## _cr0666 ## Source details **Canonical URL:** [_cr0666](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr0666.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr0666.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr0666.pdf.json) --- ### Executive summary — major challenges and context - Diamonds continue to dominate the economy: account for over one-third of GDP, 75 percent of exports, and 45 percent of government revenue. - HIV/AIDS is a severe constraint: prevalence rate among adults could exceed 35 percent; a recent CSO AIDS impact survey suggests 25.3 percent of the population aged 15–49 years (survey likely underestimates true incidence). - Social indicators lag despite growth: nearly a quarter of the population living below US$1 per day; unemployment over 20 percent; Gini coefficient estimated at 0.57 in the 2002/03 Household Survey. - Long-term growth record: Real GDP growth has averaged over 8 percent per annum over the past three decades. - Near-term growth: Real GDP growth decelerated to 5.7 percent in 2003/04 (July–June) and is expected to slow to 4–5 percent in 2004/05. - Inflation developments: Bank of Botswana target range is 3–6 percent; inflation peaked at 8.0 percent in January (year not restated in excerpt) and declined to 7.3 percent in February and to 6.5 percent in March; Bank rate held at 14.25 percent until late April 2005, then lowered to 14 percent. ### Fiscal developments and near-term stance - Budget outcomes: - Budget deficit widened from about 2½ percent of GDP in 2003/04 (April–March) to over 4 percent in 2004/05. - Drivers in 2003/04: revenue shortfalls (problems in VAT administration) partly offset by scaled-back capital expenditure. - Drivers in 2004/05: lower mineral revenue (by about 2 percent of GDP) from weak US dollar, shortfalls in domestic tax collections, and a supplementary budget restoring some capital spending; cutbacks in current expenditure contained the deficit; financing via drawdown of government deposits. - Public debt and market: - Total public debt at end-2004: 10.2 percent of GDP; external debt 4.4 percent of GDP. - 2003 bond issuance: P 2.5 billion (2-, 5-, 12-year); parastatal and private bond issuance reached 24 bonds worth P 4.6 billion by January 2005. - 2005/06 budget target: - Budget targets a small deficit of about ½ percent of GDP. - Assumptions: recovery of mineral receipts in pula terms (equivalent to 3 percent of GDP); improvements in tax administration (½ percent of GDP); cuts in nonpriority expenditures. - Staff view: deficit of 1½–2 percent of GDP more likely for 2005/06 given likely supplementary drought-related spending and conservative revenue assessment. - HIV/AIDS allocation: an allocation of about 1½ percent of GDP made for HIV/AIDS programs in the 2005/06 budget; annual spending levels could rise further over the next five years. ### Medium-term fiscal outlook — scenarios (2004/05–2009/10) - Baseline scenario (assumes growth about 3–4 percent) — selected percent of GDP series: - Total revenue and grants: 39.2 (2004/05), 41.6 (2005/06), 40.8 (2006/07), 40.2 (2007/08), 39.6 (2008/09), 39.1 (2009/10). - Mineral revenue: 17.8, 20.8, 20.3, 19.7, 19.3, 18.9. - Domestic revenue: 9.7, 9.9, 10.4, 10.7, 11.0, 11.2. - Total expenditure and net lending: 43.3, 43.3, 43.1, 43.2, 43.4, 43.4. - HIV/AIDS spending: 1.5, 1.5, 1.7, 1.9, 2.2, 2.5. - Overall surplus or deficit (-): -4.1, -1.7, -2.3, -3.1, -3.7, -4.3. - Government deposits at BoB: 21.5, 16.7, 12.7, 8.4, 3.9, 0.0. - Staff note: overall deficits in the 3–4 percent range; government deposits virtually exhausted by end of five-year period. - Alternative adjustment scenario (illustrates fiscal consolidation and higher growth of 5–6 percent) — selected percent of GDP series: - Total revenue and grants: 39.2 (2004/05), 41.3 (2005/06), 40.8 (2006/07), 40.4 (2007/08), 40.2 (2008/09), 39.8 (2009/10). - Mineral revenue: 17.8, 20.6, 19.9, 19.0, 18.3, 17.5. - Domestic revenue: 9.7, 9.8, 11.0, 12.0, 12.9, 13.7. - Total expenditure and net lending: 43.3, 42.9, 41.2, 40.3, 39.9, 40.0. - HIV/AIDS spending: 1.5, 1.5, 1.6, 1.8, 2.0, 2.3. - Overall surplus or deficit (-): -4.1, -1.7, -0.4, 0.1, 0.2, -0.2. - Government deposits at BoB: 21.5, 16.6, 14.3, 12.9, 11.8, 10.4. - Staff note: deposits remain substantial at over 10 percent of GDP over the medium term. - Staff assessment: - Debt sustainability analysis: no immediate concerns on external or public debt. - Intensifying fiscal challenges: diamond revenue could decline by 2 percent of GDP relative to the 2005/06 budget target under optimistic assumptions; SACU receipts could erode by 1½–2 percent of GDP over next five years. - With HIV/AIDS expenditure not fully integrated, adjustment on the order of 4–5 percent of GDP may be required over the next five years to finance priority programs while bringing budget back to overall balance. ### Policy recommendations on fiscal and public sector reform - Immediate and medium-term fiscal priorities: - Initiate measures within the 2005/06 budget given fiscal slippage; aim for sustained adjustment to achieve overall balance over next several years. - For 2005/06, a deficit target of 1½-2 percent of GDP might be more realistic considering drought-related spending and limited near-term revenue gains. - Significant additional fiscal adjustment of 4–5 percent of GDP over next five years recommended to finance priority expenditures (notably HIV/AIDS) and restore balance. - Expenditure reprioritization and public sector reform: - Staff urged a clearer and more ambitious road map on public sector reform to reorient spending and reduce the wage bill. - Near-term authority measures: no wage increases; hiring freeze on nontechnical positions; tighter government travel budget. - Medium-term expectations: savings from a streamlined social safety net and greater efficiency in government service delivery. - Staff recommended better targeting of social safety net and more cost-effective provision of public services (tertiary education highlighted). - Privatization and public enterprises: - Authorities unveiled a Privatization Master Plan; staff cautioned progress could be problematic without comprehensive legal framework; authorities stated supporting legislation in place and Cabinet endorsement achieved. - Revenue mobilization: - Strengthen Botswana Unified Revenue Service (BURS); strengthen audit/enforcement and legal sanctions; staff noted measures such as increase in VAT rate might be needed; authorities noncommittal on a large taxpayers’ unit but working to strengthen BURS capacity. ### Monetary policy, exchange rate regime, and recent regime change - Exchange rate and monetary framework: - Authorities historically pegged the pula to a basket comprising the South African rand and the SDR; no near-term plans to abandon the peg (earlier stance). - Bank of Botswana lowered inflation target to 3–6 percent in February (year not restated in excerpt). - Overnight policy (bank) rate: 14.25 percent until late April 2005, then lowered to 14 percent. - Private sector credit growth target adjusted (private sector credit growth remained broadly within BoB’s target range of 12–15 percent; later target lowered to 10–13 percent in February 2005). - May 29 exchange rate policy change (staff