022), 3.3 (2023), 0.4 (2024), 0.4 (2025), 0.6 (2026), 1.9 (2027), 3.8 (2028), 5.5 (2029).
- Staff recommendations:
  - Near term: some fiscal relaxation warranted given fall in mineral revenues and widening output gap, but reprioritize ambitious capital budget to limit deficit increase and ensure highest value for money.
  - Medium term: planned fiscal consolidation critical to stop depletion of financial buffers; staff assesses targeting a 1 percent of GDP fiscal surplus would generate sufficient savings to protect the budget against major shocks.
  - Revenue side: scope exists to increase revenues alongside expenditure restraint.
  - Institutional support: adopt a fiscal rule, strengthen medium-term budgeting, and consider a well-designed SWF.

### Monetary policy, transmission, and external position
- Monetary policy stance: assessed as appropriate; inflation peaked at 14.6 percent in August 2022, declined and stayed within BoB’s 3–6 percent objective range; inflation stood at 3.0 percent in May 2024. Food inflation decreased from 17.8 percent in March 2023 to 4.0 percent in May 2024.
- Policy rate actions: MoPR raised by 151 basis points between April and August 2022 and cut by a cumulative 50 basis points since December 2023; two 25 basis point declines reduced the MoPR from 2.65 to 2.15 percent.
- Transmission weaknesses: limited transmission beyond short end; need to deepen interbank, credit, and government bond markets; two thirds of consumption basket consists of imported or administered goods, constraining monetary steering of inflation.
- External indicators and projections:
  - Trade balance (percent of GDP): -13.2 (2020), -3.5 (2021), 2.7 (2022), -2.4 (2023), -6.9 (2024), -0.9 (2025), 0.2 (2026), 0.3 (2027), 0.0 (2028), 0.0 (2029).
  - Current account balance (percent of GDP): -10.3 (2020), -1.7 (2021), -1.2 (2022), -0.6 (2023), -2.0 (2024), 1.5 (2025), 1.2 (2026), 1.2 (2027), 0.6 (2028), 0.2 (2029).
  - Gross official reserves (end of period, millions of USD): 4,944 (2020), 4,806 (2021), 4,281 (2022), 4,757 (2023), 4,587 (2024), 4,879 (2025), 5,198 (2026), 5,600 (2027), 5,852 (2028), 6,014 (2029).
  - Months of imports of goods and services: 6.4 (2020), 6.6 (2021), 7.1 (2022), 7.3 (2023), 6.3 (2024), 6.0 (2025), 5.8 (2026), 5.6 (2027), 5.4 (2028), 5.1 (2029).
- External assessment: 2023 external position broadly in line with fundamentals; FX reserves projected to decrease to about 5 months of imports by 2029.

### Financial sector outlook and recommendations
- Soundness indicators (end-April 2024):
  - Banking sector capital adequacy ratio: 19.7 percent (regulatory threshold: 12.5 percent).
  - Nonperforming loans (NPLs): 3.8 percent of gross loans.
  - Liquid assets-to-deposit ratio: 25.2 percent (requirement: 10 percent).
- Credit and NBFI:
  - Commercial credit growth: averaged 10 percent (y/y) over the past 12 months.
  - Private credit stock: 30 percent of GDP at end-2023 (two thirds to households); compare to 55 percent of GDP average for upper middle-income countries.
  - Non-bank financial institution system (mostly pension funds and life insurers): strong and resilient.
  - Projected private credit growth: 8½ percent over the coming year; convergence towards mid-point of 11 percent in subsequent years.
- FSAP findings and staff recommendations:
  - Under a severe diamond market slowdown, banking sector solvency would not be materially affected; liquidity stress limited to a few smaller banks.
  - Accelerate implementation of 2023 FSAP recommendations: move to implement Basel III liquidity standards; enhance risk-based supervision; reinforce crisis management framework (ELA, bank resolution); deploy macroprudential tools to address household debt risk.
  - Specific market reforms to strengthen transmission: encourage repo transactions, publish granular money market data, widen HQLA definition, deepen government bond market, revise primary dealer arrangements, provide greater price-transparency.

### Growth, structural reforms, and inclusion priorities
- Near-term drivers and risks:
  - 2024 growth projected at 1 percent due to reduction in diamond mining; medium-term convergence to 4 percent.
  - Drivers in 2024: diamond trading recovery and construction projects financed by fiscal expansion (water and electricity).
  - Drought estimated to have limited impact given small agricultural share and coal-powered electricity.
- Priority structural measures:
  - SOE modernization.
  - Improved infrastructure for doing business: internet, energy, logistics.
  - Trade facilitation measures and leveraging AfCFTA.
  - More efficient social protection system and active labor market policies.
  - Financial inclusion reforms: improve credit reporting, operationalize movable collateral registration, introduce innovative financial products, increase digital payments.
- Social and labor indicators:
  - Unemployment (as of Q3 2023): 25.9 percent overall; 34.4 percent for the youth.
  - Only 8 percent of MSMEs obtained bank credit in 2019.

### Risks and illustrative downside scenario
- Key risks:
  - Emergence and price competition from cheaper lab-grown diamonds.
  - Announced sale of De Beers by its UK parent company.
  - Weak global demand for luxury goods (especially China).
  - Drought in Southern Africa.
- Upside/offsetting factors:
  - Growing middle classes in India and China.
  - Profitability of large natural stones (>10 carat) not replicable by current lab-grown technology.
  - G7 ban on imports of Russian origin diamonds.
  - De Beers’ marketing strategy to maintain premium for natural diamonds.
- Downside illustrative scenario (diamond revenues remain at current low level, real US$ constant):
  - Government debt ratio would reach 120 percent of GDP over the next ten years if government spending is maintained as a share of GDP.
  - Annual growth would be reduced by 1–1½ percentage points on average.
  - FX reserves would be fully depleted by the end of the period unless most additional fiscal deficits were externally financed.

### Debt Sustainability Analysis — key outcomes
- Final assessment: Botswana assessed to have a low overall risk of sovereign stress.
- Public debt (Percent of GDP) — baseline:
  - Actual 2023: 20.1; 2024: 22.6; 2025: 22.1; 2026: 20.8; 2027: 20.1; 2028: 20.1; 2029: 19.7; 2030: 20.0; 2031: 20.2; 2032: 20.5; 2033: 20.5.
- Primary deficit (Percent of GDP): 2023: 4.2; 2024: 5.3; 2025: 0.9; 2026: -0.4; 2027: -1.3; 2028: -1.4; 2029: -1.4; 2030: -0.8; 2031: -0.4; 2032: -0.1; 2033: 0.0.
- Gross Financing Needs (GFN; Percent of GDP): 2023: 8.2; 2024: 8.7; 2025: 5.4; 2026: 3.4; 2027: 3.3; 2028: 2.9; 2029: 4.1; 2030: 4.4; 2031: 5.5; 2032: 5.1; 2033: 5.1.
- Stress-test findings: commodity price shock and natural disaster shock — under both, GFN trend downwards and debt is stable or declining.
- Policy implication: accelerate diversification reforms and be proactive in managing public debt to keep roll-over risks low.

### External stability assessment — highlights
- 2023 external position: broadly in line with fundamentals and desirable policies.
- NIIP and reserves:
  - NIIP improved slightly to 30 percent of GDP in 2023 from 29 percent in 2022.
  - Gross assets 71 percent of GDP in 2023; gross liabilities 41 percent of GDP in 2023.
  - Foreign reserves USD 4.8 billion at end-2023, or 7.3 months of imports; revaluation gains in 2023 estimated at USD 552 million.
  - Reserve coverage at end-2023: 235 percent of the ARA metric; ARA metric corresponded to 3.1 months of imports.
- REER and exchange rate regime:
  - Crawling peg against a basket (South African Rand 45 percent; SDR 55 percent); nominal crawl depreciation rate maintained at 1.5 percent in January 2024.
  - Staff suggests small adjustments to the REER targeting regime could help price competitiveness (e.g., calibrate nominal crawl to support inflation objective or modify weights).
- Capital and financial accounts: financial account surplus in 2023 at 1.6 percent of GDP; low vulnerabilities from capital flows given low external debt and “buy-and-hold” investor base.
- Recommended policy: combine a budget rule supporting a medium-term fiscal surplus with a financing fund model for any SWF to safeguard external stability.

### Measurement of fiscal impulse and medium-term fiscal benchmarks (Annex V)
- Fiscal impulse measured as change in fiscal balance excluding mineral and SACU revenues.
- Stability and sustainability calibration:
  - Assumed convergence towards 1 percent of GDP surplus over two years; pace illustrated as 0.5 percent of GDP consolidation a year.
  - Staff estimate: non-mining output gap deteriorates by 2.4 percent between 2022 and 2024; assumed fiscal multiplier 0.5 → need for 4.8 percent of GDP stimulus over two years to offset the gap.
  - Depending on weights between sustainability and stability, recommended fiscal relaxation over two years: 1.9 to 3.4 percent of GDP; equal weights → 1.9 percent of GDP expansion.
  - Staff’s estimated change: 2.6 percent of GDP change in the non-mining/non-SACU deficit, within the 1.9–3.4 percent range.
- Annex V scenarios (selected):
  - Scenario 1 (net debt stabilization): Overall balance: -1.2% of GDP; Primary balance: -0.5% of GDP.
  - Scenario 2 (insurance buffer of 8% or 16% of GDP under prudent or risky strategies): Overall balance around -0.1% to 1.1% of GDP; Primary balance from 0.0% to 1.0% of GDP.
  - Scenario 3 (intergenerational equity / PIH): Overall balance targets vary (6% to 9% of GDP1; see source for details).
- Policy recommendation: fiscal surplus target should be re-estimated periodically (best practice: recalibrate fiscal rules every 3–5 years).

### Financial legal and supervisory developments
- Section 43A of the Bank of Botswana (Amendment) Act, 2022 enabled the Botswana Deposit Insurance Scheme (BDIS).
- BDIS Regulations operational from 21 July 2023: establishment of Deposit Insurance Scheme, Deposit Insurance Fund, Deposit Insurance Committee; coverage, funding, staffing provisions.
- Implementation status and actions (ST–MT):
  - Full staff complement appointed; Minister appointed governing body members effective April 1, 2024.
  - Membership certificates issued to licensed banks and Botswana Savings Bank; once-off membership fees collected.
  - Public education campaigns undertaken; 2023 inaugural Annual Report produced.
  - Work started to draft standalone Deposit Insurance Scheme law.
- Crisis management and resolution planning: FSC work program and Technical Working Group established; crisis management and bank resolution framework scheduled into medium term.
- Banking Act and BoB Amendment Act (2023) strengthened financial stability legal basis; deposit insurance introduced in 2023.

