## Botswana’s Pula Fund and the Government Investment Account

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### A. Introduction and current setup
- Established in 1994, the Pula Fund is owned and managed by the Bank of Botswana (BoB) and aims to save mineral revenues for future generations.
- At end-2023, total Pula Fund assets stood at 20 percent of GDP.
- Distinction from a typical SWF:
  - Government does not have direct access to Pula Fund resources and there are no high-level operational rules for deposits and withdrawals.
  - Government has an indirect claim via the Government Investment Account (GIA) — a savings account in Pula at the BoB.
- Value drivers:
  - Pula Fund value: overall balance of payments and returns on investment (including valuation gains).
  - GIA: primarily driven by the fiscal balance.
- Existing fiscal rule: debt ceiling at 40 percent of GDP, with foreign debt at no more than half of this amount.
- Authorities considering a new government-owned SWF with specific deposit and withdrawal rules; seed funding may come from transferring a portion of existing central bank FX reserves.
- National Development Plan 11 (2017) rule: government to save 40 percent of mineral revenues in financial assets for future generations.

### B. Context — long-term depletion of fiscal and external buffers (key statistics)
- FX reserves: 121 percent of GDP in 2001 → 24 percent by 2023.
- Government cash balances: 43 percent of GDP in FY2008 → 4 percent of GDP in FY2023.
- Government deposits at the BoB (proxy for GIA) at end-2023: P10bn; GIA held P8bn.
- Budget balance: surplus of more than 12 percent of GDP in FY2006/07 → deficits averaging 5 percent of GDP over the past five years.
- Total revenues: more than 40 percent of GDP in 2007 → 28 percent of GDP in 2023.
- Public sector wage bill: 13 percent of GDP.
- Government net financial assets (NFA): 32 percent of GDP in FY2008 → minus 16 percent of GDP by FY2023.
- BoP pressures and reserves drivers:
  - Net portfolio outflows averaged 3.7 percent of GDP between 2000 and 2023.
  - Net outflows from the income balance averaged 5.8 percent of GDP.
- Trade balance: averaged a surplus of 13 percent of GDP between 2000 and 2007; typically in deficit since 2008 mainly due to decline in diamond balance.
- Structural causes: decline in domestic diamond production and elevated public spending-to-GDP ratio.

### C. Structure and mechanics of the Pula Fund and GIA
- BoB FX reserves are divided into:
  - Liquidity Portfolio: money market and fixed income fund for short‑ and medium‑term trade and capital account requirements; typically less than a fifth the size of the Pula Fund.
  - Pula Fund: long‑term investment portfolio in foreign assets; assets in excess of reserves adequacy are invested long‑term in the Pula Fund in consultation with the Ministry of Finance.
- Government accounts at BoB:
  - Government remittance account: receives zero interest for day‑to‑day transactions.
  - GIA: receives an estimated long‑term SDR rate, plus revaluation gains/losses from market‑value movements of Pula Fund assets.
  - Through the GIA, government has a notional claim on the Pula Fund; government’s share of Pula Fund capital roughly equals the GIA balance.
  - GIA increases affect government’s claim but not the size of the Pula Fund; Pula Fund and GIA typically move in tandem without a mechanical relationship.

### D. Expected benefits from creating a new SWF
- Principal benefits identified:
  - Intergenerational equity: accumulate financial savings to preserve wealth for future generations and prepare for diamond depletion.
  - Financial assets vs. investment spending: financial savings better serve intergenerational equity given infrastructure spending efficiency gaps.
  - Buffer against shocks: SWF could build insurance cushion to smooth public expenditure when diamond prices fluctuate.
- Allocation priority given low public debt:
  - Low public debt implies fiscal surpluses should primarily be allocated to building financial assets rather than debt reduction.
- Current gap:
  - Neither the Pula Fund nor the GIA prioritizes accumulation of longer‑term savings; no pure saving fund owned by the government currently exists.
- Limitation:
  - A SWF cannot rebuild buffers alone — accumulation of buffers requires persistent fiscal surpluses; a SWF only manages surpluses.

### E. Fiscal discipline and SWF design considerations (institutional conclusions)
- Feasibility: achieving meaningful savings requires much tighter fiscal policy than recent experience; example benchmark: persistent 1 percent of GDP fiscal surplus versus deficits of almost 4 percent of GDP over past decade.
- Preferable institutional choices:
  - Adopt a new fiscal rule (e.g., an expenditure ceiling) to enshrine commitment to generate fiscal surpluses.
  - Create a new SWF with clear deposit and withdrawal rules; staff favor a “financing fund” model where inflows/outflows are directly related to the budget position.
  - Fiscal rule targeting a fiscal surplus is superior to a rule saving a share of mineral revenues.
  - Financing fund model is superior to ad hoc models; improper design can undermine FX reserves.
- Caution: rigid accumulation rules may create illusion of savings if government continues to borrow in parallel; net wealth effects depend on consolidated balance sheet outcomes.

### F. Calibrating medium‑term fiscal targets — analytical approach and benchmark outcomes
- Two policy objectives:
  - “Insurance” objective: build buffers to absorb revenue shortfalls and avoid large cuts to public expenditure.
  - “Intergenerational equity” objective: stabilize total net wealth (resource wealth + financial wealth).
- Analytical framework: Permanent Income Hypothesis (PIH) — estimate total net wealth and compute fiscal balance to stabilize net wealth going forward.
- Calibration adjustments from 2023 Article IV:
  - Net debt stabilization scenario not considered (aim is to accumulate savings).
  - Asset returns assumed to differ from interest rate on debt.
- Box 2 — assumptions at end FY2023:
  - Gross debt: 20 percent of GDP.
  - Assets: 5 percent of GDP.
  - Net debt: 15 percent of GDP.
  - 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.
  - Effective interest rate on debt: 5 percent (proxy: 1 percent of GDP interest bill divided by 20 percent of GDP gross debt ratio).
- Asset return strategies:
  - Risky strategy: return in pula terms = 10 percent.
  - Prudent strategy: weighted average South Africa–US/euro return = 8 percent in pula terms; US/euro nominal return in pula = 6 percent.
- Option outcomes and required fiscal surpluses:
  - Option 1 — Insurance buffer (medium term):
    - Buffer target: 20 percent of non‑resource GDP (equivalent to 16 percent of GDP).
    - To achieve over 10 years: fiscal surplus of 1.1 percent of GDP on average; net debt ratio improves by 16 percent of GDP.
  - Option 2 — Transferring wealth to future generations (PIH scenarios; sensitive to assumptions):
    - TA report resource wealth: 225 percent of non‑mining GDP at end‑FY2021 (equivalent to 180 percent of GDP) using 8 percent discount rate; combined with net debt of 15 percent of GDP gives total wealth estimate of 165 percent of GDP.
    - Stabilizing wealth in percent of GDP:
      - Under prudent strategy (i_A = 8%, i_D = 5%): fiscal surplus of 9 percent of GDP required.
      - Under risky strategy (i_A = 10%, i_D = 5%): resource wealth revised to 190 percent of non‑resource GDP or 150 percent of GDP; total net wealth 155 percent of GDP; required fiscal surplus 6 percent of GDP.
    - Stabilizing wealth in real terms (less demanding): fiscal surplus target of 2–4 percent of GDP in the medium term.
- Historical fiscal context:
  - Over FY2020‑FY2024, fiscal deficit averaged 4.6 percent of GDP.
  - Over FY2015‑FY2019, fiscal deficit averaged 3.8 percent of GDP.