supplement, June 17, 2005): - The pula was devalued by 12 percent against the currency basket. - Exchange rate regime changed to a continuously adjusted “crawling peg” aligned with expected inflation differential. - Spread between buy and sell rates widened from 0.125 percent to 0.5 percent to encourage interbank market development. - Staff estimated direct inflation pass-through from the devaluation at 4–6 percentage points over next 12 months, with further knock-on effects of 1–2 percentage points from the crawl (could push inflation up to the 10 percent level over next 12 months). - Staff cautioned: pre-announce the rate of crawl; ensure fiscal and monetary coordination; tighten monetary policy if inflation does not decline. - Staff recommended monetary tightening promptly (including higher interest rates) to minimize second-round inflation effects and urged fiscal tightening to achieve balance in 2005/06. - Staff view on regime options: - Staff supported BoB efforts to develop inflation forecasting, understand transmission mechanism, and study inflation targeting but emphasized no compelling need to abandon the exchange rate peg; staff recommended careful sequencing and supportive macro policy. ### Financial sector stability and supervision - Banking soundness indicators (selected): - Regulatory capital to risk-weighted assets ratio: 20.6 percent (2004), above statutory 15 percent. - Nonperforming loans: 2.8 percent (2004). - Loan concentration to households: about 58½ percent (text reported "high exposure to households: loan concentration is about 58½ percent"). - Household debt to GDP: 1999/00–2004 series showing 1999/00: 8.6; 2000/01: 9.1; 2001/02: 9.7; 2002/03: 10.4; 2003/04: 10.2; 2004/05: 9.5. - Nonbank supervision and institutional reform: - Urgent need to establish a financial supervisory authority (FSA) for nonbanks; drafting of legislation expected to begin in July 2005. - Rapid growth of nonbank sector (pension funds assets exceed onshore banks) makes prompt FSA establishment imperative. - Authorities interested in FSAP but could not commit to a time frame; staff encouraged participation. - IFSC and AML/CFT: - IFSC established in 1999; 26 companies accredited to date, 11 operational. - Draft AML/CFT strategy developed; authorities undecided on extending DCEC mandate to cover money laundering; staff stressed priority on restructuring and strengthening DCEC if mandate extended. ### Structural reform, private sector development, and trade policy - Diversification and competitiveness: - Key challenge: transition away from diamond dependence to tourism, agriculture, and mining outside diamond enclave to promote employment and poverty reduction while preserving macro stability. - Structural reforms need acceleration to sustain growth; midterm review of NDP 9 focused on this. - Labor market and barriers: - Labor rigidities: lack of skilled labor and skill mismatches; reorientation of education toward vocational training and establishment of a technical university underway. - Steps to expedite work and residence permits and enhance labor market flexibility through public enterprise divestiture and performance management. - Other impediments: shortage of serviced land; multiplicity of regulations/permits; steps underway to accelerate urban land development and broaden private provision of basic services including PPPs. - Programs to support entrepreneurship: - Citizens Entrepreneurial Development Agency (CEDA) programs launched in 2002; total lending through August 2004 amounted to P 674 million (1½ percent of GDP); nonperforming loans just over 2 percent of outstanding credit. - Trade policy: - Commitment to further trade liberalization with SACU and SADC members. - Simple average tariff reduced to 11.4 percent (from over 20 percent a decade ago). - Remaining nontariff barriers: state monopoly on beef exports; import permits for certain food products; seasonal agricultural trade bans. - Authorities intend to eliminate multiple currency practice from FERS; last loan under arrangement matures in 2006. ### Data, technical assistance, and statistics - Data gaps and priorities: - Need to reduce time lag on national accounts and final balance of payments data; harmonize accounting periods (balance of payments calendar-year; national accounts July-June; budget April-March). - Recommendation to establish an autonomous CSO and adopt the 2001 GFS methodology as soon as possible. - Authorities committed to moving to 1993 SNA and to update CPI weights based on 2002/03 HIES by second quarter 2005. - Technical assistance provided (selected missions and TA): - MFD, FAD, STA missions listed (1997–2004) on central banking, banking supervision, VAT introduction, tax administration, public expenditure management, BOP statistics, monetary and financial statistics, GDDS missions. - GDDS-related outcomes: establishment of quarterly BOP framework; resolved SACU-related payments issues; improved coverage of investment flows; progress in trade data preparation and request for further TA to introduce quarterly BOP estimates and extend survey-based techniques for trade in services. - Data availability snapshot (as of April 21, 2005): exchange rates latest observation Mar. 2005; CPI latest observation Feb. 2005; GDP/GNP latest observation Q1 2005; external current account latest observation 2002 (dates and frequencies detailed in source). ### Millennium Development Goals and social indicators (selected) - Goal 1 (extreme poverty): Population below US$1 a day (percent): 23.5; poverty gap at US$1 a day: 7.7. - Goal 4 (child mortality): Under 5 mortality (per 1,000): 58.0, 66.0, 101.0, 110.0 (panel entries). - Goal 6 (HIV/AIDS): Prevalence of HIV, female (percent ages 15-24): 37.5; Number of children orphaned by HIV/AIDS: 69,000.0. - Social/demographic indicators (2004, selected): Life expectancy at birth: Botswana 41.4; Infant mortality (per 1,000 live births): Botswana 80.0; People living with HIV/AIDS: Botswana 35.4 (prevalence rate in 2002 HIV sentinel survey). - Poverty and employment: Share held by highest 20 percent (income distribution, 1993/94): 70.3; Share held by lowest 20 percent: 2.2; Youth unemployment rate (ages 15–24): 25.6. ### Staff appraisal, risks, and prioritized policy actions - Main risks and challenges: - Diamond production leveling off, HIV/AIDS spread, declining mineral revenue and potential SACU erosion place fiscal pressures on medium-term outlook. - REER appreciation pressures and competitiveness concerns for non-diamond sector. - Staff’s prioritized policy package: - Fiscal: significantly strengthen fiscal efforts beginning with 2005/06; aim for overall balance over next several years; adjustment on the order of 4–5 percent of GDP over next five years given HIV/AIDS costs. - Monetary: avoid lowering interest rates until inflation durably within target range; tighten monetary policy promptly if inflation does not decline; pre-announce crawl pace to anchor expectations. - Structural: accelerate reforms to diversify economy, remove labor market rigidities, streamline regulatory environment, and proceed with privatization within a sound legal framework. - Financial sector: expedite establishment of FSA for nonbanks; participate in FSAP; strengthen AML/CFT framework. - Data and institutions: strengthen BURS, adopt GFSM 2001, improve data timeliness and harmonization, establish autonomous CSO. *Source: IMF staff report content as provided in the supplied PDF excerpt.