### Data adequacy, gaps, and capacity development priorities (Annex X)
- Overall staff assessment: "The data provided to the Fund has some shortcomings but is broadly adequate for surveillance."
- Data heatmap median rating: BABBAAB.
- Noted gaps and issues:
  - Narrow sector coverage of GFS data (limited to Budgetary Central Government).
  - Household survey lacks income and consumption details; limits poverty and inequality measures.
  - Need mapping of infrastructure assets for climate vulnerability (C-PIMA finding).
  - Gender data gaps for literacy, education, financial usage, asset ownership.
  - Authorities do not publish SOE information; TA on SOE fiscal risk analysis not yet implemented.
  - Government fiscal reporting delays due to GABS technical problems; remedial upgrade planned by end-2024.
- Improvements and TA:
  - BOP data for 2021–23 revised; rebasing of national accounts in progress.
  - Since June 2023, BoB published reserves template on IMF portal.
  - Botswana publishes thirteen of the fifteen recommended data categories under e-GDDS; remaining needs for SDDS subscription include coverage, timeliness, and frequency for several categories.

### Staff appraisal and recommendations (summary)
- Botswana faces a severe slowdown from a diamond market contraction in 2023–2024; growth expected to fall to 1.0 percent in 2024 and rebound in 2025 as diamond production recovers.
- Near term: mix of higher fiscal deficit and reprioritization of capital expenditure warranted given widening output gap, but capital projects should be reprioritized to limit deficit increase and ensure value for money.
- Medium term: planned fiscal consolidation to reach a 1 percent of GDP surplus is critical to rebuild buffers and safeguard fiscal sustainability; complement consolidation with institutional reforms (fiscal rule, medium-term budgeting, SWF design) and structural reforms to diversify the economy and boost job creation.
- Financial sector: broadly sound and stable; accelerate implementation of FSAP recommendations to reduce financial risks and strengthen monetary policy transmission.

*Source: Botswana — Staff Report for the 2024 Article IV Consultation (selected extracts and tables).*

### 2022. This reflects weaker global demand for diamonds and a sharp increase in inventories.

### 1bwaea2024006-print-pdf - 2022

### Context and recent developments
- Botswana is experiencing a severe diamond market downturn driven by weaker global demand for rough diamonds and a sharp increase in inventories. Diamond exports had accounted for almost 90 percent of goods exports over the past decade and declined by a third in 2023.
- Diamond sales recovered at the start of 2024, but diamond production is expected to be low in 2024 amid a weak global recovery, pressures from cheaper lab-grown diamonds, and drought in Southern Africa.
- Public buffers have been materially eroded over two decades: government deposits at the central bank declined from 50 to 4 percent of GDP between 2007 and 2023; FX reserves at the central bank fell from 91 to 25 percent of GDP over the same period.
- Botswana’s development model—reliance on minerals and government investment—faces limitations: mining is capital-intensive and finite; public investment quality has been relatively low; youth unemployment is one third; Botswana is among the most unequal countries on the continent.
- The coming year (general elections in late-2024 and launch of a new NDP) is an opportune time for bold reforms to shift the model toward greater private sector participation, a diversified export base, and a more efficient public sector.

### Outlook and key projections
- Real GDP growth: -8.7 (2020), 11.9 (2021), 5.5 (2022), 2.7 (2023), 1.0 (2024), 5.2 (2025), 4.8 (2026), 4.0 (2027), 4.0 (2028), 4.0 (2029) (Annual percent change).
- Nonmineral real growth: -3.5 (2020), 7.9 (2021), 4.9 (2022), 2.6 (2023), 5.1 (2024), 4.1 (2025), 4.4 (2026), 4.4 (2027), 4.4 (2028), 4.5 (2029).
- GDP per capita (US dollars): 5,863 (2020), 7,244 (2021), 7,726 (2022), 7,250 (2023), 7,341 (2024), 8,003 (2025), 8,602 (2026), 9,146 (2027), 9,726 (2028), 10,437 (2029).
- Consumer prices (average): 1.9 (2020), 6.7 (2021), 12.2 (2022), 5.1 (2023), 3.8 (2024), 4.5 (2025), 4.5 (2026), 4.5 (2027), 4.5 (2028), 4.5 (2029).
- Diamond production (millions of carats): 16.9 (2020), 22.7 (2021), 24.5 (2022), 25.1 (2023), 21.1 (2024), 23.3 (2025), 25.0 (2026), 25.5 (2027), 26.0 (2028), 26.4 (2029).
- Box finding: Debswana plans to reduce production by 10–20 percent in 2024; rough diamond sales ended 2023 more than 50 percent lower than the previous year.

### Fiscal developments, risks, and recommended calibration
- FY2023 fiscal stance: The fiscal position loosened from a budget balance in FY2022 to an estimated 4.7 percent of GDP deficit in FY2023, driven by a contraction in mineral revenues and higher current and capital spending.
- Key fiscal aggregates (percent of GDP):
  - Total revenue and grants: 25.6 (2020), 29.0 (2021), 29.1 (2022), 28.4 (2023), 28.2 (2024), 28.8 (2025), 28.6 (2026), 28.8 (2027), 27.6 (2028), 26.7 (2029).
  - Mineral revenue: 5.3 (2020), 10.6 (2021), 13.3 (2022), 7.4 (2023), 5.8 (2024), 9.5 (2025), 9.9 (2026), 9.8 (2027), 8.9 (2028), 8.4 (2029).
  - Total expenditure and net lending: 36.5 (2020), 31.4 (2021), 29.1 (2022), 33.1 (2023), 34.2 (2024), 30.6 (2025), 29.1 (2026), 28.3 (2027), 27.1 (2028), 26.2 (2029).
  - Overall balance (deficit –): -10.9 (2020), -2.4 (2021), 0.0 (2022), -4.7 (2023), -6.0 (2024), -1.7 (2025), -0.5 (2026), 0.5 (2027), 0.5 (2028), 0.5 (2029).
  - Non-mineral non-SACU balance: -25.3 (2020), -19.5 (2021), -18.8 (2022), -21.3 (2023), -21.3 (2024), -18.2 (2025), -16.7 (2026), -15.9 (2027), -14.7 (2028), -13.8 (2029).
  - Net Debt: 15.3 (2020), 12.8 (2021), 12.6 (2022), 16.9 (2023), 22.2 (2024), 21.6 (2025), 20.2 (2026), 18.2 (2027), 16.2 (2028), 14.6 (2029).
  - Total central government debt: 18.7 (2020), 18.7 (2021), 18.1 (2022), 20.1 (2023), 22.6 (2024), 22.1 (2025), 20.7 (2026), 20.1 (2027), 20.0 (2028), 20.0 (2029).
  - Government deposits with the BoB: 3.4 (2020), 5.9 (2021), 5.5 (2022), 3.3 (2023), 0.4 (2024), 0.4 (2025), 0.6 (2026), 1.9 (2027), 3.8 (2028), 5.5 (2029).
- Staff recommendations:
  - Near term: Some fiscal relaxation is warranted given the fall in mineral revenues and the widening output gap, but the ambitious capital budget should be reprioritized to limit the increase in the deficit and ensure highest value for money.
  - Medium term: Planned fiscal consolidation is critical to stop depletion of financial buffers, build resilience, and preserve fiscal sustainability. Staff assesses that targeting a 1 percent of GDP fiscal surplus would generate sufficient savings to protect the budget against major economic shocks.
  - Revenue side: While the adjustment plan emphasizes expenditure restraint, there is scope to increase revenues.
  - Institutional support: Medium-term adjustment should be supported by institutional reforms, including a fiscal rule, more credible medium-term budgeting, and possibly a well-designed SWF.

### Monetary policy and external position
- Monetary policy stance: Assessed as appropriate. Inflation peaked at 14.6 percent in August 2022, declined rapidly, and has remained within the BoB’s 3–6 percent objective range in recent months; inflation stood at 3.0 percent in May 2024. Food inflation decreased from 17.8 percent in March 2023 to 4.0 percent in May 2024.
- Transmission: Monetary policy transmission remains limited, requiring further deepening of the interbank, credit, and government bond markets along the transmission chain.
- External sector projections and indicators:
  - Trade balance (percent of GDP): -13.2 (2020), -3.5 (2021), 2.7 (2022), -2.4 (2023), -6.9 (2024), -0.9 (2025), 0.2 (2026), 0.3 (2027), 0.0 (2028), 0.0 (2029).
  - Current account balance (percent of GDP): -10.3 (2020), -1.7 (2021), -1.2 (2022), -0.6 (2023), -2.0 (2024), 1.5 (2025), 1.2 (2026), 1.2 (2027), 0.6 (2028), 0.2 (2029).
  - Gross official reserves (end of period, millions of USD): 4,944 (2020), 4,806 (2021), 4,281 (2022), 4,757 (2023), 4,587 (2024), 4,879 (2025), 5,198 (2026), 5,600 (2027), 5,852 (2028), 6,014 (2029).
  - Months of imports of goods and services: 6.4 (2020), 6.6 (2021), 7.1 (2022), 7.3 (2023), 6.3 (2024), 6.0 (2025), 5.8 (2026), 5.6 (2027), 5.4 (2028), 5.1 (2029).
- External position assessment: The 2023 external position is assessed to be broadly in line with fundamentals and desirable policies. The external position should soften over the medium term, with FX reserves decreasing to 5 months of imports.

### Financial sector outlook and recommendations
- Financial sector soundness: The financial sector is broadly sound and stable despite the economic slowdown.
- Staff recommendation: Accelerate implementation of 2023 FSAP recommendations to reduce financial risks, including:
  - Move to implement Basel III liquidity standards.
  - Enhance risk-based supervision of banks.
  - Reinforce the crisis management framework (ELA, bank resolution).
  - Deploy macroprudential tools to address household debt risk.
- Authorities’ plans to strengthen oversight, deepening, and inclusion are welcomed.

### Structural reforms and longer-term strategy
- Growth and inclusion challenge: Accelerating growth and job creation requires a fundamental shift toward greater private sector participation, a more diversified export base, and a more efficient public sector.
- Priority structural measures:
  - SOE modernization.
  - Improved infrastructure for doing business: internet, energy, logistics.
  - Trade facilitation measures.
  - More efficient social protection system.
  - Financial inclusion reforms to support small entrepreneurs.
- Institutionalization: These goals could be enshrined in the new NDP and supported by time-bound and well-prioritized action plans.

### Key risks and uncertainties
- Market and structural risks:
  - Emergence and price competition from cheaper lab-grown diamonds.
  - Announced sale of De Beers by its UK parent company (Anglo American’s intention adds uncertainty).
  - Weak global demand for luxury goods, especially in China.
  - Drought in Southern Africa affecting broader economic conditions.
- Upside/offsetting factors:
  - Growing middle classes in India and China.
  - Profitability of large natural stones (>10 carat) not replicable by current lab-grown technology.
  - G7 ban on imports of Russian origin diamonds.
  - De Beers’ marketing strategy to segment the market and maintain a premium for natural diamonds.

