## High-Level Summary Technical Assistance Report — Botswana Domestic Bond Market Development

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**Canonical URL:** [High-Level Summary Technical Assistance Report — Botswana Domestic Bond Market Development](https://www.imf.org/-/media/files/publications/hls/2023/english/hlsea2023002.pdf)

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### Background
- Mission requested by the Ministry of Finance; IMF team mission dates: August 17–26, 2022.
- Mission team: Trevor Lessard (Mission Chief), Laszlo Buzas, and Bill Northfield (IMF external experts).
- Objective: support development of the local currency government bond market; assess the current stage of the sovereign debt market; formulate policy recommendations for each of the six building blocks in the Guidance Note for Developing Local Currency Bond Markets.
- Delivered technical presentations on investor relations, issuance strategies, and inflation-linked bonds.
- Produced an aide memoire to support a country-led comprehensive reform strategy and to inform the forthcoming FSAP for Botswana.
- JEL Classification Numbers: G11, G18, H63.

### Summary of Findings
- Monetary policy framework
  - Implementation of a new monetary policy framework to support the Bank of Botswana’s (BoB) inflation targeting regime is a welcome development for domestic debt market development.
  - Early indications are encouraging that the framework will materially improve the BoB’s ability to conduct monetary policy and achieve low and stable inflation—a key ingredient to domestic market development.

- Shift from external to domestic financing
  - Significant scope exists to shift funding from non-concessional external borrowing to the domestic bond market.
  - Such a shift would facilitate building a robust yield curve and increased depth in benchmark bond issuance.

- Primary market constraints
  - Further improvements in demand for benchmark securities require primary market reforms and a commitment to allow rates to be determined competitively in auctions.
  - Improved auction rules (including how to deal with outlier bids) and an overhaul of the primary dealer agreement would alleviate critical bottlenecks.
  - Enhanced communication with market participants is needed to increase transparency and investor appetite, especially among non-bank financial institutions and non-resident investors.

- Coordination and money market role
  - Coordination between debt management and liquidity management should be enhanced.
  - An efficient money market is important to develop the broader market for public bonds; improved coordination can help mop up excess liquidity and stimulate demand for domestic government securities.
  - Improved information sharing, especially on liquidity and cash forecasting, is a critical first step.

- Secondary market and investor base
  - Material improvements in the secondary market will take more time and should be sequenced after foundational building blocks (money markets, primary markets) operate more efficiently.
  - Opportunity to tap Botswana’s relatively large non-bank investor base, notably the pension system, which holds sizeable assets and, due to recent legal changes, will need to hold a higher share of domestic assets.

- Costs and medium-term strategy
  - Measures to develop the domestic debt market are likely to result temporarily in higher funding costs, but are expected to be counterbalanced by lower financing costs in the medium-to-long term.
  - A regular and comprehensive medium-term debt strategy (MTDS) should assess the costs and benefits of different financing strategies and domestic market development.
  - The Ministry of Finance’s current efforts to update the MTDS present an opportunity to secure high-level support for local currency bond market (LCBM) development.

- Assessment of the six building blocks
  - Financial market infrastructure: assessed at the “emerging” stage.
  - Legal and regulatory framework: assessed at the “emerging” stage.
  - Investor base: assessed as “developing”.
  - Money market: assessed as “developing”.
  - Primary market: assessed as “developing” (sub-components show significant heterogeneity).
  - Secondary market: assessed as “nascent” (lowest scored building block).

### Summary of Recommendations
- Phased implementation approach
  - Prioritize an initial phase addressing critical bottlenecks and quick wins concentrated on the primary market.
  - Sequence reforms so that secondary market and non-resident investor attraction efforts follow once foundational building blocks function efficiently.

- Primary market reforms (priority)
  - Reform auction rules, including procedures for handling outlier bids.
  - Overhaul the primary dealer agreement.
  - Commit to allow rates to be determined competitively in auctions.
  - Enhance communication and transparency with market participants to grow demand from non-bank financial institutions and non-residents.

- Coordination and institutional arrangements
  - Strengthen coordination between debt management and liquidity management; improve information sharing on liquidity and cash forecasting.
  - Consider assigning an LCBM project lead with authority, capacity, and support to coordinate across ministries and agencies and drive reform implementation.

- Medium-term planning and cost assessment
  - Update and use the MTDS to candidly assess the costs and benefits of domestic market development and secure high-level support for the reform program.

*Source: 2023 International Monetary Fund HLS/23/02 High-Level Summary Technical Assistance Report — Botswana: Domestic Bond Market Development.*

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_Source: https://www.imf.org/-/media/files/publications/hls/2023/english/hlsea2023002.pdf_