* ### Executive Summary ...................................................................................................... ### Executive Summary ### Major challenges and context - Diamonds continue to dominate the economy: account for over one-third of GDP, 75 percent of exports, and 45 percent of government revenue. - HIV/AIDS is a severe constraint: prevalence rate among adults could exceed 35 percent; a recent CSO AIDS impact survey suggests 25.3 percent of the population aged 15–49 years (survey likely underestimates true incidence). - Social indicators lag behind economic growth: nearly a quarter of the population living below US$1 per day; unemployment over 20 percent; Botswana’s Gini coefficient was estimated at 0.57 in the 2002/03 Household Survey. - Botswana’s long-term growth depends on accelerating structural reform and combating HIV/AIDS to achieve the medium-term development plan target of sustaining annual growth in the 5–6 percent range. ### Recent economic performance and risks - Long-term past performance: Real GDP growth has averaged over 8 percent per annum over the past three decades. - Near-term growth: Real GDP growth decelerated to 5.7 percent in 2003/04 (July–June) and is expected to slow further to 4–5 percent in 2004/05. - Inflation: Rise in late 2004 driven by higher oil prices, increased public utility charges, and a 7.5 percent devaluation of the pula in February 2004; inflation declined to 7.3 percent in February and to 6.5 percent in March, from 8.0 percent in January; Bank of Botswana target range is 3–6 percent. - Social trends: Infant mortality rose from 50 per 1,000 live births in 1995 to about 80 at present (MDG progress report). - Political environment: The ruling Botswana Democratic Party won 44 out of 57 seats in the National Assembly in the October 2004 election; incumbent President Festus Mogae was reelected. ### Fiscal policy stance and outlook - Authorities’ commitment: Reiterated commitment to achieving balanced budgets over the medium term. - Scale of adjustment: Staff and authorities agree significant additional fiscal adjustment on the order of 4–5 percent of GDP may be necessary to achieve balanced budgets. - Near-term fiscal measures (2005/06 budget): - An allocation of about 1½ percent of GDP was made for HIV/AIDS programs in the 2005/06 budget (April–March); annual spending levels could rise further over the next five years. - Fiscal adjustment measures to be stepped up in 2005/06 include: increased cost recovery via user fees for some government services; enhancement of civil service efficiency through introduction of a performance management system; increased domestic tax collections by further developing the institutional framework of the Botswana Unified Revenue Service. ### Monetary and exchange rate policy - Exchange rate peg: Authorities have no plans to move away from the exchange rate peg in the near term. - Monetary framework: Authorities are exploring options regarding the monetary policy framework as financial sector reforms progress and as conditions that have allowed some monetary independence are unlikely to be sustained. - Preparatory actions: Initiatives underway to better understand the monetary transmission mechanism, improve money market functioning, and strengthen inflation forecasting capacity. ### Structural and financial sector issues - Diversification priority: Key challenge is to transition away from diamond dependence and diversify into tourism, agriculture, and mining outside the diamond enclave to harness private sector initiative and promote employment creation and poverty reduction while preserving macroeconomic stability. - Structural reforms: Authorities are strengthening the structural reform agenda and moving ahead with sector-specific development programs aimed at sustaining targeted medium-term growth. - Financial sector reforms: Under way and expected to increase market integration and limit the scope for domestic arbitrage that previously supported some monetary independence. ### Key policy questions highlighted - Near term: How to initiate progress toward a balanced budget given rising fiscal pressures and keep inflation low amid pressures for real effective appreciation under a fixed exchange rate regime? - Medium term: How to adapt fiscal policy given a declining revenue base (diamond receipts) and rising expenditure pressures (HIV/AIDS and poverty reduction)? - Structural: How to sustain high growth and reduce poverty through structural reforms that develop the private sector, increase competitiveness, and attract investment (including increasing labor productivity)? *Source: Executive Summary (IMF Staff Country Report).* ### 9. The budget deficit is estimated to have widened from about 2½ percent of GDP ### _cr0666 - 9. The budget deficit is estimated to have widened from about 2½ percent of GDP ### Fiscal developments and 2004/05 outturn - The budget deficit is estimated to have widened from about 2½ percent of GDP in 2003/04 (April-March) to over 4 percent in 2004/05. - Drivers of the 2003/04 and 2004/05 outcomes: - 2003/04: Revenue shortfalls—reflecting in part problems in VAT administration—were partly offset by scaling back capital expenditure, but not sufficiently to achieve the budget target of a small deficit. - 2004/05: Widening reflects lower mineral revenue (by about 2 percent of GDP) stemming from the weak US dollar, shortfalls in domestic tax collections, and a supplementary budget to restore some earlier cutbacks in capital spending. Cutbacks in current expenditure helped contain the deficit, which was financed through a drawdown of government deposits. - Public debt and bond market developments: - Botswana’s total public debt amounted to 10.2 percent of GDP, of which external debt was 4.4 percent of GDP, at end-2004. - In 2003 the government floated 2-, 5-, and 12-year bonds with a value of P 2.5 billion; proceeds combined with P 1 billion from the sale of the Public Debt Service Fund loan book helped establish a sovereign yield curve. - By January 2005 parastatal and private bond issuance increased to 24 bonds with a value of P 4.6 billion. ### 2005/06 budget target and near-term fiscal stance - The fiscal position is targeted to return to broad balance in 2005/06. - The 2005/06 budget targets a small deficit of about ½ percent of GDP. - Assumptions underpinning the target: - Recovery of mineral receipts in pula terms (equivalent to 3 percent of GDP) owing to favorable exchange rate developments and a new revenue sharing agreement on diamond export proceeds. - Improvements in tax administration (½ percent of GDP). - Efforts to cut nonpriority expenditures. - Staff view and risks: - Staff indicated a deficit of 1½–2 percent of GDP was more likely for 2005/06, given likely supplementary drought-related spending and a conservative assessment of near-term revenue gains. - Financing in recent years included a drawdown of government deposits at the Bank of Botswana. ### Monetary and external positions - Inflation and monetary policy: - The Bank of Botswana (BoB) lowered its inflation