*Source: Botswana — Staff Report for the 2024 Article IV Consultation (selected extracts and tables).*

### 8.      After raising the monetary policy rate

### 8.      After raising the monetary policy rate

### Monetary policy actions and interest rates
- The MoPR was raised by 151 basis points between April and August 2022 and subsequently cut by a cumulative 50 basis points since December 2023.
- The two 25 basis point declines reduced the MoPR from 2.65 to 2.15 percent and were motivated by the widening output gap and muted inflation outlook.
- The prime lending rate, mortgage rate, and government securities rates followed the MoPR, dipping at the end of 2023 (Text Figure 2).
- If inflation falls durably below the lower bound of the BoB objective range, additional monetary loosening may be warranted.

### Financial sector soundness and credit
- At end-April 2024:
  - Banking sector capital adequacy ratio: 19.7 percent (regulatory threshold: 12.5 percent).
  - Nonperforming loans (NPLs): 3.8 percent of gross loans (broadly unchanged from the previous year).
  - Liquid assets-to-deposit ratio: 25.2 percent (requirement: 10 percent).
- Commercial credit growth: averaged 10 percent (y/y) over the past 12 months, at the lower end of BoB’s sustainable estimates of 9-13 percent.
- Private credit stock: 30 percent of GDP at end-2023 (two thirds extended to households); compare to 55 percent of GDP average for upper middle-income countries.
- Non-bank financial institution (NBFI) system (mostly pension funds and life insurers): continues to be strong and resilient, with steady asset growth.
- Projected private credit growth over the coming year: 8½ percent—aligned with nominal non-mining GDP growth and near the lower bound of BoB’s sustainable credit growth estimates.
- Over subsequent years: convergence towards the mid-point of 11 percent helps close the credit-to-GDP gap.
- FSAP finding: under a severe diamond market slowdown, banking sector solvency would not be materially affected; liquidity stress limited to a few smaller banks. Insurers resilient; retirement funds (defined contribution) can pass investment risks to members.

### External position and reserves
- Current account deficit: narrowed from 1.2 percent of GDP in 2022 to 0.6 percent in 2023.
- Diamond trade balance: fell from 24.7 to 18.4 percent of GDP between 2022 and 2023.
- Central bank FX reserves at end-2023: USD 4.8 billion or 7.3 months of imports (up from USD 4.3 billion or 7.1 months at end-2022).
- Reserve coverage at end-2023: 235 percent of the ARA metric.
- Revaluation gains in 2023 (equities and bonds held by central bank): estimated at USD 552 million.
- Outlook: FX reserve coverage ratio projected to erode by about two months of imports over the medium term, to 5 months by 2029.

### Growth, inflation, and outlook
- Growth projections:
  - 2024: GDP growth projected to fall to 1 percent (due to reduction in diamond mining).
  - Medium term: converge towards 4 percent.
  - Drivers in 2024: diamond trading (projected to recover after 2023 slump) and construction projects financed by fiscal expansion, especially in water and electricity.
  - Consumer demand pickup expected to support diamond production recovery in 2025.
  - Estimated impact of 2024 drought: limited, given small share of agriculture, high proportion of imported food, and coal-powered electricity.
- Inflation:
  - BoB’s medium-term objective range: 3–6 percent.
  - Inflation expected to remain within 3–6 percent over the medium term.
  - Imported goods and administered prices constitute almost two thirds of the consumption basket.
  - Drought may push up prices of South African food imports, but risk mitigated by better-than-expected harvests elsewhere.
- Downside illustrative scenario (diamond revenues remain at current low level, real US$ constant):
  - Government debt ratio would reach 120 percent of GDP over the next ten years if government spending is maintained as a share of GDP.
  - Annual growth would be reduced by 1–1½ percentage points on average.
  - FX reserves would be fully depleted by the end of the period unless most additional fiscal deficits were externally financed.

### Fiscal stance, projections, and composition
- Fiscal deficit and projections:
  - Staff estimate FY2024 fiscal deficit at 6 percent of GDP.
  - Staff projects a widening of the fiscal deficit by 6 percent of GDP between FY2022 and FY2024, corresponding to a fiscal impulse of 2.6 percent of GDP after excluding SACU and mineral revenues.
- Fiscal composition and drivers:
  - Fiscal expansion between FY2022 and FY2024 reflects mainly faster capital investment for the Transitional NDP and decline in mineral receipts; partly offset by higher SACU transfers and domestic revenue measures.
  - Large part of capital budget increase concentrated in water supply and roads and rail transportation.
  - Staff assumes 80 percent execution of the FY2024 capital budget (in line with past trends).
- Medium-term framework:
  - Authorities’ framework foresees significant tightening to achieve a fiscal surplus by FY2026 through scaled down spending.
  - Calibration exercise indicates targeting a 1 percent of GDP fiscal surplus would generate sufficient savings to protect the budget against major shocks.
- Fiscal history and risks:
  - Government position shifted from net assets of 75 percent of GDP in 2000 to net debt of 17 percent of GDP at end-FY2023.
  - If trends continue and diamond contraction persists, debt sustainability could be at risk.

### Revenue and expenditure policy options
- Staff options if authorities cannot deliver planned expenditure restraint:
  - Streamline exemptions on zero-rated VAT goods and services.
  - Replace CIT tax holidays in Special Economic Zones with less costly investment tax credits.
  - Increase PIT progressivity.
  - Improve compliance enforcement starting with the large taxpayer unit.
  - Upgrade revenue administration’s customer service strategy.
- Staff view: medium-term deficit reduction in the authorities’ plan mainly comes from scaled back capital spending and lower wage bill (decreasing positions and encouraging early retirement). If these measures are not implemented, revenue-side measures will be critical.

### Institutional reforms and fiscal frameworks
- Sequenced institutional reforms recommended:
  - Improve credibility of medium-term budget: strengthen macro-fiscal projection function, enhance fiscal reporting systems, adopt more conservative mineral revenue forecasts and spending capacity assumptions.
  - Consider a new fiscal rule once adjustment is underway. An expenditure rule is highlighted as advantageous for longer-term spending restraint while allowing automatic stabilizers to operate.
  - Establish a Sovereign Wealth Fund (SWF) later to manage savings generated by the rule; staff preference for a “financing fund” model where inflows come from budget surpluses.
  - Begin assessing SWF design options now; setting up a SWF may take time.
- Public investment efficiency:
  - 2023 IMF PIMA noted a 30 percent gap in infrastructure spending efficiency between Botswana and most efficient countries with comparable income and public capital stock.
  - World Bank findings: low quality of education despite generous public spending (2020 Human Capital Index comparisons provided).

### Authorities’ views
- Authorities broadly agreed with staff projections and risk assessment.
- They view the diamond slowdown as primarily cyclical and reiterate the resilience of the non-diamond sector (partly due to budget stimulus).
- Authorities more optimistic on medium-term reserve coverage, expecting South Africa’s improved outlook to boost SACU revenues.
- On fiscal consolidation: prefer revenue gains to come primarily from revenue administration measures rather than tax rate increases.
- On SWF: intend to ringfence public savings, develop inflow/outflow guidelines, and provide seed capital via a one-off transfer from BoB’s FX reserves.
- Committed to improving capital project appraisal and strengthening multi-year spending capacity in line ministries; taking a prudent approach to mineral revenue forecasts.

### Key risks
- Main risks concentrated in the mining sector:
  - Slow pickup in diamond demand, abrupt global growth deceleration, emergence of cheaper lab-grown diamonds, and the announced sale of De Beers by its UK parent company.
- Risk assessment indicates that persistent low diamond revenues would have severe fiscal, growth, and reserve consequences (see downside scenario above).

*Source: IMF staff report (Section 8).*

### 24.      There is scope to strengthen monetary policy transmission. While transmission has

### 1bwaea2024006-print-pdf - 24. There is scope to strengthen monetary policy transmission. While transmission has

### Monetary policy transmission: current weaknesses and reforms
- Findings
  - Transmission has improved at the lower end of the yield curve, but some longer-term interest rates do not fully reflect changes in the policy rate.
  - Wholesale deposit rates are mostly driven by competition to attract large deposits from the mining industry and pension funds.
  - T-Bill prices are influenced by banks holding them as high-quality assets to comply with statutory liquidity requirements.
  - Bond yields tend to align with investments rates abroad.
  - Monetary policy ability to steer inflation is constrained by the fact that two thirds of the consumption basket consists of goods that are either imported or subject to administered prices.
- Short-end market reforms and recommendations
  - Agreement with Frontclear to develop money markets and provide guarantees for interbank trades to lower counterparty risk.
  - Further reforms include:
    - Encouraging repo transactions by strengthening the legal framework, building commercial bank capacity, and expanding the range of eligible collateral.
    - Publishing more granular and timely price/volume data to develop reference rates for money markets (e.g., overnight, 7, 14, 28 day rates).
  - Widening the definition of eligible HQLA to include government bonds to reduce excess demand for T-Bills and ensure T-Bill rates better reflect market conditions.
- Long-end market reforms and recommendations
  - Priority is to deepen the government bond market.
  - Authorities introduced switch auctions in 2023 and aim to introduce inflation-linked bonds in the second half of the year.
  - Annual borrowing plan and auction calendar were shared with the market.
  - Ongoing IMF TA-recommended reforms include:
    - Revising the primary dealer agreement to encourage active participation in every auction.
    - Providing greater price-transparency in primary and secondary markets.
    - Expanding the investor base.
    - Improving market infrastructure for trading.

### Authorities’ views on monetary policy orientation
- Broad agreement between authorities and staff on orientation and effectiveness.
- Bank of Botswana (BoB) sees scope to keep monetary policy accommodative given the negative output gap, anchored expectations, and inflation at the lower bound of the objective range.
- BoB noted improvement in the interbank market and short-end policy transmission; plans to collect data on actual lending rates (not just prime rates).
- On bond market development: FY2024 borrowing strategy published; medium-term debt strategy work ongoing; plans to review the primary dealer agreement with IMF support.
- On HQLA: authorities transitioning to Basel III standards but noted including government bonds as HQLA could crowd out private credit extension.