### Fiscal rule design and timing recommendations
- Fiscal surplus target could be supported by a fiscal rule; several rule types could achieve a 1 percent of GDP surplus (expenditure rule, structural balance rule, non‑resource balance rule).
- Rules should allow nominal balance to fluctuate counter‑cyclically around the 1 percent surplus target; key objective: stable expenditure path.
- Recalibration:
  - Fiscal surplus target should be re‑estimated periodically (best practice: every 3–5 years) because calibration is sensitive to assumptions and objectives.
  - Recalibration should account for export prices, external demand, and frequency of severe shocks.
- Enshrine fiscal target in a fiscal rule for duration of the next National Development Plan (NDP).

### Financing fund model — policy, legal framework, and mechanics
- Legal gaps with current Pula Fund:
  - Legal basis in the Bank of Botswana Act but not legally separated from foreign exchange reserves.
  - No legal provisions requiring monies be paid into the Fund, nor legal restrictions on drawdowns.
  - An Act of Parliament (new or amendment) may be needed to set rules for inflows and outflows.
- Financing fund (mirror image of budget):
  - SWF receives any budget surplus; any budget deficit is financed by withdrawing from the SWF.
  - In practice, net inflows to the financing fund may differ from the fiscal balance because surpluses can reduce debt or governments may fund the SWF while running deficits.
  - A financing fund must be accompanied by a fiscal rule applying to the budget to ensure sufficient savings.
  - Multiple funds option: single financing fund can combine stabilization and saving if fiscal rule is counter‑cyclical; alternatively separate funds require an additional rule to split transfers (example: Chile—transfers to saving fund capped at 0.5 percent of GDP with structural surplus target of 1 percent of GDP).
- Funding/withdrawal mechanics:
  - Pure model: inflows/outflows mirror fiscal surplus/deficit (e.g., 10 pula budget surplus → 10 pula inflow to SWF).
  - Deviations: surpluses may be used to reduce debt; governments may borrow to fund SWF while running deficits.

### Risks with ad hoc inflow–outflow models
- Ad hoc models where SWF rules are independent from the budget and no fiscal rule applies can undermine fiscal discipline.
- Common ad hoc rules: price‑ or revenue‑contingent deposit rules; revenue‑share rules; ad hoc withdrawal rules disconnected from the budget.
- Key problems:
  - Ad hoc rules do not discipline the budget; government can borrow instead of using deposits, worsening fiscal position.
  - “Leveraged deposits” and poor asset‑liability management:
    - SWF deposits financed by government borrowing raise budgetary costs because borrowing is generally more expensive than SWF returns.
    - Example: Ghana (early‑2010s) — inflows increased while government ran large deficits, leading to rising debt‑to‑GDP and withdrawals used for debt repayment rather than stabilization.
    - Risk of selling assets at a discount or exhausting assets when rollover becomes costly or impossible.
  - Transparency problems: SWF wealth may not reflect consolidated government wealth if central government debt rises simultaneously.

### Risks from poorly calibrated rules and recommended calibration
- Poorly calibrated rules may be too ambitious and lead to systematic underfunding of the budget and loss of SWF credibility.
- Example for Botswana:
  - Funding rule transferring 40 percent of mineral revenues to SWF every year would represent 4–5 percent of GDP of forgone revenues for the budget — likely too high.
  - Targeting a surplus of 1 percent of GDP (transferring 1 percent of GDP every year to SWF) would be sufficient to create an adequate safety buffer against shocks.
- IMF caution: borrowing to accumulate deposits is discouraged; Botswana may have a stronger case for accumulating both debt and financial assets given relatively moderate debt costs (effective interest around 4.5 percent at time of writing) and limited rollover risks (no Eurobond).

### Impact of a new SWF on FX reserves (mechanics and scenarios)
- Core point: transferring government deposits to an SWF invested abroad could reduce BoB reserves because those government foreign assets would no longer meet IMF (2009) reserve classification criteria.
- Reserve classification criteria summary:
  - Invested in external assets in foreign financial markets and high‑quality instruments traded in liquid global markets;
  - Controlled by the monetary authority (on central bank books);
  - Can be used for balance‑of‑payments purposes.
- Mechanisms and mitigation:
  - One‑off reallocation reduces BoB reserves; future reserves growth could slow if public‑sector FX inflows are retained by government rather than remitted to central bank.
  - Mitigation: greater fiscal prudence supported by a fiscal rule; tighter monetary policy; competitiveness reforms or beneficiation.
- Illustrative scenarios (assume SWF assets entirely invested abroad and equal loss of central bank reserves):
  - Scenario 1 — “ad hoc model” with 40% funding rule and no fiscal rule:
    - Annual transfer of 40 percent of mineral revenues → 5 percent of GDP forgone reserves for central bank yearly.
    - With reserves at about 25 percent of GDP, this could be unsustainable for peg sustainability.
  - Scenario 2 — “financing fund model” with 1 percent of GDP fiscal surplus rule:
    - Government transfers 1 percent of GDP to fund annually → reduces central bank reserves by same amount, all else equal.
    - Budget position improves by 5 percent of GDP compared to average deficit ratio of 4 percent of GDP over past decade.
    - Assuming import content of 50 percent, import drain on reserves reduces by 2.5 percent of GDP per year → net positive effect on reserves for central bank.

### Institutional setup options, investment strategy, and governance
- Institutional options:
  - Host at BoB with government ownership (no separate legal personality) — leverage BoB expertise; limit administrative costs.
  - Legally independent SWF (statutory or corporate entity) owned by government — own investment management (models: GIC, NSIA); Namibia: independent statutory entity but managed by central bank.
- Process recommendation:
  - Start early; consider ‘starting small’: select design, establish inflow/outflow rules, define legal/institutional requirements, identify team, set aside small seed funding.
  - Seed capital should not substitute for regular transfers from the budget; SWF should become fully operational after fiscal surpluses are restored.
- Investment strategy:
  - Policy determines asset mix: stabilization → liquid low‑risk assets; intertemporal equity → longer‑term assets and higher risk.
  - Risk management: diversification; consider assets negatively correlated with major exports.
  - Domestic investments generally ruled out: risk of quasi‑fiscal operations, inflationary pressures, currency conversion pressures; Botswana Development Corporation better suited for domestic projects.
- Governance, transparency, accountability:
  - Legal basis and clear roles/responsibilities for owner and managers.
  - Managers operate at arm’s length on strategic asset allocations.
  - Oversight: internal auditors, private independent audits, external custodians; publish annual reports and audited financial statements.

### Risks to public financial management (PFM)
- SWFs must respect budget integrity:
  - Budget process remains central mechanism to allocate resources.
  - SWFs should not have authority to spend; outflows should go through the budget.
  - Avoid extrabudgetary designs.
- Lack of integration risks:
  - Liquidity problems, government arrears, fragmented policymaking, duplication, and rent‑seeking capture if SWF outflows are earmarked or allowed extra‑budgetary spending.
  - Domestic investment by SWF risks undermining national PFM system development.