target to 3–6 percent in February (year not restated in excerpt) despite rising inflationary pressures. - The overnight policy (bank) rate was 14.25 percent until late April 2005, when it was lowered to 14 percent. - Private sector credit growth remained broadly within the BoB’s target range of 12–15 percent, despite rapid household credit growth. - BoB issued Bank of Botswana Certificates to mop up excess liquidity from pension privatization. - External sector and reserves: - The external current account surplus widened to about 9¾ percent of GDP in 2004, up from 6½ percent of GDP in 2003. - Foreign reserves remained broadly stable at about US$5.7 billion by end-2004; import cover declined from about 24 months at end-2003 to 18½ months. - The real effective exchange rate (REER) remains about 5 percent more depreciated in comparison with predevaluation levels; the pula is pegged to a basket comprising the South African rand and the SDR (precise weights not known by staff). ### Medium-term outlook and scenarios (Box 2: Medium-Term Fiscal Outlook) - Staff explored two scenarios for 2004/05–2009/10 (selected, exact numbers taken from the source): - Baseline scenario (assumes growth about 3–4 percent): - Total revenue and grants: 39.2 (2004/05), 41.6 (2005/06), 40.8 (2006/07), 40.2 (2007/08), 39.6 (2008/09), 39.1 (2009/10) (In percent of GDP). - Mineral revenue: 17.8, 20.8, 20.3, 19.7, 19.3, 18.9 (In percent of GDP). - Domestic revenue: 9.7, 9.9, 10.4, 10.7, 11.0, 11.2 (In percent of GDP). - Total expenditure and net lending: 43.3 (2004/05), 43.3 (2005/06), 43.1 (2006/07), 43.2 (2007/08), 43.4 (2008/09), 43.4 (2009/10) (In percent of GDP). - HIV/AIDS spending: 1.5, 1.5, 1.7, 1.9, 2.2, 2.5 (In percent of GDP). - Overall surplus or deficit (-): -4.1, -1.7, -2.3, -3.1, -3.7, -4.3 (In percent of GDP). - Government deposits at BoB: 21.5, 16.7, 12.7, 8.4, 3.9, 0.0 (In percent of GDP). - Under this scenario overall deficits in the 3–4 percent range would result and government deposits would be virtually exhausted by the end of the five-year period. - Alternative adjustment scenario (illustrates fiscal consolidation and higher growth of 5–6 percent): - Total revenue and grants: 39.2 (2004/05), 41.3 (2005/06), 40.8 (2006/07), 40.4 (2007/08), 40.2 (2008/09), 39.8 (2009/10). - Mineral revenue: 17.8, 20.6, 19.9, 19.0, 18.3, 17.5. - Domestic revenue: 9.7, 9.8, 11.0, 12.0, 12.9, 13.7. - Total expenditure and net lending: 43.3, 42.9, 41.2, 40.3, 39.9, 40.0. - HIV/AIDS spending: 1.5, 1.5, 1.6, 1.8, 2.0, 2.3. - Overall surplus or deficit (-): -4.1, -1.7, -0.4, 0.1, 0.2, -0.2. - Government deposits at BoB: 21.5, 16.6, 14.3, 12.9, 11.8, 10.4. - Under this scenario, government deposits would remain substantial at over 10 percent of GDP over the medium term. - Staff’s assessment: - Debt sustainability analysis does not point to immediate concerns about external or public debt. - However, intensifying fiscal challenges: diamond revenue could decline by 2 percent of GDP relative to the 2005/06 budget target under optimistic assumptions; SACU receipts could erode by 1½–2 percent of GDP over the next five years. - With HIV/AIDS-related expenditure still to be fully integrated, adjustment on the order of 4-5 percent of GDP may be required over the next five years to finance priority programs while gradually bringing the budget back into overall balance. ### Policy recommendations and authorities’ actions - Fiscal measures and priorities: - Staff urged immediate measures within the 2005/06 budget given recent fiscal slippage; authorities aimed to restore broad balance in 2005/06 but acknowledged the need for sustained adjustment. - Authorities intend to enhance expenditure efficiency and prioritization, including expanding cost recovery and means-tested user fees for some government services. - Strengthening budget systems and capacity to track expenditure on priority areas is intended; completion of the rollout of the new Government Accounting and Budgeting System is an immediate priority. - HIV/AIDS integration: - Authorities to integrate an updated strategy for HIV/AIDS based on the National Strategic Framework into the medium-term budgetary framework via a joint working group (MFDP and National AIDS Coordination Agency). - An allocation of about 1½ percent of GDP was made for HIV/AIDS programs in the 2005/06 budget, including initiatives to expand free ARV distribution. - Preliminary estimates suggest annual spending could rise by an additional 1 percent of GDP over the next five years, though authorities sought cost-effective integration and reported progress in accessing external financing (including U.S. Emergency Plan funds and the Global Fund) and cheaper ARV sources. *Source: _cr0666 - 9. The budget deficit is estimated to have widened from about 2½ percent of GDP* ### 27. Staff advocated a clearer and more ambitious road map on public sector reform ### 27. Staff advocated a clearer and more ambitious road map on public sector reform ### Public sector reform and expenditure reprioritization - Staff recommended a clearer and more ambitious road map on public sector reform to support the reorientation of spending. - While supporting the recent introduction of a performance management system in the civil service, staff judged that significantly greater efforts were necessary to reduce the wage bill, including more closely linking staffing levels to identified priorities. - The authorities did not view comprehensive civil service reform as an immediate priority given the public sector’s predominance in the labor market, but indicated near-term measures: - wage levels would not be increased; - expected additional savings through a hiring freeze on nontechnical positions; and - tighter government travel budget. - Over the medium term, the authorities expected savings through a more streamlined social safety net and greater efficiency in government service delivery. - Staff concurred that better targeting of the social safety net and more cost-effective provision of public services, particularly in tertiary education, could yield significant expenditure savings over the medium term. ### Privatization and public enterprises - The authorities unveiled a Privatization Master Plan and other initiatives to improve performance of enterprises remaining in the public sector. - Staff welcomed the initiatives but cautioned that progress could prove problematic without a comprehensive legal framework for sale of government assets. - Authorities stated that supporting legislation was in place, the Master Plan had Cabinet endorsement, and a measured pace of divestiture would be required to achieve political consensus and ensure broad citizen benefit. ### Revenue mobilization and tax administration - Authorities reported sustained efforts to strengthen tax administration and broaden the domestic tax base, notably: - establishment of the Botswana Unified Revenue Service (BURS); - ongoing efforts to strengthen BURS administrative capacity and institutional framework. - Authorities were noncommittal on establishing a large taxpayers’ unit recommended earlier by Fund technical assistance. - Efforts to improve tax compliance include strengthened audit and enforcement procedures and stronger legal sanctions against tax