### Financial sector policies to strengthen stability and resilience
- Reforms enacted and implementation priorities
  - 2023 FSAP proposed reforms across banking regulation/supervision, macroprudential oversight, money and bond markets, and financial safety nets/crisis management.
  - 2022 Bank of Botswana Amendment Act and 2023 revised Banking Act strengthened legal basis for financial stability oversight.
  - Progress with market development, liquidity regulations, cybersecurity risk supervision, and operationalization of the deposit insurance scheme introduced in July 2023.
  - Outstanding needs include operationalizing emergency lending assistance (ELA), strengthening offsite quarterly financial analysis of banks, and reforming bank risk rating for risk-based supervision.
- Funding liquidity risks and recommended actions
  - System faces significant funding liquidity risk due to concentration of large, lumpy short-term deposits among a few larger banks; volatile deposits from large corporations and pension funds increase vulnerability.
  - Pension funds repatriation may exacerbate liquidity stress.
  - Banks hold large precautionary liquidity buffers that may be inefficient and could depress short-term interest rates and encourage risk-taking.
  - Specific actions to strengthen funding liquidity:
    - Enhancing BoB refinancing operations and operationalizing the ELA, especially by incentivizing the use of the primary reserve requirement (PRR) as risk absorber.
    - Expanding the definition of liquid assets (HQLA), including bonds and required reserves.
    - Moving to Basel III minimum liquidity requirements (e.g., LCR, NSFR).
    - Developing the repo interbank market (see reforms in paragraph 25).
- Credit risks and macroprudential options
  - System-wide NPLs remain low, but household debt doubled to about 20 percent of GDP between 2007 and 2023.
  - Most lending comprises unsecured, short-term, variable rate personal loans; growing lending to privately-employed individuals could raise credit risk in a downturn.
  - Banks show widely differing NPL ratios, loan portfolios, and customer bases.
  - Excess liquidity and low interest rates may prompt some banks toward riskier lending.
  - New credit data (supported by the 2022 Credit Information Act) should give supervisors more granular insights into household indebtedness.
  - Authorities may consider macroprudential tools (e.g., debt service-to-income ratio) to address specific credit risks in bank and NBFI loan books.

### AML/CFT and supervisory capacity
- Progress and outstanding tasks
  - BoB and NBFIRA made significant AML/CFT reforms; Botswana removed from the FATF grey list in October and the EU blacklist of high-risk third countries in January 2022.
  - NBFIRA encouraged to continue improving risk-based supervisory tools and data collection systems.
  - Risk assessment for Virtual Asset Service Providers (VASPs) should be completed urgently; revisions to legal definitions of Prominent Influential Persons and VASPs are ongoing.
  - Beneficial Ownership Enhancement Project expected to be completed by end-2024, establishing a public beneficial ownership registry.
- Authorities’ views
  - Authorities emphasize resilience of the domestic financial system, noting adequate capitalization, improved industry earnings, and asset growth.
  - Monitoring of funding risk and rise in household debt continues.
  - Ongoing work to operationalize the 2023 Banking Act, upgrade the payment system, and launch the LCR.
  - Completed a second national risk assessment in December 2023 to inform AML/CFT reform priorities ahead of the Eastern and Southern Africa Anti-Money Laundering Group’s Mutual Evaluation scheduled for 2027.

### Structural reforms for inclusive growth
- Challenges
  - Unemployment: latest official unemployment rate (as of Q3 2023) is 25.9 percent (34.4 percent for the youth).
  - Inequality is high by global standards; joblessness is a main driver of inequality.
  - Causes include capital-intensive mining industry, large public sector wage premium, lack of progressivity in fiscal policy, urban-rural divide, and disparities in land ownership.
- Priorities and recommendations
  - Accelerate structural transformation toward greater economic diversification and private sector participation.
  - Focus on horizontal (cross-cutting) reforms: investment in energy, IT, and logistical infrastructure to relax business constraints.
  - Restructure SOEs to reduce barriers to entry and improve resource allocation.
  - Enhance private sector productivity through FDI attraction, facilitating skilled worker entry, and domestic-foreign firm partnerships.
  - Support export-oriented growth via trade facilitation to leverage AfCFTA and integrate into regional/global value chains.
  - Recent agreement-in-principle between government and De Beers could help develop downstream diamond value-chain activities (more rough diamonds sold to local cutters and polishers).
- Social protection, education, and financial inclusion measures
  - Reform social security protection by consolidating programs, making them scalable to shocks, introducing a single social registry, and leveraging modern technologies for targeting and delivery.
  - Active labor market policies to reduce skill mismatches via training and educational programs aligned with job-market needs.
  - Reallocate funding toward better targeted programs (e.g., Destitute Persons Program), improve income tax progressivity, and minimize VAT zero-rating.
  - Education reforms: improve curriculum design, develop technical and vocational training, and reallocate funds from tertiary to lower education levels benefiting poorer communities.
  - Leverage Internet access and AI to facilitate learning in remote areas.
  - Financial inclusion: only 8 percent of MSMEs obtained bank credit in 2019.
    - Enhance credit reporting and operationalize movable collateral registration.
    - Introduce innovative financial products (e.g., accounts receivable finance) with flexible collateral requirements.
    - Shift public sector support toward co-investments and financial training.
    - Increase use of digital payment services by developing the acquiring ecosystem, improving interoperability, and enabling market entry of new players.

### Other surveillance issues, data, and capacity development
- Capacity development and implementation
  - Authorities have received IMF CD to strengthen macroeconomic competencies and have a good track record implementing reforms.
  - Future CD should support building fiscal buffers, enhancing public financial management, increasing monetary policy effectiveness, strengthening financial supervision and regulation, and improving data quality and timeliness.
  - Implementation of some Article IV recommendations has been slow in some areas.
- Data adequacy and gaps
  - Data provided to the Fund has shortcomings but is broadly adequate for surveillance.
  - Progress includes development of the producer price index and expanding CPI coverage to include owner-occupied housing.
  - Since June 2023, BoB has published the reserves template on the IMF’s International Reserves and Foreign Currency Liquidity portal.
  - Botswana publishes thirteen of the fifteen recommended data categories under e-GDDS.
  - Remaining needs to subscribe to SDDS: coverage, timeliness, and frequency for several categories, including producer price index, production index, BOP, IIP, and external debt.
  - Government financial statistics gaps need addressing, including upgrading accounting and budgeting systems to finalize FY2023 accounts and expanding institutional coverage toward consolidated statistics.

### Staff appraisal and outlook
- Recent shock and growth projections
  - Botswana is facing a severe slowdown from a diamond market contraction in 2023 and 2024.
  - Growth is expected to fall to 1.0 percent this year, from 2.7 percent in 2023 and 5.5 percent in 2022, reflecting weaker global demand for diamonds and a sharp increase in inventories.
  - Real GDP growth should rebound in 2025, driven by rebound in diamond production and trade, but risks remain elevated (cheaper lab-grown diamonds and announced sale of De Beers by its UK parent company).
- Fiscal policy guidance
  - In the near term, the fall in diamond revenues could be accommodated by a mix of higher fiscal deficit and reprioritization of capital expenditure.
  - Some fiscal relaxation is warranted given the widening output gap, but staff encourages authorities to reprioritize capital projects to limit the increase in the deficit and ensure highest value for money.

*International Monetary Fund — Botswana: Article IV consultation (extract).*

### 42.      Over the medium term, the authorities’ planned fiscal consolidation is critical to put a

### Over the medium term, the authorities’ planned fiscal consolidation is critical to put a stop to the depletion of government’s financial buffers

### Fiscal consolidation and institutional reforms
- Staff assesses that targeting a 1 percent of GDP fiscal surplus would generate sufficient savings to protect the budget against major economic shocks.
- The authorities’ adjustment plan focuses mostly on expenditure restraint, but there is also scope to increase revenues.
- The medium-term adjustment should be supported by institutional reforms, including:
  - a fiscal rule,
  - more credible medium-term budgeting,
  - and possibly a well-designed SWF.

### Monetary policy stance
- The monetary policy stance is appropriate.
- Inflation has declined since August 2022 and is projected to remain within the central bank’s objective range in the medium term.
- Underlying pressures, as measured by core inflation indicators, seem contained, while inflation expectations are well anchored.
- The 2023 external position is assessed to be broadly in line with fundamentals and desirable policies.

### Financial sector oversight, deepening, and inclusion
- The authorities’ plans to strengthen financial sector oversight, deepening, and inclusion are welcomed.
- The financial sector is broadly sound and stable despite the economic slowdown.
- Faster implementation of the 2023 FSAP recommendations will further reduce financial risks. Key recommendations include:
  - moving to implement Basel III liquidity standards,
  - enhancing risk-based supervision of banks,
  - reinforcing the crisis management framework (ELA, bank resolution),
  - deploying macroprudential tools to address household debt risk.

### Accelerating growth and job creation — structural priorities
- Accelerating growth and job creation requires a fundamental shift towards greater private sector participation, a more diversified export base, and a more efficient public sector.
- Priority policy actions recommended:
  - SOE modernization,
  - improved infrastructure for doing business (internet, energy, logistics),
  - trade facilitation measures,
  - more efficient social protection,
  - financial inclusion reforms that support small entrepreneurs.
- These goals could be enshrined in the new NDP, supported by time-bound and well-prioritized action plans.

*Source: IMF staff assessment (excerpt).*

### 46.      Staff recommends that the next Article IV consultation with Botswana be held on the

### 1bwaea2024006-print-pdf - 46.      Staff recommends that the next Article IV consultation with Botswana be held on the

### Article IV timing
- Staff recommends that the next Article IV consultation with Botswana be held on the standard 12-month cycle.

### Real sector developments
- Recovery in real GDP since the pandemic slowed in 2023.
- Key drivers and dynamics:
  - Decline in mining and diamond trading activity reduced output.
  - Net exports contributed negatively to growth.
  - Headline CPI has returned to the BoB objective range.
  - Lower imported fuel prices moderated the pace of transport inflation.
  - Core inflation has remained contained.
- Selected statistics and projections (calendar years):
  - Real GDP: 2020 -8.7; 2021 11.9; 2022 5.5; 2023 2.7; 2024 1.0; 2025 5.2; 2026 4.8; 2027 4.0; 2028 4.0; 2029 4.0
  - Nonmineral GDP: 2020 -3.5; 2021 7.9; 2022 4.9; 2023 2.6; 2024 5.1; 2025 4.1; 2026 4.4; 2027 4.4; 2028 4.4; 2029 4.5
  - GDP per capita (US dollars): 2023 7,250; 2024 7,341; 2025 8,003; 2026 8,602; 2027 9,146; 2028 9,726; 2029 10,437
  - Consumer prices (average): 2020 1.9; 2021 6.7; 2022 12.2; 2023 5.1; 2024 3.8; 2025 4.5; 2026 4.5; 2027 4.5; 2028 4.5; 2029 4.5
  - Diamond production (millions of carats): 2020 16.9; 2021 22.7; 2022 24.5; 2023 25.1; 2024 21.1; 2025 23.3; 2026 25.0; 2027 25.5; 2028 26.0; 2029 26.4