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### Social protection system diagnosis and policy options (selected findings and reforms)
- Spending and composition (FY2022):
  - Botswana allocated 2 percent of GDP to social assistance programs in FY2022.
  - Tertiary education scholarships and sponsorships: over 45 percent of social assistance budget (equivalent to 1 percent of GDP).
  - Old age pensions: 20 percent of social assistance budget (equivalent to 0.4 percent of GDP).
  - Trend: social assistance allocation fell from 3.7 percent of GDP in FY2019 to just above 2 percent in FY2022 (20 percent decline in nominal terms).
- FY2022/FY2023 program‑level figures (select exact values):
  - All social protection: 8,940 mn pula; 3.5 percent of GDP.
  - All social assistance: 5,360 mn pula; 2.08 percent of GDP.
  - Tertiary scholarships: 2,504 mn pula; 0.97 percent of GDP; 35,000 recipients; 1.3 percent of population.
  - Old age pensions: 1,046 mn pula; 0.41 percent of GDP; 137,773 recipients; 5.2 percent of population.
  - Destitute Persons Program: 626 mn pula; 0.24 percent of GDP; 68,712 recipients; 2.6 percent of population.
  - Ipelegeng: 529 mn pula; 0.20 percent of GDP; 83,814 recipients; 3.2 percent of population.
  - School feeding (secondary): 479 mn pula; 0.19 percent of GDP; 182,017 recipients; 6.9 percent of population.
  - All labor market programs: 1,145 mn pula; 0.44 percent of GDP.
  - ISPAAD: 729 mn pula; 0.28 percent of GDP; 124,028 recipients; 4.7 percent of population.
  - All social insurance: 2,434 mn pula; 0.94 percent of GDP; 10,401 recipients; 0.4 percent of population.
  - Public officers pension fund: 2,434 mn pula; 0.94 percent of GDP; 10,401 recipients; 0.4 percent of population.
- Coverage and targeting:
  - Total coverage: 55.8 percent of population benefit directly or indirectly from at least one social assistance scheme.
  - All social assistance programs: Total coverage 52.8 percent.
  - Tertiary scholarships: Total 2.4 percent coverage; Q1 1.8; Q5 3.4; Poor 1.7; Non‑poor 2.6.
  - Old age pensions: Total 19.9; Q1 37.8; Q5 4.6; Poor 36.9; Non‑poor 14.7.
  - Ipelegeng: Total 15.1; Q1 29.2; Q5 1.1; Poor 28.4; Non‑poor 11.0.
  - All labor market programs: Total 6.2; Q1 12.3; Q5 2.1; Poor 11.4; Non‑poor 4.6.
  - All social insurance: Total 3.8; Q1 3.0; Q5 5.9; Poor 2.8; Non‑poor 4.1.
- Empirical performance:
  - Benefit‑cost ratio (Panel A): 0.15 — "for every 100 pula spent on social assistance, only 15 accrue to the individuals below the poverty line."
  - Comparative benchmark: average benefit‑cost ratio ≈ 0.3; frontier ratio for comparable spending = 0.5.
- Administrative design and costs:
  - System comprises nearly 30 programs under 10 ministries/entities.
  - No single fully operational electronic beneficiary registry; administrative expenses ~12 to 14 percent of social assistance budget (EU average ≈ 2½ percent).
  - Two thirds of Destitute Persons Program beneficiaries also receive old age pension — duplication.
- Policy‑relevant implications and recommended reforms:
  - Reallocate away from regressive, high‑cost‑per‑beneficiary programs (notably tertiary scholarships) toward progressive programs (old age pensions, destitute persons, school feeding).
  - Administrative reforms: establish a single digital social registry and joint information management system; streamline eligibility and delivery; harmonize coordination across ministries and districts.
  - Targeting improvements: strengthen means‑testing and program design to prioritize the poor.
  - Program design: consider conditional cash transfers and comprehensive active labor market policies; expand digital payments and data integration (satellite data, mobile usage) for targeting and shock response.
  - Financing: maintain or increase social protection budget while improving progressivity of financing (consider higher top PIT rates; reconsider zero‑rating of goods like petrol and diesel).
  - Specific simulations: discontinuing all tertiary sponsorships could reduce social assistance spending by 50 percent and increase benefit‑cost ratio by more than a third without adversely affecting the Gini coefficient (per simulated scenarios).
- Broader context:
  - Botswana among most unequal countries; drivers include capital‑intensive mining and sparse geography.
  - Targeted fiscal interventions and improved tax progressivity can enhance distributional impact of social protection.

*Source: IMF staff chapter "Designing a Sovereign Wealth Fund for Botswana: Issues and Policy Options" and related chapter excerpts from the supplied PDF.*

### 1. Botswana’s Pula Fund and the Government Investment Account ______________________ 5

### Botswana’s Pula Fund and the Government Investment Account

### A. Introduction and Current Setup
- Established in 1994, the Pula Fund is owned and managed by the Bank of Botswana (BoB) and aims to save mineral revenues for future generations.
- At end-2023, total Pula Fund assets stood at 20 percent of GDP.
- Distinction between Pula Fund and a typical SWF:
  - Government does not have direct access to Pula Fund resources and there are no high-level operational rules for deposits and withdrawals.
  - Government has an indirect claim via the Government Investment Account (GIA) — a savings account in Pula at the BoB.
- The value drivers:
  - Pula Fund value is driven by overall balance of payments and returns on investment (including valuation gains).
  - GIA is primarily driven by the fiscal balance.
- Existing fiscal rule: debt ceiling at 40 percent of GDP, with foreign debt at no more than half of this amount.
- Authorities are considering a new SWF owned by the government with specific deposit and withdrawal rules; seed funding may come from transferring a portion of existing central bank FX reserves.
- National Development Plan 11 (2017) outlined a rule requiring the government to save 40 percent of mineral revenues in financial assets for future generations.

### B. Context: Long-Term Depletion of Fiscal and External Buffers
- External and fiscal buffers have persistently declined over the past two decades; the fiscal and BoP accounts show similar trends with declining inflows and relatively stable outflows.
- Key quantitative trends and indicators:
  - FX reserves: 121 percent of GDP in 2001, falling to 24 percent by 2023.
  - Government cash balances: declined from 43 percent of GDP in FY2008 to 4 percent of GDP in FY2023.
  - Government deposits at the BoB (proxy for GIA) at end-2023: P10bn; GIA held P8bn.
  - Budget balance: shifted from a surplus of more than 12 percent of GDP in FY2006/07 to deficits averaging 5 percent of GDP over the past five years.
  - Total revenues: fell from more than 40 percent of GDP in 2007 to 28 percent of GDP in 2023.
  - Public sector wage bill: 13 percent of GDP.
  - Government net financial assets (NFA): fell from 32 percent of GDP in FY2008 to minus 16 percent of GDP by FY2023.
  - BoP pressures and reserves drivers:
    - Net portfolio outflows averaged 3.7 percent of GDP between 2000 and 2023.
    - Net outflows from the income balance averaged 5.8 percent of GDP.
  - Trade balance: averaged a surplus of 13 percent of GDP between 2000 and 2007; typically in deficit since 2008, mainly due to decline in diamond balance.
- Structural causes: decline in domestic diamond production and elevated public spending-to-GDP ratio.

### C. Box: Structure and Mechanics of Pula Fund and GIA
- BoB FX reserves divided into Liquidity Portfolio and Pula Fund:
  - Liquidity Portfolio: money market and fixed income fund for short- and medium-term trade and capital account requirements; typically less than a fifth the size of the Pula Fund.
  - Pula Fund: long-term investment portfolio in foreign assets; assets in excess of reserves adequacy are invested long-term in the Pula Fund in consultation with the Ministry of Finance.
- GIA and government deposit accounts:
  - Government remittance account: receives zero interest for day-to-day transactions.
  - GIA: receives an estimated long-term SDR rate, plus revaluation gains/losses from market-value movements of Pula Fund assets.
  - Through the GIA, government has a notional claim on the Pula Fund; government’s share of Pula Fund capital roughly equals the GIA balance.
  - When GIA increases, it affects government’s claim but not the size of the Pula Fund; Pula Fund and GIA typically move in tandem but without a mechanical relationship.

### D. Expected Benefits from a New Sovereign Wealth Fund
- Principal benefits identified:
  - Intergenerational equity: accumulating financial savings to preserve wealth for future generations and prepare for diamond depletion.
  - Financial assets vs. investment spending: creating financial assets can better serve intergenerational equity, given challenges in spending mineral revenues efficiently (noted infrastructure spending efficiency gaps).
  - Buffer against shocks: a SWF could build an insurance cushion to smooth public expenditure when diamond prices fluctuate.
- Allocation priority given low public debt:
  - Botswana’s low public debt implies fiscal surpluses should primarily be allocated to building financial assets rather than debt reduction.
- Current gap in saving vehicles:
  - Neither the Pula Fund nor the GIA prioritizes the accumulation of longer-term savings; no pure saving fund owned by the government currently exists.
- Limitation: A SWF cannot, by itself, rebuild buffers — accumulation of buffers requires persistent fiscal surpluses; a SWF only manages surpluses.