evaders. - Staff noted additional measures, such as an increase in the VAT rate, might be needed to boost domestic revenues over the medium term. ### Monetary and exchange rate policies - Near-term priority: bring inflation back within the target range. - Core inflation was 7.8 percent in January. - Staff discussed preemptive tightening given core inflation and a recently loosened fiscal stance, but authorities saw no near-term need to raise interest rates, attributing recent headline inflation to factors other than domestic demand (administered price adjustments and the pula devaluation). - Staff cautioned interest rates should not be lowered until inflation is durably within the target range and advised readiness to raise rates if inflation does not decline as expected. - The BoB cut interest rates by ¼ percent in late April following discussions, citing “generally positive” inflation prospects. - Exchange rate regime: - Monetary policy anchored by a peg to a basket comprising the South African rand and the SDR. - Authorities set an inflation target range based on average inflation in trading partner countries to keep the real effective exchange rate stable. - Staff noted the peg has provided a credible nominal anchor and served Botswana well. - Exploration of alternatives: - Authorities explored possible move to inflation targeting, developing a short-term inflation forecasting model and studying the monetary transmission mechanism. - Staff supported these efforts but emphasized no compelling need to abandon the exchange rate peg. - Interbank FX market: - Currently largely dormant due to lumpiness of foreign exchange flows (for example, diamond receipts transmitted to the BoB in only a couple of tranches per year) and narrow bid/ask spread. - Authorities investigating widening the pula’s trading band to facilitate a more active interbank market. - Competitiveness: - Tendency toward REER appreciation is an ongoing challenge. - Authorities and staff agreed on accelerating structural reforms to facilitate external competitiveness and economic diversification. - Interim competitiveness adjustments would need to be addressed through exchange rate level changes; realigning weights in the currency basket to trading partners was also considered helpful. ### Financial sector policies and supervision - Banking sector soundness and indicators: - regulatory capital to risk-weighted assets ratio of 20.6 percent, above the statutory 15 percent; - nonperforming loans at 2.8 percent. - high exposure to households: loan concentration is about 58½ percent. - Authorities interested in the Financial Sector Assessment Program (FSAP) but could not commit to a time frame. - Nonbank supervision: - Urgent need to establish a financial supervisory authority (FSA) for nonbanks. - Initial work under the Financial Sector Reform and Strengthening initiative completed; recommendations under MFDP consideration. - Drafting of legislation to establish the FSA expected to begin in July 2005 following formal endorsement of the recommendations. - Rapid growth of the nonbank sector—particularly pension funds, where total assets now exceed those of onshore banks—makes prompt establishment imperative. - International Financial Services Center (IFSC): - IFSC established in 1999; development slower than expected: only 26 companies accredited to date, of which 11 are operational. - Staff urged BoB to continue vigilant vetting of IFSC applicants to avoid reputational damage. - AML/CFT: - Authorities developed a draft AML/CFT strategy to align the legal framework with international standards. - Authorities undecided on extending the mandate of the Directorate on Corruption and Economic Crime (DCEC) to address money laundering; staff noted that if extended, priority must be given to restructuring and strengthening the DCEC so it can serve as a full-fledged financial intelligence unit fulfilling AML/CFT and anti-corruption roles. ### Structural issues and private sector development - Pace of structural reform needs significant acceleration to sustain strong economic performance; major focus of midterm review of NDP 9. - Labor market rigidities impede private sector activity: - lack of skilled labor and skill mismatches are significant barriers for foreign investors. - steps under way to reorient education toward vocational training and establish a technical university. - expedited processing procedures for work and residence permits developed to facilitate import of skilled labor. - hope that civil service performance management and public enterprise divestiture will enhance labor market flexibility and productivity. - Other impediments: - shortage of serviced land (with utility connections and infrastructure) and multiplicity of regulations/permits. - steps to accelerate land development in urban centers and broaden private-sector provision of basic services, including via public/private partnerships. - review of regulatory environment to streamline procedures and enhance efficiency. - Programs to support entrepreneurship: - Citizens Entrepreneurial Development Agency (CEDA) launched three programs in 2002 supporting small and medium enterprises, providing credit at highly subsidized rates, managerial training, mentoring, a venture capital fund at commercial rates, and a credit guarantee fund. - Total lending by CEDA through August 2004 amounted to P 674 million (1½ percent of GDP), with nonperforming loans just over 2 percent of outstanding credit. - Agriculture and tourism: - increased investment in irrigation and water recycling per national development plan launched in October 2002; - Botswana Meat Commission restructuring and tracking system to meet EU “food origin” requirements; - Tourism Board launched last October to promote Botswana as a travel destination. ### Trade policy and exchange regime - Commitment to further trade liberalization with SACU and SADC members. - Simple average tariff reduced to 11.4 percent, compared with over 20 percent a decade ago; tariff structure simplified. - Remaining nontariff barriers include a state monopoly on beef exports, import permit requirements for certain food products, and seasonal agricultural trade bans that should be removed. - Authorities confirmed intention to eliminate multiple currency practice from the Foreign Exchange Risk-Sharing Scheme (FERS); the scheme was abandoned in 1990 and the last loan under the arrangement matures in 2006. ### Data, technical assistance, and other issues - Economic data generally adequate for surveillance but significant room for improvement, particularly: - timeliness of national accounts and final balance of payments data; - synchronization of data accounting periods for government sector and national accounts with financial statistics and balance of payments; - establishment of an autonomous CSO to improve quality and transparency of statistical base; - adoption of the 2001 GFS methodology for compiling fiscal data recommended as soon as possible. - Staff recommended continued technical assistance in establishing an FSA for nonbanks and in inflation modeling; authorities welcomed ongoing Fund TA. ### Staff appraisal, risks, and fiscal outlook - Botswana has been among the world’s fastest-growing economies over the past three