### Fiscal sector developments and projections
- Overall trajectory and near-term outlook:
  - The fiscal deficit ratio is expected to continue to widen in FY2024 before turning to a small surplus in the medium term.
  - Mineral revenues are forecast to continue falling in FY2024 before recovering in the medium term.
  - The expenditure ratio is expected to decline as both current and capital expenditures moderate.
  - Gross government debt ratio increased in 2023 due to higher external borrowing.
  - Government deposits held with the central bank have fallen substantially since 2007.
- Selected fiscal figures:
  - Central government (fiscal years):
    - Total Revenue and Grants (billions of pula): FY2023 75.4; FY2024 79.2; FY2025 91.0; FY2026 99.1; FY2027 108.5; FY2028 113.2; FY2029 119.3
    - Total Expenditure and Net Lending (billions of pula): FY2023 88.0; FY2024 96.0; FY2025 96.4; FY2026 100.7; FY2027 106.8; FY2028 111.1; FY2029 117.2
    - Primary Balance (deficit -) (billions of pula): FY2023 -11.1; FY2024 -14.8; FY2025 -2.8; FY2026 1.4; FY2027 4.9; FY2028 5.7; FY2029 6.2
    - Overall Balance (A) (billions of pula): FY2023 -12.6; FY2024 -16.7; FY2025 -5.5; FY2026 -1.6; FY2027 1.7; FY2028 2.1; FY2029 2.1
  - Fiscal ratios (percent of GDP, fiscal years):
    - Total Revenue and Grants: FY2024 28.2 percent; FY2025 28.8 percent; FY2026 28.6 percent
    - Total Expenditure and Net Lending: FY2024 33.1 percent; FY2025 34.2 percent; FY2026 30.6 percent
    - Primary Balance (deficit -): FY2024 -5.3 percent; FY2025 -0.9 percent; FY2026 0.4 percent
    - Overall Balance (A): FY2024 -6.0 percent; FY2025 -1.7 percent; FY2026 -0.5 percent
    - Total central government debt: FY2023 20.1 percent; FY2024 22.6 percent; FY2025 22.1 percent; FY2026 20.7 percent

### External sector developments
- Key developments:
  - The current account deficit widened in the second half of 2023, reflecting a worsening diamond trade balance.
  - The financial account recorded a surplus due to less external repatriation of diamond trade profits.
  - Terms of trade weakened in 2023 with the decline in diamond export prices.
  - Foreign reserves have declined over time with months of import coverage in the single digits since 2020.
  - The REER has depreciated in line with lower domestic inflation and a nominal depreciation.
- Selected external sector figures (calendar years and levels):
  - Current Account Balance (millions of USD): 2020 -1,538; 2021 -328; 2022 -241; 2023 -123; 2024 -391; 2025 323; 2026 286; 2027 325; 2028 167; 2029 62
  - Current Account Balance (percent of GDP): 2024 -2.0 percent; 2025 1.5 percent; 2026 1.2 percent; 2027 1.2 percent; 2028 0.6 percent; 2029 0.2 percent
  - Trade balance (millions of USD): 2023 -458; 2024 -1,383; 2025 -195; 2026 429; 2027 0; 2028 3; 2029 0
  - Exports, f.o.b. (millions of USD): 2023 5,715; 2024 5,497; 2025 7,468; 2026 8,622; 2027 9,690; 2028 10,722; 2029 11,642
  - Diamonds (exports, millions of USD): 2023 4,532; 2024 4,237; 2025 6,080; 2026 7,058; 2027 7,942; 2028 8,765; 2029 9,456
  - Imports, f.o.b. (millions of USD): 2023 -6,173; 2024 -6,880; 2025 -7,663; 2026 -8,580; 2027 -9,600; 2028 -10,725; 2029 -11,653
  - Gross official reserves (end of period, millions of USD): 2020 4,944; 2021 4,806; 2022 4,281; 2023 4,757; 2024 4,587; 2025 4,879; 2026 5,198; 2027 5,600; 2028 5,852; 2029 6,014
  - Months of imports of goods and services (based on following year): 2020 6.4; 2021 6.6; 2022 7.1; 2023 7.3; 2024 6.3; 2025 6.0; 2026 5.8; 2027 5.6; 2028 5.4; 2029 5.1
  - Months of non-diamond imports: 2020 9.3; 2021 8.7; 2022 8.2; 2023 8.8; 2024 7.9; 2025 7.8; 2026 7.6; 2027 7.5; 2028 7.2; 2029 7.1
  - Terms of trade (2005=100): 2020 140.5; 2021 178.9; 2022 161.3; 2023 152.7; 2024 125.9; 2025 162.2; 2026 171.4; 2027 176.6; 2028 181.6; 2029 186.6

### Financial sector developments
- Banking and financial system strengths and trends:
  - Credit growth has increased since 2021 but remains subdued.
  - The policy rate was lowered in December 2023, and again in June2024.
  - Bank liquidity has improved significantly.
  - The banking sector is well capitalized.
  - Non-performing loans remain low with adequate provisioning.
- Selected financial indicators and projections:
  - Credit to the private sector (annual % change): 2020 5.3; 2021 5.4; 2022 4.7; 2023 5.6; 2024 8.5; 2025 11.0; 2026 11.0; 2027 11.0; 2028 11.0; 2029 11.0
  - Policy rate changes: policy rate lowered December 2023; policy rate lowered June2024.
  - Capital adequacy (regulatory capital to risk-weighted assets): 2023 19.6 percent (Table 5)
  - Nonperforming loans to total gross loans: 2023 3.7 percent (Table 5)
  - Bank provisions to nonperforming loans: 2023 49.0 percent (Table 5)
  - Liquidity measures: Liquid assets to total assets 2023 12.2 percent (Table 5)

### Monetary and macro-financial aggregates
- Monetary aggregates (end of period, calendar years, selected):
  - Net Foreign Assets (billions of pula): 2023 71.0; 2024 69.3; 2025 76.0; 2026 82.8; 2027 90.6; 2028 96.6; 2029 101.5
  - Monetary Base (annual % change): 2023 33.1; 2024 8.7; 2025 9.7; 2026 9.3; 2027 9.2; 2028 9.3; 2029 9.3
  - Broad Money (M2) (annual % change): 2023 9.3; 2024 8.7; 2025 9.7; 2026 9.3; 2027 9.2; 2028 9.3; 2029 9.3
  - Broad Money (M2) (index, end period): 2023 110.1; 2024 119.7; 2025 131.3; 2026 143.5; 2027 156.6; 2028 171.1; 2029 186.9

### Key macro-fiscal risks and outlook (drawn from figures and tables)
- Near-term growth and public finances vulnerable to diamond sector volatility:
  - Diamond production and diamond export price shocks materially affect trade, current account, fiscal revenues (mineral revenue), and reserves.
- Reserves and external liquidity:
  - Gross official reserves have declined from 2020 levels and months of import coverage have been in single digits since 2020, posing external liquidity sensitivity.
- Fiscal consolidation and debt:
  - FY2024 shows a widening deficit with recovery to small surpluses over the medium term; monitoring of debt dynamics warranted as gross government debt rose in 2023.

*Source: Botswana authorities and IMF staff estimates, as presented in the provided content unit.*

### Annex I. Debt Sustainability Analysis

### Annex I. Debt Sustainability Analysis

### DS A Summary Assessment
- Final assessment: Botswana is assessed to have a low overall risk of sovereign stress.
- Debt stabilization in the baseline: Yes.
- Not required for surveillance countries.
- Commentary findings:
  - Projected stabilization of the debt-to-GDP ratio depends on the successful implementation of the planned fiscal consolidation, described as "fairly ambitious but achievable by international standards."
  - Baseline long-term risk outlook: low.
  - Key risk: negative shocks to commodity revenues may put upward pressure on debt issuance.
  - Reducing potential risks from declining long-term diamond production requires accelerating diversification reforms.
- Note highlights:
  - The risk of sovereign stress is broader than debt sustainability; sovereign stress can be remedied without debt restructuring (e.g., fiscal adjustment, new financing).
  - Near-term assessment: N/A in cases where there is a disbursing IMF arrangement; in surveillance-only or precautionary arrangements the near-term assessment is performed but not published.
  - A DSA is optional for surveillance-only cases and mandatory with a Fund arrangement; mechanical signal and certain qualifiers are deleted before publication in surveillance-only cases.

*Source: Fund staff.*

### Public Debt Structure Indicators
- Perimeter: general government.
- Commentary findings:
  - Since 2018, an increasing share of Botswana’s debt has been held by domestic banks and other domestic creditors (e.g. pension funds); the share of external official creditors has declined.
  - The share of foreign debt in total public debt is projected to keep declining over the medium-term as domestic debt markets deepen and pension funds increasingly repatriate some of their assets domestically.
  - As external loans tend to have longer maturities, the composition of debt will pivot towards short and medium-term debt.

### Baseline Scenario (Extended projection; Percent of GDP)
- Public Debt:
  - Actual 2023: 20.1
  - 2024: 22.6
  - 2025: 22.1
  - 2026: 20.8
  - 2027: 20.1
  - 2028: 20.1
  - 2029: 19.7
  - 2030: 20.0
  - 2031: 20.2
  - 2032: 20.5
  - 2033: 20.5
- Change in Public Debt:
  - 2024: 2.0
  - 2025: 2.5
  - 2026: -0.6
  - 2027: -1.3
  - 2028: -0.6
  - 2029: -0.1
  - 2030: -0.4
  - 2031: 0.3
  - 2032: 0.2
  - 2033: 0.3
  - 2034: 0.0
- Contribution of identified flows:
  - 2024: 2.6
  - 2025: 2.7
  - 2026: -0.4
  - 2027: -1.2
  - 2028: -0.6
  - 2029: 0.0
  - 2030: -0.3
  - 2031: 0.3
  - 2032: 0.3
  - 2033: 0.3
  - 2034: 0.0
- Primary deficit (Percent of GDP):
  - 2023: 4.2
  - 2024: 5.3
  - 2025: 0.9
  - 2026: -0.4
  - 2027: -1.3
  - 2028: -1.4
  - 2029: -1.4
  - 2030: -0.8
  - 2031: -0.4
  - 2032: -0.1
  - 2033: 0.0
- Noninterest revenues (Percent of GDP): 2023: 28.1; 2024: 28.0; 2025: 28.6; 2026: 28.4; 2027: 28.5; 2028: 27.3; 2029: 26.5; 2030: 26.7; 2031: 26.4; 2032: 26.1; 2033: 25.9
- Noninterest expenditures (Percent of GDP): 2023: 32.3; 2024: 33.2; 2025: 29.5; 2026: 27.9; 2027: 27.9; 2028: 25.9; 2029: 25.1; 2030: 25.9; 2031: 26.0; 2032: 26.0; 2033: 25.9
- Automatic debt dynamics (Percent of GDP): 2023: 0.7; 2024: 0.4; 2025: -1.2; 2026: -0.7; 2027: -0.4; 2028: -0.4; 2029: -0.4; 2030: -0.4; 2031: -0.5; 2032: -0.6; 2033: -0.7
- Real interest rate and relative inflation (Percent of GDP): 2023: 0.4; 2024: 0.6; 2025: -0.1; 2026: 0.3; 2027: 0.3; 2028: 0.4; 2029: 0.4; 2030: 0.4; 2031: 0.3; 2032: 0.1; 2033: 0.1
- Real GDP growth (percent; memo):
  - 2023: 2.5
  - 2024: 1.0
  - 2025: 5.2
  - 2026: 4.8
  - 2027–2033: 4.0 (each year)
- Inflation (GDP deflator; percent; memo): 2023: 2.2; 2024: 2.0; 2025: 7.7; 2026: 5.0; 2027–2033: 4.7 (each year)
- Nominal GDP growth (percent; memo): 2023: 4.3; 2024: 5.6; 2025: 12.5; 2026: 9.8; 2027–2033: 8.8 (each year), 2032: 8.9; 2033: 8.9
- Effective interest rate (percent; memo): 2023: 5.0; 2024: 5.0; 2025: 5.4; 2026: 5.6; 2027: 5.8; 2028: 6.1; 2029: 6.4; 2030: 6.3; 2031: 5.8; 2032: 5.0; 2033: 5.0
- Gross Financing Needs (GFN; Percent of GDP):
  - 2023: 8.2
  - 2024: 8.7
  - 2025: 5.4
  - 2026: 3.4
  - 2027: 3.3
  - 2028: 2.9
  - 2029: 4.1
  - 2030: 4.4
  - 2031: 5.5
  - 2032: 5.1
  - 2033: 5.1
- Of which: debt service (Percent of GDP): 2023: 4.3; 2024: 3.7; 2025: 4.8; 2026: 4.1; 2027: 4.8; 2028: 4.6; 2029: 5.7; 2030: 5.2; 2031: 5.9; 2032: 5.2; 2033: 5.1
- Local currency GFN (Percent of GDP): 2023: 4.0; 2024: 3.0; 2025: 3.9; 2026: 3.4; 2027: 4.2; 2028: 4.0; 2029: 5.3; 2030: 4.9; 2031: 5.8; 2032: 5.1; 2033: 5.0
- Foreign currency GFN (Percent of GDP): 2023: 0.3; 2024: 0.8; 2025: 0.9; 2026: 0.7; 2027: 0.6; 2028: 0.6; 2029: 0.4; 2030: 0.3; 2031: 0.2; 2032: 0.2; 2033: 0.1
- Commentary summary:
  - Authorities limited debt increase by drawing down cash reserves over past 5 years.
  - Post-pandemic recovery helped close fiscal deficit by FY2022.
  - FY2023-24 deficits financed by reducing deposits as domestic debt approaches nominal limits.
  - From FY2025, medium-term fiscal adjustment planned to reach surpluses.
  - Negative interest-growth differential and improved fiscal position will contribute to accumulation of fiscal buffers and stabilization of debt over the medium-term.