### E. Fiscal Discipline and SWF Design Considerations
- Staff conclusion on feasibility:
  - Achieving significant savings to meaningfully fund an SWF would require much tighter fiscal policy than recent experience. Example benchmark: achieving a 1 percent of GDP fiscal surplus on a persistent basis versus deficits of almost 4 percent of GDP over the past decade.
- Preferable institutional choices (high-level):
  - Adopt a new fiscal rule (e.g., an expenditure ceiling) to enshrine government commitment to generate fiscal surpluses in the medium term.
  - Create a new SWF with clear deposit and withdrawal rules; staff favor a “financing fund” model where inflows and outflows are directly related to the budget position.
  - Fiscal rule targeting a fiscal surplus is superior to a rule saving a share of mineral revenues.
  - A financing fund model is superior to ad hoc models; improper design can undermine FX reserves.
- Caution: Rigid accumulation rules may create illusion of savings if the government continues to borrow in parallel; net wealth effects depend on consolidated balance sheet outcomes.

### F. Calibrating Medium-Term Fiscal Targets (Analytical Approach)
- Two alternative policy objectives to guide calibration:
  - “Insurance” objective: build sufficient financial buffers to absorb revenue shortfalls and avoid large cuts to public expenditure when shocks occur.
  - “Intergenerational equity” objective: transfer wealth across generations by stabilizing total net wealth.
- Analytical framework:
  - Use the Permanent Income Hypothesis (PIH) framework by estimating total net wealth (net financial wealth plus resource wealth) and computing the fiscal balance that would stabilize net wealth going forward — i.e., total wealth remains constant with growing financial assets offsetting falling resource wealth.

*Source: IMF staff chapter "Designing a Sovereign Wealth Fund for Botswana: Issues and Policy Options."*

### 15.      This section updates the 2023 Article IV report’s calculation of fiscal targets,

### 15.      This section updates the 2023 Article IV report’s calculation of fiscal targets,

### Calibration adjustments for a SWF context
- Two changes from the 2023 Article IV report are applied:
  - The net debt stabilization scenario is not considered because the aim is to accumulate savings.
  - Asset returns are assumed to differ from the interest rate on debt (previously equal), reflecting that SWF savings are invested in a wide range of assets to achieve higher yield.

### Main conclusions and required fiscal balances
- Authorities will need to generate fiscal surpluses in the medium term.
- Calibration varies significantly by policy objective and the interest-growth differential:
  - Insurance objective: would require 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 even larger surpluses to stabilize wealth in percent of GDP.
- Historical context on fiscal balances:
  - Over FY2020-FY2024, the fiscal deficit averaged 4.6 percent of GDP.
  - Over FY2015-FY2019, the fiscal deficit averaged 3.8 percent of GDP.

### Box 2 — Assumptions used to estimate fiscal balance benchmarks
- Balance sheet and fiscal ratios at end FY2023:
  - Gross debt: 20 percent of GDP.
  - Assets: 5 percent of GDP.
  - Net debt: 15 percent of GDP.
  - Gross interest bill: 1 percent of GDP.
  - Mineral revenues: 10 percent of GDP.
  - Debt ratio assumed constant in the future.
- Growth and GDP composition:
  - 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 return assumptions:
  - Effective interest rate on debt: 5 percent (proxy: 1 percent of GDP interest bill divided by 20 percent of GDP gross debt ratio).
  - Return on financial assets depends on investment strategy:
    - Risky strategy: return in pula terms = 10 percent (long-term bonds), assuming all investments in rand and no currency depreciation.
    - Prudent strategy: half investment in South Africa and half in US/euro; for US/euro assume neutral real rate 1.5 percent + inflation target 2 percent + depreciation against the pula of 2.5 percent => 6 percent nominal return in pula; weighted average South Africa–US/euro return = 8 percent in pula terms.
- Resource wealth definition note: Resource wealth is the net present value of future resource revenues until full depletion of resources.

### Box 2 — Option outcomes and required fiscal surpluses
- Option 1 — Insurance buffer (medium-term):
  - A buffer of 20 percent of non-resource GDP (equivalent to 16 percent of GDP) is estimated sufficient to protect the budget over a full National Development Plan.
  - To achieve this over 10 years, authorities should maintain, on average, a fiscal surplus of 1.1 percent of GDP, which would improve the net debt ratio by 16 percent of GDP.
- Option 2 — Transferring wealth to future generations (PIH-based scenarios, highly sensitive to assumptions):
  - TA report estimates resource wealth at 225 percent of non-mining GDP at end-FY2021 (equivalent to 180 percent of GDP) using an 8 percent discount rate. Combined with net debt of 15 percent of GDP gives total wealth estimate of 165 percent of GDP.
  - Stabilizing wealth in percent of GDP (most demanding, likely unrealistic):
    - Under prudent strategy (i_A = 8%, i_D = 5%): would require a fiscal surplus of 9 percent of GDP (using today’s interest bill and resource revenue ratios: 1 percent of GDP and 10 percent of GDP).
    - Under risky strategy (i_A = 10%, i_D = 5%): resource wealth revised to 190 percent of non-resource GDP or 150 percent of GDP; combined with financial wealth gives total net wealth of 155 percent of GDP; stabilizing this would require a fiscal surplus of 6 percent of GDP.
  - Stabilizing wealth in real terms (less demanding):
    - Using the TA report excel template with an 8 percent discount rate, the non-resource primary deficit is constant in real terms and remains around 7–9 percent of non-resource GDP in the medium term.
    - In terms of overall balance, this translates into a fiscal surplus target of 2–4 percent of GDP in the medium term.
  - Footnotes in Box 2:
    - Reference to formula in Escolano (2010), equation (23).
    - The 8 percent scenario uses the TA report excel template where interest rates on assets and debt were not differentiated; all assumed to be 8 percent.

### Fiscal rule design and timing
- A fiscal surplus target could be supported by a fiscal rule; several rule types could achieve a 1 percent of GDP surplus (expenditure rule, structural balance rule, non-resource balance rule).
- These rules have countercyclical properties by allowing nominal balance to fluctuate around the 1 percent surplus target; key objective is a stable expenditure path.
- Recalibration recommendation:
  - Fiscal surplus target should be re-estimated periodically because calibration is sensitive to assumptions and objectives.
  - Best practice: recalibrate fiscal rules every 3–5 years, accounting for export prices, external demand, and frequency of severe shocks.
  - A fiscal target could be enshrined in a fiscal rule for the duration of the next NDP.

### Proposing a “Financing Fund” design for Botswana (policy and legal framework)
- Current Pula Fund issues:
  - Legal basis in the Bank of Botswana Act, but not legally separated from foreign exchange reserves.
  - No legal provisions requiring monies to be paid into the Fund, nor legal restrictions on drawdowns.
  - An Act of Parliament (new or amendment) may be needed to set rules for inflows and outflows.
- Financing fund model (best-practice example; mirror image of budget):
  - The SWF receives any budget surplus; any budget deficit is financed by withdrawing from the SWF.
  - In practice, net inflows to the financing fund may differ from the fiscal balance because surpluses may be used to reduce debt or governments may continue funding the SWF while running deficits if deficits can be cheaply financed.
  - The fiscal rule link:
    - A financing fund must be accompanied by a fiscal rule applying to the budget to ensure sufficient savings to fund the SWF.
    - Except for stabilization funds, the fiscal rule should generate persistent fiscal surpluses to build assets in the SWF.
  - Multiple funds:
    - A single financing fund can achieve both stabilization and long-term saving if the fiscal rule is counter-cyclical.
    - Alternatively, separate funds can be used (e.g., one for long-term saving and another for stabilization). An additional rule is required to split budget savings across funds (example: Chile—transfers to the saving fund capped at 0.5 percent of GDP with structural surplus target of 1 percent of GDP).
  - Escape clauses and withdrawals:
    - If a tight fiscal rule is pursued (e.g., structural surplus of 1 percent of GDP with expenditure ratio of 30 percent and output gap oscillating between -4 to 4 percent), the nominal overall balance likely fluctuates in range 0–2 percent of GDP; during normal cycles the budget would remain balanced and financing need is unlikely, so withdrawals from the SWF would be unnecessary except in exceptional circumstances. In severe downturns, advice is to resort to debt rather than drawing from the SWF, given low debt in Botswana.