decades but faces challenges as diamond production levels off and HIV/AIDS spreads. - Real GDP growth has averaged over 8 percent per annum since the 1970s. - Key challenge: preserve macroeconomic stability while transitioning to a more diversified economy, harnessing private sector initiative and deepening poverty reduction. - Near-term priorities: - initiate progress toward a balanced budget despite rising fiscal pressures; - keep inflation low amid pressures for real effective appreciation under the fixed exchange rate regime. - Medium-term priorities: - adapt fiscal policy and expenditure composition as revenues decline and spending pressures increase; - accelerate structural reforms to develop the domestic private sector and attract FDI; - reinforce broad-based efforts to prevent and combat HIV/AIDS. - Fiscal recommendations and projections: - Authorities’ commitment to achieving balanced budgets over the medium term is commendable; with a comfortable government net asset position, there appears no compelling need for fiscal surpluses, but large deficits would be imprudent given HIV/AIDS uncertainty. - Authorities should significantly strengthen fiscal efforts beginning with the 2005/06 budget and aim for overall balance over the next several years; for 2005/06, a deficit target of 1½-2 percent of GDP might be more realistic owing to drought-related supplementary spending and limited near-term prospects for significantly raising domestic revenues. - Significant additional fiscal adjustment will be necessary to achieve medium-term budget balance: with HIV/AIDS-related expenditure not yet fully integrated into the medium-term fiscal framework, fiscal adjustment on the order of 4–5 percent of GDP may be required—starting in the current fiscal year—over the next five years to finance priority expenditures while restoring balance. - Policy priorities highlighted by staff: - clearer road maps for expenditure reprioritization and public sector reform to address a wage bill high by international standards; - strengthen budget systems and expenditure tracking urgently to enable efficient reprioritization; - sustain efforts to strengthen tax administration and broaden the domestic tax base, including strengthening BURS capacity and institutional framework and establishing a large taxpayers’ unit; - improve tax compliance through strengthened audit, enforcement procedures, and stronger legal actions against tax evaders. *Source: IMF staff report excerpt as provided.* ### 54. There is a need to be cautious on monetary policy in the near term given the ### _cr0666 - 54. There is a need to be cautious on monetary policy in the near term given the ### Monetary policy - There is a need to be cautious on monetary policy in the near term given the recent fiscal loosening. - The authorities should avoid lowering interest rates until inflation has been brought down sustainably to within the target range. - Staff believes the recent rate cut was premature. ### Exchange rate regime and competitiveness - The exchange rate peg to the currency basket has provided a credible nominal anchor for monetary policy and there is no compelling need for a regime change. - Staff supports the authorities’ efforts to better understand their future options in terms of a possible transition to an alternative monetary framework. - Over the medium to long term, competitiveness concerns will need to be addressed through deeper structural reforms. - There may be a need for periodic exchange rate adjustments in the interim. ### Financial system stability and supervision - The financial system appears to be broadly sound and adequately supervised, with no apparent systemic risks. - Available data suggest that banks are well capitalized and nonperforming loans low, with adequate provisioning. - High exposure of the banking sector to households as indicated by the high loan concentration merits close monitoring. - An area of concern that needs to be addressed with some urgency is the establishment of a FSA for nonbanks. - The authorities are encouraged to participate in the FSAP. ### Trade policy - Botswana’s commitment to trade liberalization is commendable. - The new SACU framework will provide Botswana with the opportunity to help shape trade negotiations and policies. - Staff welcomes the progress made in negotiating free trade agreements and lowering tariffs, but urges the authorities to remove nontariff barriers. ### Multiple currency practice (FERS) - The staff notes the authorities’ intention to eliminate by 2006 the multiple currency practice arising out of the FERS. - Staff recommend that the Board approve the retention of the measure until June 30, 2006, or the conclusion of the next Article IV consultation with Botswana, whichever is earlier. *Source: _cr0666 - 54.* ### 59. It is proposed that Botswana remain on the standard 12-month consultation cycle. ### _cr0666 - 59. It is proposed that Botswana remain on the standard 12-month consultation cycle. ### Proposed consultation cycle - It is proposed that Botswana remain on the standard 12-month consultation cycle. ### Millennium Development Goals (selected indicators) - Goal 1: Eradicate extreme poverty and hunger - Population below US$ 1 dollar a day (in percent): 23.5 - Poverty gap at US$ 1 dollar a day (in percent): 7.7 - Percentage share of income or consumption held by poorest 20 percent: 2.2 - Prevalence of child malnutrition (percent of children under 5): 17.2, 12.5 - Population below minimum level of dietary energy consumption (in percent): 18.0, 22.0, 24.0 - Goal 2: Achieve universal primary education - Net primary enrollment ratio (percent of relevant age group): 93.3, 81.3, 80.9 - Percentage of cohort reaching grade 5 (in percent): 97.0, 90.0, 89.5 - Youth literacy rate (percent ages 15–24): 83.3, 86.1, 88.7, 89.1 - Goal 3: Promote gender equality - Ratio of girls to boys in primary and secondary education (in percent): 107.8, 103.4, 102.1 - Ratio of young literate females to males (percent ages 15–24): 110.0, 109.6, 108.7, 108.5 - Share of women employed in the nonagricultural sector (in percent): 46.5, 46.6, 44.8 - Proportion of seats held by women in national parliament (in percent): 9.0 - Goal 4: Reduce child mortality - Under 5 mortality rate (per 1,000): 58.0, 66.0, 101.0, 110.0 - Infant mortality rate (per 1,000 live births): 45.0, 50.0, 74.0, 80.0 - Immunization, measles (percent of children under 12 months): 87.0, 89.0, 90.0, 90.0 - Goal 5: Improve maternal health - Maternal mortality ratio (modeled estimate, per 100,000 live births): 100.0 - Births attended by skilled health staff (percent of total): 77.5, 87.0, 98.5 - Goal 6: Combat HIV/AIDS, malaria, and other diseases - Prevalence of HIV, female (percent ages 15-24): 37.5 - Contraceptive prevalence rate (percent of women ages 15-49): 33.0 - Number of children orphaned by HIV/AIDS: 69,000.0 - Incidence of tuberculosis (per 100,000 people): 664.0, 656.7 - Tuberculosis cases detected under DOTS (in percent): 70.0, 75.0, 72.8 - Goal 7: Ensure environmental sustainability - Forest area (percent of total land area): 24.0, 21.9 - Nationally protected areas (percent of total land area): 18.5, 18.5, 18.5 - CO2 emissions (metric tons per capita): 1.7, 2.3, 2.3 - Access to an improved water source (percent of population): 93.0, 95.0 - Access to improved sanitation (percent of population): 60.0, 66.0 - Goal 8: Develop a Global Partnership for Development - Youth unemployment rate (percent of total labor force ages 15–24): 25.6 - Fixed line and mobile telephones (per 1,000 people): 20.6, 40.9, 272.8, 328.5 - Personal computers (per 1,000 people): 10.3, 38.7, 40.7 - Source for MDG table: World Development Indicators database, April 2004. ### Social and Demographic Indicators (2004, selected) - Area (in thousands of square kilometers): Botswana 566.7; South Africa 1,221.0; Sub-Saharan Africa 24,266.0 - Population (2002) - Total (in millions): Botswana 1.7; South Africa 45.3; Sub-Saharan Africa 710.0 - Annual rate of growth (percent): Botswana 1.0; South Africa 1.2; Sub-Saharan Africa 2.2 - Population characteristics - Density (per square kilometer): Botswana 3.0; South Africa 37.1; Sub-Saharan Africa 29.2 - Urban (percent of total): Botswana 49.9; South Africa 58.4; Sub-Saharan Africa 33.1 - Age structure (percent of total): 0–14 years 41.3; 15–64 years 55.3; 65 years and above 2.2 - Income distribution (based on 1993/94 survey) - Share held by highest 20 percent: 70.3 - Share held by lowest 20 percent: 2.2 - Access to safe water (percent of population, 2000) - Total: Botswana 95.0; South Africa 86.0; Sub-Saharan Africa 58.2 - Rural: Botswana 90.0; South Africa 73.0; Sub-Saharan Africa 46.5 - Urban: Botswana 100.0; South Africa 99.0; Sub-Saharan Africa 41.9 - Health (2002) - Life expectancy at birth: Botswana 41.4; South Africa 46.5; Sub-Saharan Africa 45.8 - Infant mortality (per 1,000 live births): Botswana 80.0; South Africa 52.0; Sub-Saharan Africa 103.1 - People living with HIV/AIDS: Botswana 35.4 (prevalence rate in 2002 HIV sentinel survey) - GDP per capita (constant 1995 U.S. dollars): Botswana 4,102.0; South Africa 4,019.9; Sub-Saharan Africa 474.6 - Education (2001) - School enrolment (percent, gross): Primary Botswana 103.3; South Africa 105.1; Sub-Saharan Africa 86.9 - Adult literacy rate: Botswana 78.9; South Africa 86.0; Sub-Saharan Africa 64.9 ### Selected Economic and Financial Indicators (2001–05, selected) - Real GDP (annual percentage change): 2001/2.1; 2002/7.8; 2003/5.7; 2004/4.1; 2005/3.7 - Consumer prices (average): 2001/6.6; 2002/8.1; 2003/9.6; 2004/6.6; 2005/8.0 - Nominal GDP (in billions of pula): 2001/31.9; 2002/36.7; 2003/39.9; 2004/44.3; 2005/48.9 (year beginning July 1) - Exports of goods, f.o.b. (in U.S. dollar terms): 2001/-13.3; 2002/1.2; 2003/26.5; 2004/17.7; 2005/9.8 (Twelve-month percentage change) - Of which: diamonds: 2001/-13.4; 2002/2.2; 2003/20.0; 2004/13.9; 2005/8.5 - Total revenue and grants (percent of GDP): 2001/40.5; 2002/40.1; 2003/39.3; 2004/39.2; 2005/41.6 - Total expenditure and net lending (percent of GDP): 2001/44.0; 2002/44.2; 2003/41.6; 2004/43.3; 2005/43.3 - Overall balance (including grants, percent of GDP): 2001/-3.4; 2002/-4.1; 2003/-2.4; 2004/-4.1; 2005/-1.7 - External current account balance (deficit -) (percent of GDP): 2001/11.5; 2002/2.2; 2003/6.5; 2004/9.8; 2005/8.5 - Gross official reserves (end of period, in millions of U.S. dollars): 2001/5,897; 2002/5,474; 2003/5,339; 2004/5,667; 2005/5,925 - (In months of imports of goods and services): 2001/33.0; 2002/29.1; 2003/24.0; 2004/18.5; 2005/18.2 ### Sectoral GDP and Savings-Investment Balances (2000/01–2004/05, selected) - Consumption (in millions of pula): 2000/01/17,180; 2001/02/19,860; 2002/03/22,503; 2003/04/25,167; 2004/05/27,754 - Public consumption (millions of pula): 2000/01/8,742; 2001/02/10,553; 2002/03/12,167; 2003/04/13,692; 2004/05/14,949 - Private consumption (millions of pula): 2000/01/8,439; 2001/02/9,308; 2002/03/10,336; 2003/04/11,475; 2004/05/12,805 - Gross investment (in millions of pula): 2000/01/5,607; 2001/02/8,351; 2002/03/10,737; 2003/04/11,967; 2004/05/11,665 - Net exports of goods and services (in millions of pula): 2000/01/6,749; 2001/02/3,826; 2002/03/3,820; 2003/04/3,007; 2004/05/4,909 - Gross domestic savings (in millions of pula): 2000/01/4,310; 2001/02/5,742; 2002/03/6,757; 2003/04/9,615; 2004/05/10,063 - GDP at market prices (in millions of pula): 2000/01/28,636; 2001/02/31,922; 2002/03/36,715; 2003/04/39,881; 2004/05/44,327 ### Central Government Operations (2001/02–2005/06, selected) - Total revenue and grants (in millions of pula): 2001/02/12,601; 2002/03/14,240; 2003/04/15,348; 2004/05/17,876; 2005/06 staff proj. 20,179 - Total revenue (in millions of pula): 2001/02/12,542; 2002/03/14,155; 2003/04/15,287; 2004/05/17,676; 2005/06 staff proj. 19,959 - Tax revenue (in millions of pula): 2001/02/10,582; 2002/03/12,259; 2003/04/13,376; 2004/05/16,097; 2005/06 staff proj. 18,157 - Mineral revenue (in millions of pula): 2001/02/6,996; 2002/03/7,503; 2003/04/7,393; 2004/05/8,070; 2005/06 staff proj. 9,926 - Total expenditure and net lending (in millions of pula): 2001/02/13,671; 2002/03/15,710; 2003/04/16,275; 2004/05/18,140; 2005/06 staff proj. 20,454 - Current expenditure (in millions of pula): 2001/02/9,935; 2002/03/11,581; 2003/04/12,934; 2004/05/14,571; 2005/06 staff proj. 15,720 - Capital expenditure (in millions of pula): 2001/02/3,698; 2002/03/4,200; 2003/04/4,256; 2004/05/3,610; 2005/06 staff proj. 4,858 - Overall surplus or deficit (–, in millions of pula): 2001/02/-1,069; 2002/03/-1,471; 2003/04/-927; 2004/05/-264; 2005/06 staff proj. -1,758 - In percent of GDP: Total revenue and grants: 2001/02/40.5; 2002/03/40.1; 2003/04/39.3; 2004/05/39.2; 2005/06 staff proj. 41.6 - Total expenditure and net lending: 2001/02/44.0; 2002/03/44.2; 2003/04/41.6; 2004/05/43.3; 2005/06 staff proj. 43.3 - Overall surplus or deficit (including grants): 2001/02/-3.4; 2002/03/-4.1; 2003/04/-2.4; 2004/05/-0.6; 2005/06 staff proj. -4.1 ### Monetary Survey and Bank of Botswana (selected) - Monetary survey (end-period, in millions of pula) - Net foreign assets (end period): e.g., 2001/43,075; 2002/31,247; 2003/25,238; 2004/27,669; 2005/25,896 - Net domestic assets (end period): e.g., 2001/-33,458; 2002/-21,740; 2003/-14,261; 2004/-16,202; 2005/-13,295 - Money plus quasi-money (M2) (end period): 2001/9,617; 2002/9,508; 2003/10,977; 2004/11,467; 2005/12,601 - Broad money (M3) (end period): 2001/14,764; 2002/17,171; 2003/19,717; 2004/20,040; 2005/21,785 - Bank of Botswana: Bank of Botswana certificates outstanding (end period): 2001/5,148; 2002/7,663; 2003/8,739; 2004/8,573; 2005/9,184 - Reserve money (end period): e.g., 2004/1,297; 2005/1,229 - Broad money (M4) (end period): e.g., 2001/16,743; 2002/18,709; 2003/21,234; 2004/21,463; 2005/23,448 ### Balance of Payments (2002–10, selected) - Current account balance (in millions of U.S. dollars): 2002/117.3; 2003/502.5; 2004/892.5; 2005/917.0; projections thereafter - Trade balance (in millions of U.S. dollars): 2002/618.2; 2003/958.3; 2004/632.6; 2005/799.3; 2006/701.8 (est./proj.) - Exports, f.o.b. (in millions of U.S. dollars): 2002/2,353.2; 2003/2,975.8; 2004/3,502.2; 2005/3,844.6; 2006/3,994.8 - Of which: Diamonds (in millions of U.S. dollars): 2002/1,978.4; 2003/2,373.5; 2004/2,702.7; 2005/2,931.4; 2006/3,090.2 - Imports, f.o.b. (in millions of U.S. dollars): 2002/-1,735.0; 2003/-2,017.5; 2004/-2,869.6; 2005/-3,045.2; 2006/-3,293.0 - Income (in millions of U.S. dollars, negative = outflow): 