### Realism of Baseline Assumptions
- Staff assessment:
  - Botswana's improvement in debt level is realistic compared with international comparators.
  - Growth outlook aligns with historical averages.
  - Credibility of adjustment: fiscal consolidation is described as "quite ambitious by international standards."
  - A large share of the improvement in fiscal balance in FY2024-FY2026 comes from projected increase in mineral revenues as global demand for rough diamonds is expected to recover over the next two years.
  - Historical experience: significant fiscal adjustments following mining sector downturns have been common in Botswana (examples listed: Global Financial Crisis, end of commodity cycle in 2015, CoVID-19 pandemic).
  - The projected 3-year fiscal adjustment under the baseline is smaller than past adjustments following diamond market shocks.
  - There is large untapped potential from revenue-enhancing measures, not factored into staff projections (authorities’ MTF plan is mostly expenditure-based).
  - Growth is expected to rebound in 2025 as diamond production recovers after a steep contraction in 2024.
- Quantitative realism indicators (selected):
  - 3-year debt reduction: percentile rank 54.1; 3-year reduction above 75th percentile = 5.9 ppts of GDP threshold noted.
  - 3-year adjustment above 75th percentile (2 ppts of GDP) percentile rank: 88.

### Medium-Term Risk Analysis
- Debt fanchart module:
  - Fanchart width: 51.3 0.7 (percent of GDP).
  - Probability of debt non-stabilization: 2.3 0.0 (percent).
  - Terminal debt-to-GDP x: 8.9 0.2.
  - Debt fanchart index (DFI): 1.0.
  - Risk signal: Low.
- Gross Financing Needs (GFN) module:
  - Average baseline GFN: 4.6 1.6 (percent of GDP).
  - Initial banks' claims on the gen. govt (pct bank assets): 9.7 3.1.
  - Change in banks' claims in stress (pct banks' assets): 2.4 0.8.
  - GFN financeability index (GFI): 5.5.
  - Risk signal: Low.
- Medium-term index:
  - Debt fanchart index contribution: 1.0
  - GFN financeability index contribution: 5.5
  - Medium-term index risk signal: Low.
  - Final assessment probabilities for 2024-2029:
    - Prob. of missed crisis, if stress not predicted: 0.0 pct.
    - Prob. of false alarms, if stress predicted: 64.8 pct.
- Commentary findings:
  - Medium-term index signals an overall low risk assessment because both Debt fanchart and GFN modules signal low risk.
  - Debt fanchart assessment driven by low medium-term debt level and overall good quality of institutions.
  - Fanchart width is wide (about the 75th percentile), reflecting high historical volatility of the diamond market, translating into volatile growth and primary balances.
  - Liquidity risks (GFN financeability index) are low due to low gross financing needs and limited domestic bank exposure to the sovereign.
  - Stress tests applied: commodity price shock and natural disaster shock — under both, gross financing needs trend downwards and debt is stable or declining.
  - Recommendation/implication: Authorities need to be proactive in managing public debt to ensure roll-over risks remain low over the medium-term.
- Comparative group: emerging markets, non-commodity exporter, surveillance.

### Long-Term Risk Analysis
- Final long-term assessment: low risk in the baseline scenario.
- Commentary findings:
  - Long-term risk in the baseline scenario is low as fiscal surpluses contribute to stabilization of the debt-to-GDP ratio.
  - Key long-term risk: a long-term decline in diamond production could result in lower mineral revenues and higher debt.
  - Policy implication: accelerating diversification reforms is required to reduce potential risks from declining long-term diamond production.

*Source: IMF staff estimates and projections.*

### Annex II. External Stability Assessment

### Annex II. External Stability Assessment

### Overall Assessment
- The external position of Botswana in 2023 is broadly in line with the level implied by fundamentals and desirable policies.
- Despite the weak diamond market, the current account deficit narrowed to 0.6 percent of GDP in 2023 from 1.2 percent of GDP in 2022, due to strong customs union revenues and lower outward repatriation transfers from diamond re-export activities.
- The current account is initially projected to recover in 2025 (in line with a diamond market rebound) before weakening over the medium term, mostly due to falling SACU revenues.
- In line with long-term trends, the net international investment position (NIIP) is projected to weaken as a result of declining FX reserves.
- Potential policy responses:
  - Fiscal consolidation and structural reforms to strengthen competitiveness and promote diversification will be key to support the external position in the medium term.
  - The REER targeting regime has delivered relatively stable inflation. While a crawling regime remains well-suited to Botswana’s characteristics, small adjustments could help support price competitiveness and enhance consistency with monetary policy, for instance:
    - calibrating the nominal crawl rate to support the inflation objective (rather than to compensate the inflation differential with the main trading partners); or
    - modifying the weights used in the REER calculation to mirror trade patterns more closely.

---

### Foreign Assets and Liabilities: Position and Trajectory
- Background and recent trajectory:
  - From a peak of 105 percent of GDP in 2007, the NIIP has declined substantially over time due to decreasing reserve assets.
  - Botswana’s IIP improved slightly in 2023 to 30 percent of GDP from 29 percent in 2022 (the lowest level on record).
  - Gross assets rose from 67 percent of GDP in 2022 to 71 percent of GDP in 2023.
  - In 2023, almost half of gross assets were portfolio investment, and one-third were reserve assets.
  - Gross liabilities rose to 41 percent of GDP in 2023 from 38 percent of GDP, partly because of upward revisions to direct investment in Botswana, which accounts for 70 percent of liabilities.
  - The 2023 NIIP composition included a net portfolio balance (31 percent of GDP), reserve assets (24 percent of GDP), and a negative direct investment balance (-24 percent of GDP).
  - Foreign reserves improved in 2023 to USD 4.8 billion, largely reflecting valuation gains.
  - At end-2023, reserve coverage was 7.3 months of imports, slightly up from 7.1 months of imports at end-2022.
- Assessment and projection:
  - Botswana is a net creditor country, but the NIIP is projected to fall further to 24 percent of GDP by 2029, as reserve assets decline.
  - There are no large gross liabilities.
  - External debt remains very low and consists of long-term multilateral and bilateral borrowing.

---

### Current Account
- Background:
  - The current account (CA) reached a high of 20 percent of GDP in 2006 and 11.5 percent in 2014. Since 2015, the CA balance has averaged -0.4 percent of GDP (against an average surplus of 6 percent between 2000 and 2014).
  - The decline is primarily due to a deterioration of the diamond trade balance, reflecting lower locally-sourced diamond exports.
- 2023 developments:
  - The CA improved to -0.6 percent of GDP in 2023 from -1.2 percent of GDP in 2022.
  - The trade balance fell from a surplus of 2.7 percent of GDP in 2022 to -2.4 percent of GDP in 2023 because of the diamond market slowdown.
  - This deterioration was offset by higher current transfers (i.e., Southern African Customs Union receipts) and a stronger income balance (from lower repatriation of returns related to diamond re-exports).
  - The services trade deficit narrowed from 2.3 percent of GDP in 2022 to 1.9 percent in 2023, indicative of the continued recovery in travel receipts.
- Assessment:
  - Table 1 presents results of four models. Under the CA model and the commodity investment module, the external position of Botswana in 2023 is estimated to be broadly in line with fundamentals and desirable policies.
  - The investment module is better suited to Botswana, a developing country with large investment needs, compared to the consumption model, which requires larger savings in the medium-term and is more applicable to high-income economies.

---

### Real Exchange Rate (REER)
- Background:
  - Since May 2005, the monetary authorities have aimed at stabilizing the REER relative to Botswana’s main trading partners.
  - At the beginning of the year, the authorities announce the ‘crawl rate’ of the NEER that offsets the projected gap in CPI inflation between Botswana and a trade-weighted basket of currencies over the coming 12 months.
  - In January 2024, the authorities maintained the nominal crawl depreciation rate of the Pula at 1.5 percent for the year.
  - The basket is composed of the South African Rand (weighted at 45 percent) and the SDR (55 percent).
- Assessment:
  - The CA model suggests that the Pula is broadly in line with fundamentals, and that the REER would need to depreciate slightly (about 1.7 percent) for the CA deficit to be in line with the norm.
  - The REER model suggests that the Pula would need to appreciate by 13.9 percent for the CA gap to be reduced to the norm; however, the relative fit of the REER model is poor, supporting staff’s preference for the CA model.
  - The implicit REER gap of the investment model (3.0) is in line with the CA model.
  - The REER targeting regime has delivered relatively stable inflation and remains well suited to Botswana’s economic and financial characteristics.
  - Challenges: slow deterioration of export performance, stalled diversification, and a decline in foreign exchange reserves over the past two decades.
  - Small changes to the current regime could support price competitiveness and mitigate tension between monetary policy and exchange rate policy objectives, for instance:
    - calibrating the nominal crawl rate to support the inflation objective (rather than to compensate the inflation differential with the main trading partners); or
    - modifying the weights used in the REER calculation to mirror trade patterns more closely.