### Funding and withdrawal mechanics under the financing fund model
- Pure model: fund inflows/outflows mirror fiscal surplus/deficit (e.g., 10 pula budget surplus → 10 pula inflow to SWF; 10 pula budget deficit → 10 pula outflow).
- Deviations in practice:
  - Surpluses sometimes used to reduce government debt rather than flow to SWF.
  - Governments may fund the SWF while running deficits if they can borrow cheaply or to develop domestic financial markets.
  - Therefore, the fiscal balance is not always equal to the change in SWF financial assets.

### Risks with ad hoc inflow–outflow models
- Many governments use ad hoc models where SWF operational rules are independent from the budget and no fiscal rule applies to the budget; SWF is treated as an independent fiscal instrument.
- Common ad hoc operational rules:
  - Funding rules: price- or revenue-contingent deposit rules (e.g., threshold price per barrel), revenue-share rules (predetermined share of revenue to fund).
  - Withdrawal rules: ad hoc, price- or revenue-contingent withdrawal conditions disconnected from the budget.
- Problems identified:
  - Ad hoc rules do not discipline the budget. Limiting deposit usage via tight withdrawal rules is ineffective if government can borrow without restriction, potentially worsening the fiscal position because borrowing is generally more expensive than depleting deposits.
  - “Leveraged deposits” and poor asset-liability management can occur:
    - SWF deposits can be generated from government borrowing, increasing budgetary costs because borrowing is generally more expensive than SWF asset returns.
    - Example: Ghana’s early-2010s experience where inflows increased while government ran large deficits, leading to rising debt-to-GDP and withdrawals used for debt repayment rather than stabilization.
    - Risk that in bad times, debt rollover becomes costly or impossible; SWF assets may be sold at a discount or used to cover debt costs, leaving no assets to support spending in downturns.
    - Borrowed deposits are not “true” savings since they do not accumulate net financial assets.
  - Transparency problems: SWF wealth may not represent the outcome of fiscal policy or government overall wealth if SWF accumulates assets while central government has large debt.

*Source: 1bwaea2024007-print-pdf - 15.      This section updates the 2023 Article IV report’s calculation of fiscal targets,*

### 32.      Another problem is that poorly calibrated rules may be too ambitious and lead to

### 1bwaea2024007-print-pdf - 32.      Another problem is that poorly calibrated rules may be too ambitious and lead to

### Risks from poorly calibrated SWF funding/withdrawal rules
- Poorly calibrated rules may be too ambitious and lead to systematic underfunding of the budget, undermining the credibility of the SWF.
- If funding/withdrawal rules are inconsistent with the budget (for instance, by creating funding shortages, cash management problems, or additional budget costs), they are likely to be bypassed; the SWF itself could eventually be closed, as illustrated by numerous country examples.
- Example for Botswana:
  - A funding rule transferring 40 percent of mineral revenues to the SWF every year (as initially considered) would represent 4–5 percent of GDP of forgone revenues for the budget, which seems too high.
  - Targeting a surplus of 1 percent of GDP—meaning transferring 1 percent of GDP every year to the SWF—would be sufficient to create an adequate safety buffer against shocks.
- IMF general caution: borrowing to accumulate deposits is discouraged for cost and risk management reasons; however, in Botswana there is perhaps a stronger case for accumulating both debt and financial assets, since debt costs are relatively moderate (an effective interest of around 4.5 percent at the time of writing this paper) and rollover risks are limited (no Eurobond).

### Impact of the SWF on FX reserves (Box 3)
- Core point: A new SWF could paradoxically lead to a decline in FX reserves if government deposits are transferred to the SWF and converted into forex invested abroad, because government foreign assets in a SWF are not treated as central bank reserves by international statistics standards.
- Criteria for reserve classification (IMF 2009): reserves must meet (a) invested in external assets in foreign financial markets and in high-quality financial instruments traded in highly liquid and deep global markets; (b) controlled by monetary authority (in the books of the central bank); and (c) can be used toward balance-of-payments purposes.
- Mechanisms:
  - One-off reallocation to the SWF reduces the level of BoB reserves.
  - Future reserve growth could slow if public-sector FX inflows (mostly SACU and mineral revenues) are partly retained by the government rather than remitted to the central bank.
  - Given that reserves have already declined sharply in the past decade, slower accumulation may be problematic for the sustainability of the exchange rate regime.
- Mitigation: effect could be mitigated if the government exerts greater fiscal prudence, supported by a fiscal rule—higher fiscal balance → lower public imports and lower external debt service → less pressure on reserves.
- Additional offset possibilities: tighter monetary policy and competitiveness reforms or beneficiation (to increase the share of higher-priced polished diamond exports) could offset the decline in reserves.

- Simple illustrative scenarios (assume SWF assets entirely invested abroad so any transfer equals loss of central bank reserves, all else equal):
  - Scenario 1—"ad hoc model” with 40% funding rule and no fiscal rule:
    - Every year, the government transfers 40 percent of mineral revenues to the Fund, which translates into 5 percent of GDP of forgone reserves for the central bank.
    - If the government is not subject to a fiscal rule and does not change the fiscal deficit path, it continues to tap reserves at the same pace (for imports and debt service).
    - Given that FX reserves account today for about 25 percent of GDP, this could be an unsustainable reform from the perspective of the sustainability of the peg.
  - Scenario 2—"financing fund model” with 1 percent of GDP fiscal surplus rule:
    - The government transfers to the fund 1 percent of GDP every year, which reduces the central bank’s reserves by the same amount, all else being equal.
    - The budget’s position would now be much stronger, with an improvement of 5 percent of GDP compared to the average deficit ratio of 4 percent of GDP observed over the past decade.
    - Assuming an import content of 50 percent, this means that the import drain on reserves would be reduced by 2.5 percent of GDP every year (without even considering the possible reduction in external debt service).
    - Thus, the net effect on reserves would be positive for the central bank.

### Institutional setup considerations
- Options for SWF structure and ownership:
  - Host at the Bank of Botswana (BoB) with government ultimate ownership (similar to Norway’s SWF): the fund would be a pool of assets without separate legal personality; assets managed by BoB leveraging its asset management expertise; limits administrative costs.
  - Legally independent SWF (statutory or corporate entity) owned by government with its own investment management (model of Singapore’s GIC or Nigeria Sovereign Investment Authority); Namibia variation: independent statutory entity but managed by the central bank.
- Process recommendation:
  - Start early; consider ‘starting small’ with initial steps: select overall design, establish inflow/outflow rules, define legal and institutional requirements, identify a team, and set aside a small amount of seed funding.
  - Seed capital should not substitute for regular transfers from the budget; SWF should only become fully operational after significant fiscal effort has been made to return to fiscal surpluses from the current deficit position.

### SWF investment strategy
- Legal framework must include clear and transparent investment policy and guidelines to monitor external managers.
- Investment policy depends on economic objective:
  - Short-term stabilization → focus on liquid and low-risk investments.
  - Intertemporal equity → longer-term assets and more risk-taking, requiring expertise to oversee and protect SWF integrity.
- Proper risk management requires diversification; SWFs may hold assets with negative correlation to the country’s major exports (e.g., diamonds) or offset price risk of future imports.
- Domestic investments are generally ruled out:
  - Domestic investments can counteract objective of isolating the economy from revenue volatility.
  - Large domestic investments can be hidden quasi-fiscal or extrabudgetary operations and could overlap with development banks’ remit.
  - Domestic investments typically require converting accumulated assets back to domestic currency, creating pressures on the domestic currency and stimulating domestic demand with inflationary consequences.
  - In Botswana, institutions such as Botswana Development Corporation are better suited for domestic projects.

### Governance, transparency, and accountability
- Safeguards for sound and transparent management:
  - Legal basis and institutional setup with clear roles and responsibilities for government (owner) and fund managers.
  - SWF managers should administer assets at arm’s length on the basis of strategic asset allocations and accountability principles provided by the government.
  - Proper oversight and transparent operations: internal auditors, private independent auditing firms, external custodians; production and publication of annual reports and financial statements; annual audits in line with international standards or equivalent national auditing standards.

### Risks to public financial management (PFM)
- SWFs should respect budget integrity:
  - Budget process must remain the central mechanism to allocate resources.
  - SWFs should not have authority to spend; their outflows should go through the budget.
  - Avoid designs where the SWF is an extrabudgetary entity.
- Lack of integration between SWF operations and the budget process can create expenditure management problems:
  - Spending pressures in the budget can lead to liquidity problems and government arrears if the government loses revenues going to the SWF and is short on cash.
  - If SWF is allowed extra-budgetary spending or outflows are earmarked, policymaking fragments, reducing efficiency and control over expenditure (duplication, re-channeled spending pressures).
  - Allowing SWFs to pursue domestic investment increases risk of rent-seeking capture.
  - Scarce resources may be diverted away from developing national PFM systems, undermining broader institutional development.

### Annex highlights — Norway and Chile frameworks (selected points)
- Norway’s fiscal rule and SWF:
  - Fiscal rule: non-oil structural deficit of the central government should not exceed the expected real return of the SWF (initially estimated at 4 percent, lowered to 3 percent in 2017).
  - GPF receives every year the full amount of oil revenues (transferred from the budget) and funds the budget’s non-oil deficit; the GPF covers the budget non-oil deficit which is capped at 3 percent of the GPF assets.
  - The GPF functions like a “financing fund”; sending oil revenues net of returns is equivalent to sending oil revenues and receiving financing of the non-oil deficit.
  - The government transfers all oil revenues to the fund is possible because Norway has large non-oil revenues and the budget receives returns of the GPF (assets above 300 percent of GDP in 2023).
  - The GPF does not finance debt amortization; it only finances the non-oil deficit.
- Chile’s fiscal rule:
  - Sets a limit on the structural budget balance with an independent body providing key inputs.
  - Structural revenues are defined as revenues if (i) the economy were operating at full potential; and (ii) the prices of copper and molybdenum were at their long-term levels.
  - Fiscal surplus target has been revised over time:
    - 2001–07: constant target for the structural balance was a 1 percent of GDP surplus.
    - 2008–09: new constant target specified (surplus of 0.5 percent of GDP).
    - 2011–2019: CAB target remained in the range between -1.0 and -1.8 percent of GDP.

*Source: Excerpt from 1bwaea2024007-print-pdf (IMF).*

### 10.      Chile maintains two separate SWFs: a stabilization fund to insulate the budget from

### 10.      Chile maintains two separate SWFs: a stabilization fund to insulate the budget from volatile commodity prices (ESSF) and a saving fund to accumulate resources over a longer time horizon (PRF).

### Structure and rules for transfers
- Chile operates two sovereign wealth funds (SWFs): the stabilization fund (ESSF) and the saving fund (PRF).
- Any fiscal surpluses generated by the fiscal rule are transferred first to the PRF (with a minimum of 0.2 percent of GDP per year but could go up to 0.5 percent of GDP if there are large fiscal surpluses), then the residual surplus (if any) goes to the stabilization fund.

### Withdrawal rules and asset-liability management
- Withdrawals from the ESSF are not automatic and are decided annually by the minister of finance.
- This discretionary approach allows incorporation of asset-liability management considerations.
- The ESSF can be used to:
  - finance fiscal deficits (or part of them), or
  - repay debt by selling some SWF assets if debt is considered too expensive.
- The ESSF could potentially cover up to the gross financing needs (rather than just the deficit, as in the vanilla financing fund model).
- Alternatively, the minister may decide that the ESSF will not be used to cover the deficit in a particular year, in which case the deficit would be financed solely through additional borrowing.

### Implications of the fiscal surplus target — illustrative examples
- If the fiscal surplus target is sufficiently high, withdrawals from the stabilization SWF may not be needed, even during a downturn. Two simple examples are provided:
  - Example 1: 1 percent of GDP surplus target (target set over 2001–07).
    - During the business cycle, the nominal balance oscillates around the structural surplus target of 1 percent of GDP.
    - The balance would fluctuate between 0 and 2 percent of GDP assuming an expenditure ratio of 25 percent of GDP and an OG between -4 percent and +4 percent (as estimated by Medina and Magud 2011).
    - Under the 1 percent surplus rule, the budget is unlikely to require transfers from the ESSF. Even in severe downturns, the fiscal balance is likely to record a small surplus; thus, even after transferring the minimum amount of 0.2 percent of GDP to the PRF, the budget is unlikely to be in deficit.
    - In bad times, the budget would simply reduce its transfers to the two funds, but these transfers would not turn negative.
  - Example 2: 0.5 percent of GDP structural target (revised Chilean rule in 2008-09).
    - Under the same assumptions, the nominal balance would oscillate between -0.5 percent and +1.5 percent of GDP.
    - Given the mandatory transfer to the PRF, the budget would draw 0.7% of GDP from the ESSF at the trough of the business cycle, and it would transfer 1 percent of GDP at its peak (given that the transfer to PRF is capped at 0.5 percent of GDP).
    - Over the cycle, the budget transfers to the ESSF a maximum of 1 percent of GDP, which declines gradually when the economy slows down until becoming a withdrawal of 0.7 percent of GDP; when the output gap is closed, the nominal balance is 0.5 percent of GDP and there is no transfer/withdrawal to the ESSF.

### Key technical relation and notes
- Relation: SB ≈ OB – α.OG with α being the expenditure ratio.
- Note: The budget does not draw from a fund when it records a balance or surplus.

*Source: Excerpt from IMF PDF chapter content.*

### Box 1. Botswana Social Protection System (concluded)

### Box 1. Botswana Social Protection System (concluded)

### Evaluation framework and data
- Analysis uses administrative data from the Ministry of Local Government and Rural Development and the 2015–16 Multi-Topic Household Survey (MTHSS) to:
  - Construct aggregate measures of social protection spending across programs and track number of beneficiaries.
  - Estimate program coverage and transfer amounts received by individuals at different consumption levels.
  - Infer distribution of pre-transfer consumption (pre-transfer consumption is total consumption minus identified social protection transfers).
  - Estimate program impacts on inequality and assess spending efficiency in reducing inequality.