---

### Capital and Financial Accounts: Flows and Policy Measures
- Background:
  - Botswana has historically had large financial account deficits, mainly because of external investments by pension funds, and other investment outflows.
  - Botswana is a global diamond hub: diamonds are imported for sales events, then re-exported, with part of the profits repatriated overseas.
  - The financial account has strengthened since the pandemic, reflecting lower external portfolio investment, upward revisions to domestic FDI, and smaller foreign dividend payments from the diamond sector.
  - The financial account remained in surplus in 2023 at 1.6 percent of GDP (from a 3.1 percent of GDP surplus in 2022). This remained above the average deficit of 2.5 percent of GDP since 2000.
- Assessment:
  - Botswana has low vulnerabilities related to capital flows, given low external debt (largely to multilateral institutions and long-term in nature), and low feedthrough from international financial conditions to capital flows, partly due to the nature of investors (e.g., “buy-and-hold” pension funds with a long-term investment horizon).
  - Amendments to the Retirement Funds Act, which require pension funds to gradually increase the share of their domestically held assets, are likely to reduce future portfolio outflows.

---

### FX Intervention and Reserves Level
- Structure of reserves:
  - The BoB’s FX reserves are divided between the Liquidity Portfolio (required to be maintained by the BoB Act) and the Pula Fund (excess/residual from the Liquidity Portfolio).
  - The Liquidity Portfolio is primarily a money market and fixed income fund providing a buffer for short- and medium-term trade and capital account requirements.
  - The benchmark level for the Liquidity Portfolio is currently set at 3 months of import cover (in the authorities’ definition, which is based on current year imports excluding diamonds). FX reserves up to 3 months of imports are allocated to and invested in the Liquidity Portfolio.
  - The Liquidity Portfolio is split into the Liquidity Investment Tranche (LIT) and the Transaction Balance Tranche (TBT). The TBT caters for short term needs for foreign currency, while the LIT provides further support for medium term funding.
  - The Pula Fund is a long-term investment portfolio in foreign assets, with higher risks and returns. Assets in excess of what is needed for reserves adequacy (i.e., above 3 months of imports) are invested long-term in the Pula Fund, with investment decisions made in consultation with the Ministry of Finance.
- Recent developments:
  - The BoB’s international reserves rose to USD 4.8 billion or 7.3 months of imports at end-2023, from USD 4.3 billion or 7.1 months in 2022.
  - The increase in reserves largely reflects revaluation gains, estimated at USD 552 million, from the increase in the value of equities and bonds held by the central bank.
  - Botswana has a crawling pegged exchange rate, with a standing facility where the monetary authorities commit to buy and sell foreign exchange within a narrow daily range; there are no discretionary foreign exchange interventions.
  - The authorities are considering establishing a new SWF to manage government savings invested in foreign assets.
- Assessment:
  - End-2023 reserves, which are held mostly in the Pula Fund, are adequate, representing about 236 percent of the ARA metric and increased from 198 percent in 2022.
  - At end-2023, the ARA metric corresponded to 3.1 months of imports.
  - Reserve coverage is expected to remain above this threshold over the medium term.
  - The reserve management strategy of the authorities appears sound and prudent.
  - Staff view: careful design of the new SWF and the new fiscal rule will be key to ensure that any reallocation of FX from the Pula Fund to the new SWF does not undermine the central bank’s reserve position.
  - Staff recommendation: external stability would be safeguarded by combining a budget rule supporting a medium-term fiscal surplus with a financing fund model for the SWF.

---

*Source: Annex II. External Stability Assessment, 2023–2024 IMF staff report on Botswana.*

### 3. The fiscal impulse is measured as the change in the fiscal balance excluding mineral

### 3. The fiscal impulse is measured as the change in the fiscal balance excluding mineral and SACU revenues

### Measurement of the fiscal impulse
- The fiscal impulse is measured as the change in the fiscal balance excluding mineral and SACU revenues.
- Rationale:
  - SACU revenues are externally sourced and do not exert any drag on domestic activity (e.g., a decrease in the fiscal deficit due to higher SACU revenues does not have a contractionary effect).
  - Mining revenues are excluded because they do not really constitute a tax on residents and private demand; a large part of these revenues is comprised of dividends paid by Debswana to the government.

### Sustainability component (fiscal target and calibration)
- Assumption: gradual convergence towards the 1 percent of GDP surplus target over two years (as estimated in Annex V).
- Pace illustrated: 0.5 percent of GDP consolidation a year over two years, given that FY2022 recorded a budget balance.
- Note: 0.5 percent of GDP per year is also the average pace of adjustment in the medium-term budget framework of the authorities.

### Stability component (cyclical offset and multiplier)
- Staff estimate: non-mining output gap deteriorates by 2.4 percent between 2022 and 2024 (excluding the effect of the projected fiscal expansion).
- Assumed fiscal multiplier: 0.5.
- Calculation: to offset a 2.4 percent widening of the non-mining output gap, a 4.8 percent of GDP stimulus over two years would be sufficient (4.8 percent = 2.4 percent / 0.5).

### Overall recommended fiscal stance (weights, ranges, and staff estimate)
- Depending on weights between sustainability and stability:
  - Fiscal relaxation of 1.9 to 3.4 percent of GDP spread over two years is warranted given the deterioration of cyclical conditions.
  - Equal weights on both components: recommended fiscal expansion of 1.9 percent of GDP (1.9 = 0.5 * (-1) + 0.5 * (+4.8)).
  - 75 percent weight to stability: stimulus of 3.4 percent of GDP (3.35 = 0.25 * (-1) + 0.75 * (+4.8)).
- Staff’s estimated change: 2.6 percent of GDP change in the non-mining/non-SACU deficit, which falls within the 1.9–3.4 percent of GDP range.

### Fiscal execution assumptions and implications
- Staff projections assume an execution rate of 80 percent of capital expenditure based on past experience.
- If authorities implemented fully the budgeted envelope (i.e., 100 percent execution), the fiscal stimulus would seem excessive given cyclical conditions.
- Conclusion: projected fiscal expansion between FY2022 and FY2024 seems broadly appropriate, provided that the authorities under-execute their capital budget in line with previous years.

### Annex V — Estimates of Medium-Term Fiscal Benchmarks: key working assumptions
- Fiscal and macro assumptions:
  - Gross debt: 20 percent of GDP.
  - Assets: 5 percent of GDP.
  - Net debt: 15 percent of GDP at end FY2023.
  - Gross interest bill: 1 percent of GDP.
  - Mineral revenues: 10 percent of GDP.
  - Debt ratio assumed constant in the future.
  - Nominal GDP growth: 8.5 percent (equal to 4 percent real growth plus 4.5 percent midpoint inflation target).
  - Ratio of non-resource GDP to total GDP: 80 percent.
- Interest and asset return assumptions:
  - Effective interest rate on debt (proxy for average debt costs): 5 percent (1 percent of GDP interest bill divided by 20 percent of GDP gross debt).
  - Return on financial assets depends on SWF investment strategy:
    - "Risky strategy": return of long-term bonds of 10 percent in pula terms (all investments in rand, no currency depreciation).
    - "Prudent strategy": weighted average return of 8 percent in pula terms (half in South Africa long-term bonds at 10 percent, half in US/euro with 6 percent nominal return in pula; weighted average = 8 percent).

### Annex V — Scenarios and fiscal targets (summary of main simulations)
- Scenario 1 (net debt stabilization, no meaningful SWF accumulation):
  - Overall balance: -1.2% of GDP
  - Primary balance: -0.5% of GDP
  - Non-resource primary balance: n/a
  - Note: return on assets assumed 5 percent since there is no SWF.
- Scenario 2 (insurance buffer built over 10 years):
  - Buffer of 8% of GDP; prudent investment strategy:
    - Overall balance: -0.1% of GDP
    - Primary balance: 0.2% of GDP
    - Non-resource primary balance: n/a
  - Buffer of 8% of GDP; risky investment strategy:
    - Overall balance: -0.1% of GDP
    - Primary balance: 0.0% of GDP
    - Non-resource primary balance: n/a
  - Buffer of 16% of GDP; prudent investment strategy:
    - Overall balance: 1.1% of GDP
    - Primary balance: 1.0% of GDP
    - Non-resource primary balance: n/a
  - Buffer of 16% of GDP; risky investment strategy:
    - Overall balance: 1.1% of GDP
    - Primary balance: 0.8% of GDP
    - Non-resource primary balance: n/a
- Scenario 3 (intergenerational equity / Permanent Income Hypothesis):
  - Constant wealth ratio, prudent investment strategy:
    - Overall balance: 9% of GDP1
    - Primary balance: n/a
    - Non-resource primary balance: 0.2% of GDP
  - Constant wealth ratio, risky investment strategy:
    - Overall balance: 6% of GDP1
    - Primary balance: n/a
    - Non-resource primary balance: -2.8% of GDP
  - Constant wealth in real terms, prudent investment strategy:
    - Overall balance: 2-4% of GDP2
    - Primary balance: 3-5% of GDP2
    - Non-resource primary balance: 7-9 of non-resource GDP2

Notes from table:
- 1/ The overall balance target is based on the non-resource primary balance ratio (last column) combined with today’s interest and resource revenue ratios. This target would change over time.
- 2/ This method estimates real wealth. The three columns show the corresponding GDP ratios for overall balance, primary balance, and non-resource primary balance in the medium term.

### Annex V — Synthesis and historical context
- Authorities need to generate fiscal surpluses in the medium term to accumulate meaningful financial buffers.
- Calibration varies significantly by policy objective and interest-growth differential assumption:
  - Net debt stabilization consistent with a 1 percent of GDP deficit.
  - Insurance objective requires a surplus of 1 percent of GDP.
  - Intergenerational equity objective requires a surplus of 2–4 percent of GDP to stabilize wealth in real terms, and larger surpluses to stabilize wealth as a percentage of GDP.
- Historical comparisons:
  - Past five years (FY2020-FY2024): fiscal deficit averaged 4.6 percent of GDP.
  - Five years before the pandemic (FY2015-FY2019): fiscal deficit averaged 3.8 percent of GDP.

### Policy recommendation on rule recalibration
- The fiscal surplus target should be re-estimated periodically.
- Best practice: recalibrate fiscal rules every 3–5 years, taking into account changes in the economic environment (export prices, external demand, frequency of severe shocks).
- Suggestion: a fiscal target could be enshrined in a fiscal rule for the duration of the next NDP.