### Spending levels and composition
- Botswana allocated 2 percent of GDP to social assistance programs in FY2022.
- In FY2022:
  - Tertiary education scholarships and sponsorships consume over 45 percent of the social assistance budget (equivalent to 1 percent of GDP).
  - Old age pensions absorb 20 percent of the social assistance budget (equivalent to 0.4 percent of GDP).
  - Other major social assistance items include Ipelegeng (public works), the Secondary School Feeding Program, and the Destitute Persons Program.
- Trend:
  - Social assistance allocation fell from 3.7 percent of GDP in FY2019 to just above 2 percent in FY2022, with a decline of 20 percent in nominal terms.
- Other program spending:
  - Labor market programs averaged 0.5 percent of GDP between FY2018 and FY2022.
  - OECD median for labor market spending cited as 1.7 percent of GDP.
  - Social insurance spending is about 1 percent of GDP (noted as half the level of neighboring countries like Namibia and South Africa).
- FY2022/FY2023 program-level figures (select, exact values from Table 1):
  - All social protection: 8,940 mn pula; 3.5 percent of GDP.
  - All social assistance: 5,360 mn pula; 2.08 percent of GDP.
  - Tertiary scholarships: 2,504 mn pula; 0.97 percent of GDP; 35,000 recipients; 1.3 percent of population.
  - Old age pensions: 1,046 mn pula; 0.41 percent of GDP; 137,773 recipients; 5.2 percent of population.
  - Destitute Persons Program: 626 mn pula; 0.24 percent of GDP; 68,712 recipients; 2.6 percent of population.
  - Ipelegeng: 529 mn pula; 0.20 percent of GDP; 83,814 recipients; 3.2 percent of population.
  - School feeding (secondary): 479 mn pula; 0.19 percent of GDP; 182,017 recipients; 6.9 percent of population.
  - All labor market programs: 1,145 mn pula; 0.44 percent of GDP.
  - ISPAAD: 729 mn pula; 0.28 percent of GDP; 124,028 recipients; 4.7 percent of population.
  - All social insurance: 2,434 mn pula; 0.94 percent of GDP; 10,401 recipients; 0.4 percent of population.
  - Public officers pension fund: 2,434 mn pula; 0.94 percent of GDP; 10,401 recipients; 0.4 percent of population.

### Coverage and distributional patterns
- Overall coverage:
  - More than half of the total population are beneficiaries, directly or indirectly, of at least one social assistance scheme (about double the SSA average).
  - Main programs with wide reach: old age pensions, Ipelegeng, and the universal secondary school feeding program.
  - Tertiary scholarships and sponsorships, despite large funding, benefit only 2½ percent of the population.
  - Combination of all social assistance programs covers nearly four-fifths of Botswana’s poor population.
  - Labor market programs cover 6 percent of the total population (comparable to upper-middle income country averages).
- Social insurance coverage:
  - Approximately 10,000 pensioners receive benefits from the Public Officers Pension Fund, representing only 15 percent of those over the age of 65.
  - There are 150,000 active contributors—representing 30 percent of formal employment and 18 percent of total (formal and informal) employment.
  - When combined with non-public pension funds, slightly below 60 percent of formal sector employees are enrolled in a pension plan.
- Distribution by consumption decile and poverty status (select exact shares from Table 2):
  - All social protection: Total coverage 55.8 percent; Q1 79.2; Q2 72.0; Q3 59.4; Q4 41.1; Q5 27.2; Poor 78.3; Non-poor 48.8.
  - All social assistance programs: Total 52.8; Q1 76.7; Q5 22.7; Poor 76.1; Non-poor 45.7.
  - Tertiary scholarships: Total 2.4; Q1 1.8; Q5 3.4; Poor 1.7; Non-poor 2.6.
  - Old age pensions: Total 19.9; Q1 37.8; Q5 4.6; Poor 36.9; Non-poor 14.7.
  - Ipelegeng: Total 15.1; Q1 29.2; Q5 1.1; Poor 28.4; Non-poor 11.0.
  - School feeding (secondary): Total 12.4; Q1 14.3; Q5 6.3; Poor 15.0; Non-poor 11.6.
  - All labor market programs: Total 6.2; Q1 12.3; Q5 2.1; Poor 11.4; Non-poor 4.6.
  - All social insurance: Total 3.8; Q1 3.0; Q5 5.9; Poor 2.8; Non-poor 4.1.
- Targeting performance:
  - More than 70 percent of beneficiaries are from the upper four quintiles of consumption.
  - Labor market programs are relatively better targeted: almost 40 percent of individuals served fall within the poorest quintile (ISPAAD excluded from some analyses due to data limitations).
  - Social insurance recipients skew toward higher income quintiles.

### Administrative design, coordination, and costs
- System complexity:
  - Social protection encompasses 30 programs under the jurisdiction of 10 different ministries and government entities.
  - No single fully operational electronic registry of beneficiaries or joint information management system across programs.
  - Multiple delivery methods and absence of a single social registry limit rapid expansion in shocks.
  - Implementation varies significantly across districts; coordination between local implementers and supervising ministries is often weak.
- Administrative costs and inefficiencies:
  - Administrative expenses constitute approximately 12 to 14 percent of the social assistance budget.
  - For comparison, average administrative costs in the European Union are about 2½ percent of total spending.
  - Duplication: Two thirds of Destitute Persons Program beneficiaries also benefit from the old age pension.
  - Resultant issues include paperwork burdens, repeated submission of information by beneficiaries, time-consuming targeting and selection, and financial leakages.

### Impact on poverty and inequality and efficiency considerations
- Overall effect:
  - Poor targeting and system complexity reduce the ability of social protection to markedly reduce poverty and inequality.
- Specific findings and scenarios:
  - A large share of financing is allocated to regressive programs: tertiary education expenditures predominantly benefit higher income quintiles and yield limited poverty and inequality reduction.
  - Hypothetical scenario: discontinuing all tertiary sponsorships and scholarships would have limited impact on the poverty gap, but would result in a 50 percent reduction in social assistance spending and could increase the benefit-cost ratio by more than a third without adversely affecting the Gini inequality coefficient.
  - Progressive programs (old age pensions, destitute persons, secondary school feeding) collectively reach more than half of the poor population, but average spending per recipient in these programs is 9-11 times lower than the average spending per recipient of tertiary scholarships and sponsorships.
  - Reducing administrative costs to European Union levels could improve the benefit-cost ratio by 10 percent, even without reallocating spending across programs.

### Key policy-relevant implications (as described in the text)
- Reallocation potential:
  - Significant fiscal savings and efficiency gains could be achieved by reallocating funds away from regressive, high-cost-per-beneficiary programs (notably tertiary scholarships and sponsorships) toward more progressive programs that reach the poor.
- Administrative reforms:
  - Establishing a single fully operational electronic registry of beneficiaries and a joint information management system could reduce administrative overhead, limit duplication, and facilitate rapid expansion of benefits during shocks.
  - Streamlining eligibility criteria, harmonizing delivery methods, and improving coordination across ministries and local implementers would reduce paperwork burdens and overhead costs.
- Targeting improvements:
  - Strengthening means-testing and program design to prioritize progressive programs (old age pensions, destitute persons, school feeding) would enhance poverty and inequality reduction per pula spent.
- Note on labor market programs:
  - Labor market programs cover a modest share of GDP but reach poorer quintiles relatively well; data gaps (e.g., ISPAAD) should be addressed to fully assess effectiveness.

*Source: MoLGRD, WB, 2022, and BPOPF annual report (figures and program descriptions as reported in Box 1 of the source).*

### 23.      The limited effect on poverty and inequality is confirmed by an empirical analysis

### 23.      The limited effect on poverty and inequality is confirmed by an empirical analysis

### Empirical analysis of social assistance
- Data source: World Bank ASPIRE database based on the 2015–16 Multi-Topic Household Survey.
- Panel A finding: For Botswana, the benefit-cost ratio is 0.15 — "for every 100 pula spent on social assistance, only 15 accrue to the individuals below the poverty line."
- Comparative benchmarks:
  - Average benefit-cost ratio: approximately 0.3.
  - Frontier ratio for countries with comparable spending: 0.5.
- Interpretation: Although social assistance programs reach most of the poor population, spending is tilted towards richer individuals through regressive programs, producing only modest improvements in inequality (see simulated Gini reductions in Figure 3, Panel B).