*Source: 1bwaea2024006-print-pdf - 3. The fiscal impulse is measured as the change in the fiscal balance excluding mineral and SACU revenues*

### Section 43A of the Bank of Botswana (Amendment) Act, 2022 makes

### Section 43A of the Bank of Botswana (Amendment) Act, 2022 makes

### Deposit Insurance Scheme (BDIS) — establishment and operationalization
- Section 43A provides for establishment, through regulations, of a deposit insurance scheme for Botswana.
- The BoB’s Deposit Insurance Scheme Regulations came into operation on 21 July 2023 and operationalize the Scheme.
- The regulations provide for:
  - establishment of the Deposit Insurance Scheme of Botswana, Deposit Insurance Fund and Deposit Insurance Committee (i.e., governing body of the Scheme);
  - types of deposits covered;
  - funding sources for the fund; and
  - staff of the Scheme.

### Authorities’ actions, implementation status, and timelines (Recommendations ¶32–33)
- Recommendation: Align legal framework for the Botswana Deposit Insurance Scheme with sound practices and address gaps in the regulatory framework to develop strategic and operational plan for implementation of deposit insurance (¶32–33).
- Authorities’ actions (status and timing):
  - The Scheme has full a staff complement as per its organizational structure, headed by a Director. (ST–MT)
  - The Minister of Finance appointed all private/independent members of the governing body effective April 1, 2024 for a four-year term each. (ST–MT)
  - The Scheme issued membership certificates to all licensed banks and the Botswana Savings Bank (i.e., member institutions) and collected once-off membership fee from each member institution. (ST–MT)
  - Public education initiatives were carried out through national radio and TV and pamphlets printed for distribution to members of the public. (ST–MT)
  - The Scheme produced its 2023 inaugural Annual Report. (ST–MT)
  - Work has commenced to draft a standalone Deposit Insurance Scheme law. (ST–MT)
- Time horizons: ST = short term (1–3 years), MT = medium term (3–5 years).

### Crisis management, resolution planning, and Financial Stability Council (FSC) remit (Recommendations ¶32–33)
- Recommendation: Expand supervisory memoranda of understanding with all home country regulators to include resolution plans and issues, and prepare a contingent resolution plan for foreign subsidiaries (¶32).
- Recommendation: Expand the remit of the Financial Stability Council to coordinate and develop the framework for crisis preparedness and management; oversee recovery and resolution planning; conduct stress testing and simulations; develop manuals; and implement a communications strategy (¶33).
- Authorities’ actions and status:
  - Development of crisis management and bank resolution has been incorporated in the work program of the FSC. (MT)
  - The FSC is working on developing a crisis preparedness and management framework. (MT)
  - A Technical Working Group (TWG) of the FSC was established to drive work in this area and the general work program of the FSC. (MT)
  - The TWG undertakes technical assessments on priority areas to enhance understanding of financial stability risks, develop macroprudential policy tools, crisis prevention and resolution framework, and other tools and initiatives for stability and resilience of the domestic financial system. (MT)
  - The TWG has scheduled development of crisis management and bank resolution framework into the medium term. (MT)

### Financial development and development finance institutions (DFIs) (Recommendation ¶38)
- Recommendation: Strengthen line-ministries oversight of DFIs by: (i) improving performance monitoring, (ii) establishing a results framework to track outcomes, and (iii) introducing a regulatory framework specifically designed for DFIs (¶38).
- Authorities’ actions and status:
  - The Presidential Directive CAB 5SP (B) 2021 REV. 1, dated 30th March 2022 directed that the Bank be transitioned into an AgriBank. (ST)
  - In 2022, the Bank submitted the DB’s Project Business Case and Project Initiation Document to the Ministry, which were signed off, enabling the NDB to commence procurement of a Transactional Advisor whose costs were to be borne by the Bank. (ST)
  - The project will be governed through a Project Steering Committee, with Ministry representation. (ST)
  - The Bank requested the Ministry to present an update of the NDB Transformation Journey/Roadmap in May 2024 and will brief the Ministry on the project and unpack findings of the Contextual Assessment report. (ST)

### Key related developments in the financial legal and supervisory framework
- The Banking Bill and the Bank of Botswana Amendment Act, both passed in 2023, strengthened the Financial Stability Council, clarified the mandate of the central bank, and set out arrangements for handling bank resolutions.
- The Botswana Deposit Insurance Scheme (BDIS) was introduced in 2023.

*Source: 1bwaea2024006-print-pdf - Section 43A of the Bank of Botswana (Amendment) Act, 2022 makes*

### Annex X. Data Issues

### Annex X. Data Issues

### Data Adequacy Assessment
- Table 1 heatmap median rating: BABBAAB
- Sectoral questionnaire results (as presented):
  - National Accounts: Coverage BABAA; Consistency BB; Frequency and Timeliness AACAA
  - Prices: Coverage BABB; Consistency A; Frequency and Timeliness A
  - Government Finance Statistics: Coverage BA; Consistency A; Frequency and Timeliness B
  - External Sector Statistics: Coverage BABB; Consistency A; Frequency and Timeliness C
  - Monetary and Financial Statistics: Coverage BA; Consistency A; Frequency and Timeliness D
  - Inter-sectoral Consistency: Median Rating BABBAAB
- Overall staff assessment summary:
  - "The data provided to the Fund has some shortcomings but is broadly adequate for surveillance."
  - Rationale: "Data provision is broadly adequate for surveillance, with some shortcomings including narrow sector coverage of global finance statistics (GFS) data which is limited to Budgetary Central Government."
- Data Quality Characteristics:
  - Granularity: top/bottom cell distinctions noted for Government Finance Statistics and Monetary and Financial Statistics (as in source table).

### Use of Other Data, Data Gaps, and Limitations
- Use of data different from official statistics:
  - The mission supplements official data with diamond production and price data from the largest diamond mining company.
- Other data gaps and limitations:
  - Household survey lacks information on income and consumption, hindering computation of recent measures of poverty and inequality.
  - C-PIMA identified the main data gap: mitigation of climate risk on infrastructure asset management by mapping location and climate vulnerability of major infrastructure assets, including current condition and hazard exposure and vulnerability.
  - Gender data improvements needed for literacy and education, financial usage, and asset ownership.
  - Authorities do not publish information on SOEs; TA was delivered on SOE fiscal risk analysis, and the TA recommendation that SOEs provide financial information to the Ministry of Finance on a regular basis has not yet been implemented.

### Changes Since the Last Article IV Consultation
- Balance of Payments:
  - BOP data for 2021-23 were revised and net errors and omissions reduced to reflect:
    - the 2022 BOP survey
    - the 2022 Foreign Capital Survey with improved data accuracy and increased coverage of transactions from commercial banks.
- National Accounts:
  - The process to rebase the national accounts to update the 2016 benchmark estimates is progressing.
  - Major surveys required for rebasing are planned.
  - Statistics Botswana (SB) is reviewing and finalizing questionnaires for the Census of Economic Establishments (CEE), sample design and IT processing system.
- Government Finance:
  - Decline in quality of fiscal reporting with increased lag to receive fiscal sector data due to technical problems with the budget information system (GABS), preventing finalization of the FY2023 accounts.
  - Authorities are taking actions to upgrade the system by end-2024.

### Corrective Actions and Capacity Development Priorities
- Technical assistance (TA) and ongoing work:
  - STA provided TA to support expanding institutional sector coverage of GFS to consolidated government data; this has not yet been implemented.
  - TA is ongoing on updating/development of the PPI and on rebasing the annual national accounts.
- Assessment language in the source:
  - "The data provided to the Fund has some shortcomings that somewhat hamper surveillance."
  - "The data provided to the Fund has serious shortcomings that significantly hamper surveillance." (phrasing retained as presented in source document)

### Data Standards Initiatives and Common Indicators
- Participation:
  - Botswana participates in the Enhanced General Data Dissemination System (e-GDDS) and publishes data on its National Summary Data Page since January 2016.
- Table of Common Indicators: (as of July 2024) — frequency and timeliness entries shown in source for multiple indicators, including:
  - Exchange Rates: Date of Latest Observation May-24; Date Received 5/31/24; Frequency of Data A; Frequency of Reporting MA; Expected Frequency same day
  - Consumer Price Index: Date of Latest Observation Apr-24; Date Received 7/13/24; Frequency of Data MA; Frequency of Reporting MMM; Expected Frequency 1M3M
  - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Apr-24; 7/13/24; MA; MMM; Expected Frequency 2M3M
  - Reserve/Base Money: Apr-24; 7/13/24; MA; MMM; Expected Frequency 2M3M
  - Broad Money: Apr-24; 7/13/24; MA; MMM; Expected Frequency 1M3M
  - Central Bank Balance Sheet: Apr-24; 7/13/24; MMMM; Expected Frequency 1Q3M
  - Consolidated Balance Sheet of the Banking System: Jun-24; 7/9/24; MMMM; Expected Timeliness 5D
  - Interest Rates: Jun-23; 7/13/24; A/Q/MA/Q/MMM; Expected Frequency 2M2W
  - GDP/GNP and other items: varied entries including Jul-23 11/1/23 A/Q/MA/Q/MQM1Q6W, Dec-23 3/31/24 A/QA/QQQ2Q1Q, Dec-23 3/1/24 A/QA/QQA1Q3Q, Mar-24 6/1/24 A/QA/QMM12W2M, Mar-23 7/1/24 A/QA/QQQ1Q3M, Mar-23 6/1/23 AAQ...2Q..., Dec-23 3/1/24 AAAA3Q9M (entries preserved verbatim as in source).

### Relations with the Fund and Key Financial Statistics
- Membership Status:
  - Joined July 24, 1968; Article VIII
- Quota and SDR positions:
  - Quota 197.20 SDR (million) 100.0 percent of Quota
  - Fund holdings of currency 145.33 SDR (million) 73.70 percent of Quota
  - Reserve position in Fund 51.88 SDR (million) 26.31 percent of Quota
- SDR Department:
  - Net cumulative allocation 246.44 SDR (million) 100.00 percent of Quota
  - Holdings 252.12 SDR (million) 102.30 percent of Quota
- Outstanding Purchases and Loans: None
- Financial Arrangements: None
- Project Obligations to Fund: None
- Implementation of HIPC Initiative: Not Applicable
- Implementation of Multilateral Debt Relief Initiative: Not Applicable
- Implementation of Catastrophe Containment and Relief: Not Applicable
- Exchange Rate Arrangement:
  - "The exchange rate of the Botswana Pula is a crawling peg arrangement against a weighted basket of currencies comprising the SDR and the South African Rand."
  - As of June 30, 2024, the exchange rates: US$1= P13.62; R1=P0.74
- Article IV Consultation:
  - Botswana is on a standard 12-month consultation cycle.
  - The last Article IV consultation was concluded by the Executive Board on August 28, 2023.

*Source: Annex X. Data Issues (from the Botswana staff report materials provided).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1bwaea2024006-print-pdf.pdf_