### Scope and limitations of the analysis
- Programs not covered due to data limits: labor market and social insurance programs.
- Tertiary education subsidies and scholarships:
  - Fall under the NSPF purpose: "to prevent, address, and reduce the risks of poverty and vulnerability for Batswana throughout their lives."
  - Not primarily aimed at poverty eradication; access skewed towards wealthier individuals.
  - The chapter focuses on distributional impacts and does not account for the long-run human capital and earnings effects of tertiary education subsidies.

### Financing social protection: overview
- Rationale: The distributional impact of social protection depends on both spending and financing. A progressive benefits package could be negated by regressive financing; conversely, progressive taxation can enhance the distributive effect of neutral transfers.
- Focus: Preliminary assessment of the consolidated effects of social protection and its financing, concentrating on the PIT and VAT.

### Personal Income Tax (PIT) and VAT: effects on inequality
- PIT design in Botswana:
  - Five income tax brackets with progressive rates varying from 0 to 25 percent for top earners.
  - The highest marginal tax rate is the lowest in the SACU region and low by international standards.
  - Estimated effect: PIT reduces the Gini coefficient by 3.5 percentage points.
- VAT design in Botswana:
  - Uniform rate of 14 percent, with exceptions (some staple food items and fuel zero-rated).
  - Estimation method: compute average VAT rates 휏g for 12 consumption categories and VAT paid per individual as VAT_i = ∑ 휏g C_ig where C_ig is consumption by individual i of category g.
  - Estimated effect: VAT leads to an estimated reduction in the Gini coefficient by approximately 1 percentage point.
- Interpretation: Both PIT and VAT have limited impact on inequality in Botswana; the tax system is insufficiently progressive to markedly amplify social protection’s effect on income inequality.

### Key policy implication on tax design
- With a relatively flat PIT schedule and low top rates, higher earners do not contribute enough to create a more equitable income distribution.
- VAT exemptions for certain goods may benefit richer consumers more than poorer consumers, potentially aggravating income disparities.
- Conclusion: There is a clear need for a more progressive taxation approach so the tax system complements, rather than undermines, social protection objectives.

### Reforms: international experiences and options for Botswana — overview
- Four reform areas examined: (1) overall design, (2) choice of programs, (3) delivery and targeting technologies, and (4) financing.
- Sources referenced for best practices: IMF (2014), Clements and others (2015), World Bank (2022b), ILO (2023), Soares and others (2010), World Bank (2014), ILO (2016), World Bank (2019).

### Simplifying the social protection system (Best practice 1)
- Common reform actions observed internationally:
  - Consolidating programs to reduce fragmentation and improve coherence.
  - Introducing a single social registry to centralize beneficiary data and improve targeting.
  - Making the system more "adaptive" to allow rapid vertical (benefit level) or horizontal (number of beneficiaries) adjustments in response to shocks.
- Example: Bolsa Familia (Brazil) — integrated multiple cash transfers into a unified conditional cash transfer program supported by a single social registry and flexible scaling in crises.
- Application to Botswana — suggested measures:
  - Reduce the number of programs (current landscape: nearly 30 programs).
  - Accelerate rollout of the digital Single Social Registry (SSR), initiated in 2016 but delayed.
  - Improve program adaptability to allow swift scaling in response to mining-related or climate shocks.

### Introducing more effective programs (Best practice 2)
- Promising program types:
  - Conditional cash transfers (CCT):
    - Provide financial assistance to families contingent on behaviors (e.g., school attendance, health check-ups).
    - Example: Prospera (Mexico) with medium- and long-term gains in education, consumption, and labor outcomes.
  - Comprehensive active labor market programs:
    - Focus on workforce development, technical and vocational education, and training.
    - Evidence of success in countries like Ghana, Uruguay, India; outcomes depend on program design and execution.
    - Complementary measures: employment incentives, public employment services, start-up incentives.
- Application to Botswana — suggested reforms:
  - Move from in-kind delivery to means-tested conditional cash transfers for some programs, contingent on administrative capacity and effective SSR operation.
  - Reform labor-market programs to emphasize skills development, life-long learning, private sector cooperation, job-search assistance, career guidance, intermediation services, and entrepreneurship promotion.
  - Noted Botswana initiatives: Ipelegeng Skills Development Component launched in 2022; Chema Chema Fund created to support youth entrepreneurship and credit access.

### Exploiting new technologies for targeting and delivery (Best practice 3)
- International examples:
  - Electronic social registries that exchange data across land, vehicle, and health registries (Turkey, Chile).
  - Use of machine-learning on registry data to construct need-based indicators (Colombia, Togo).
  - Mobile money and digital payments to reduce delivery costs (Ghana, Kenya, Rwanda, Uganda).
- Application to Botswana — suggested actions:
  - Build capacity to digitize and regularly update beneficiary data.
  - Integrate SSR data with other sources (e.g., satellite imagery, mobile phone usage) to identify expansion opportunities.
  - Use satellite data on crop performance to scale up programs in drought-affected areas as in Kenya, Uganda, or Niger.
  - Leverage digital or mobile payments supported by Botswana’s national identity card system.

### Ensuring sufficient and progressive financing (Best practice 4)
- Key financing strategies:
  - Redirect funds away from less effective programs (potentially budget-neutral) to interventions with higher impact on the most vulnerable; example: Indonesia cut costly fuel subsidies to finance low-income family support.
  - Improve progressivity of income taxation and minimize use of reduced VAT rates:
    - Design PIT with progressive rate structures to redistribute from richer to poorer segments.
    - Recognize that consumption taxes like VAT are generally less suitable to combat inequality; exemptions or reduced rates are blunt redistributive tools because the poor consume less than the rich in absolute terms.

*Source: Chapter excerpt titled "The limited effect on poverty and inequality is confirmed by an empirical analysis" from the supplied IMF PDF content.*

### 37.      Application to Botswana: On the financing side, the priority is to maintain or increase the

### Application to Botswana

### Financing priorities and options
- Priority: maintain or increase the budget allocated to social protection, while enhancing progressivity.
- Reallocating existing funding across programs:
  - Introducing means-tested eligibility criteria for tertiary education scholarships and sponsorships could reduce the number of beneficiaries (excluding the richest ones) and generate savings.
  - Alternatively, evaluate replacing most of the scholarships and sponsorships with a student loan program.
  - Funds saved from such reforms could be redirected to more targeted programs that better address the needs of economically disadvantaged groups, including school feeding schemes, old age pensions, and the destitute persons program.
- Enhancing tax system progressivity:
  - Consider increasing the top marginal PIT rates, which are currently among the lowest in SSA.
  - Reconsider the application of zero-rated VAT on items that disproportionately benefit higher-income groups, such as petrol and diesel (see IMF 2017b).

### Key conclusions on inequality and economic structure
- Botswana stands as one of the most unequal countries globally.
- Primary drivers of inequality:
  - Economic structure heavily relies on capital-intensive mining industries.
  - Geographic characteristics: the country is both vast and sparsely populated.
- These elements create a challenging environment for addressing economic disparities and fostering more inclusive growth.
- Targeted fiscal interventions can play a key role to mitigate these trends.

### Assessment of the social protection system
- The social protection system, despite being designed to support the neediest, suffers from inefficiency.
- Observed system weaknesses:
  - Allocation of funds is tilted towards regressive programs.
  - The system is fragmented and incurs high administrative costs.
- These features compound the system’s inefficiency and limit effectiveness in reaching the poor.

### Recommended reforms to improve efficiency and effectiveness
- Simplify the existing framework and make it more adaptive.
- Introduce a single social registry to enhance targeting and coordination.
- Strengthen the role of conditional transfers and active labor market policies to better align assistance with beneficiary needs.
- Modernize delivery and targeting methods to reduce administrative costs and improve reach.
- Secure sufficient and progressively-sourced financing to sustain improvements over time.

*Source: INTERNATIONAL MONETARY FUND (Botswana).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1bwaea2024007-print-pdf.pdf_