2002/-700.4; 2003/-718.3; 2004/-364.1; 2005/-473.9; 2006/-611.0 - Current account (percent of GDP): 2002/2.2; 2003/6.5; 2004/9.8; 2005/8.5 - End-of-year reserves (millions of U.S. dollars): 2002/5,473.5; 2003/5,338.7; 2004/5,667.1; 2005/5,924.7; 2006/6,292.0 - In months of imports of goods and services: 2002/29.1; 2003/24.0; 2004/18.5; 2005/18.2 ### Medium-Term Scenario, 2004–10 (Baseline and Alternative, selected) - Baseline scenario (real GDP annual percentage change): 2004/4.1; 2005/3.7; 2006/3.6; 2007/3.6; 2008/3.4; 2009/3.3; 2010/3.3 - Baseline: Nominal GDP (in billions of pula): 2004/44.3; 2005/48.9; 2006/53.9; 2007/59.2; 2008/64.8; 2009/71.2; 2010/78.2 - Baseline: External current account balance (deficit -) (percent of GDP): 2004/9.8; 2005/8.5; 2006/5.8; 2007/4.5; 2008/3.3; 2009/1.6; 2010/0.7 - Alternative scenario (real GDP annual percentage change): 2004/4.1; 2005/4.6; 2006/4.8; 2007/5.0; 2008/5.1; 2009/5.2; 2010/5.2 - Alternative: Nominal GDP (in billions of pula): 2004/44.3; 2005/49.4; 2006/55.1; 2007/61.5; 2008/68.6; 2009/77.0; 2010/86.5 - Alternative: External current account balance (deficit -) (percent of GDP): 2004/9.8; 2005/9.1; 2006/6.7; 2007/5.7; 2008/4.7; 2009/3.2; 2010/2.6 - Reserves under baseline (gross official reserves, end of period, in millions of U.S. dollars): 2004/5,667; 2005/5,925; 2006/6,292; 2007/6,673; 2008/6,949; 2009/7,018; 2010/6,968 - (In months of imports of goods and services): 2004/18.5; 2005/18.2; 2006/18.0; 2007/17.6; 2008/16.9; 2009/15.8; 2010/14.4 - Reserves under alternative scenario (in millions of U.S. dollars): 2004/5,667; 2005/5,930; 2006/6,426; 2007/6,987; 2008/7,502; 2009/7,860; 2010/8,166 ### Indicators of Financial and External Vulnerability (selected) - Public sector debt of the central government (percent of GDP): 1999/10.1; 2000/8.8; 2001/7.8; 2002/10.6; 2003/12.0; 2004/10.2 - Broad money (percent change, 12-month basis): 1999/27.8; 2000/-3.6; 2001/33.7; 2002/16.3; 2003/23.4; 2004/13.5 - Private sector credit (percent change, 12-month basis): 1999/22.5; 2000/11.4; 2001/23.7; 2002/10.7; 2003/17.4; 2004/12.5 - Bank of Botswana lending interest rate (end of period): 1999/13.3; 2000/14.3; 2001/14.3; 2002/15.3; 2003/14.3; 2004/14.3 - Current account balance (percent of GDP): 1999/12.3; 2000/10.4; 2001/11.5; 2002/2.2; 2003/6.5; 2004/9.8 - Gross official reserves (in millions of U.S. dollars): 1999/6,229.2; 2000/6,318.6; 2001/5,897.3; 2002/5,473.5; 2003/5,338.7; 2004/5,667.1 - Official reserves in months of imports of goods and services: 1999/31.1; 2000/32.6; 2001/33.0; 2002/29.1; 2003/24.0; 2004/18.5 ### Financial Soundness Indicators (1999–2004, selected) - Capital adequacy (average of banks in Botswana) - Regulatory capital to risk-weighted assets: 1999/17.2; 2000/27.1; 2001/27.6; 2002/20.2; 2003/21.5; 2004/20.6 - Tier 1 regulatory capital to risk-weighted assets: 1999/13.0; 2000/14.1; 2001/14.1; 2002/13.3; 2003/11.6; 2004/10.5 - Asset quality - Past due advances (NPL) to total advances: 1999/3.9; 2000/1.7; 2001/4.1; 2002/3.5; 2003/3.7; 2004/2.8 - Loan loss provisions to nonperforming loans: 1999/58.2; 2000/96.1; 2001/118.3; 2002/131.8; 2003/179.6; 2004/55.4 - Earnings and profitability - Return on average assets: 1999/3.8; 2000/4.7; 2001/4.6; 2002/4.3; 2003/4.2; 2004/4.0 - Return on equity: 1999/45.1; 2000/45.2; 2001/46.7; 2002/43.8; 2003/44.3; 2004/36.0 - Liquidity - Liquid assets to total assets: 1999/27.5; 2000/21.5; 2001/23.7; 2002/19.6; 2003/20.1; 2004/22.9 - Advance to deposit Ratio: 1999/60.2; 2000/68.4; 2001/57.7; 2002/71.4; 2003/67.5; 2004/70.0 - Exposure to foreign currency - Foreign currency loans to total gross loans: 1999/0.0; 2000/0.0; 2001/4.9; 2002/15.9; 2003/13.1; 2004/17.6 - Exposure to households - Household debt to GDP: 1999/8.6; 2000/9.1; 2001/9.7; 2002/10.4; 2003/10.2; 2004/9.5 - Source for financial soundness indicators: Bank of Botswana (1999–2004; Table 11). ### Botswana: Relations with the Fund (As of March 31, 2005) - Membership: Joined July 24, 1968; Article VIII - Quota: SDR 63.00 (100.00 percent of quota) - Fund holdings of currency: SDR 43.09 (68.40 percent of quota) - Reserve position in Fund: SDR 19.91 (31.60 percent of quota) - SDR Department: Net cumulative allocation: SDR 4.36 (100.00 percent of quota) - Holdings: SDR 34.70 - Outstanding purchases and loans: None - Financial arrangements: None - Project obligations to Fund: None - Contributions to ESAF/HIPC trust: - July 1994: deposit equivalent to US$10 million for ESAF subsidy account - April 1997: five-year deposit of SDR 14.6 million in the ESAF-HIPC Trust - Exchange rate arrangements: - Exchange rate determined on basis of a basket of currencies - As of April 29, 2005: US$1 = 4.5331; R 1 = P 0.7431 - Article IV consultation: - Last Article IV consultation concluded by the Executive Board on March 24, 2004 *Source: IMF staff report content as provided in the supplied PDF excerpt.* ### 1. The Fund takes this decision relating to Botswana’s exchange measure subject to ### _cr0666 - 1. The Fund takes this decision relating to Botswana’s exchange measure subject to ### Fund decision and surveillance context - The Fund takes this decision relating to Botswana’s exchange measure subject to Article VIII, Section 3, in the light of the 1999 Article IV consultation with Botswana conducted under Decision No. 5392-(77/63), adopted April 29, 1977, as amended (Surveillance over Exchange Rate Policies). - Botswana maintains a multiple currency practice arising from the Foreign Exchange Risk-Sharing Scheme (FERS) applicable to outstanding external loans obtained by certain public enterprises before October 1, 1990, which is subject to Fund approval under Article VIII, Section 3. - In view of Botswana’s discontinuance of the FERS scheme in 1990, and of its intention to eliminate the multiple currency practice, the Fund encourages the authorities to allow the multiple currency practice to expire in 2006, when the last loan under the scheme will mature. ### Technical assistance assignments/projects - MFD: 1997 — Central Banking Advisor - MFD: 1999-2000 — Banking Supervision Advisor - STA: 1997 — Balance of Payments Advisor ### Technical assistance missions (selected) - MFD: - January 2001 — Banking supervision advisor - February 2001 — Monetary operations - December 2001 — MEFMI-Monetary operations - August 2002 — Banking supervision, anti-money laundering - July 2004 — NBFI supervision - August 2004 — Money and banking statistics follow-up - FAD: - November 1997 — Introduction of a value-added-tax (VAT) - September 2000 — Implementation of VAT next steps - February 2002 — Tax administration (SADC Region) - November 2004 — Public expenditure management - STA: - May 2001 — Inspection for visit of long-term BOP Advisor - April 2002 — ROSC data module - July 2002 — BOP statistics: peripatetic visit - August 2003 — TA on monetary and financial statistics using the GDDS - October 2004 — GDDS national accounts mission ### Relations with the World Bank Group (As of February 28, 2004) — overview - IBRD/IDA: - Botswana became a member of the IBRD and the IDA in 1968, and is now a contributor to IDA. - Cumulative commitments from IDA to Botswana include US$17 million for six development credits. - Cumulative commitments from the IBRD to Botswana amount to US$281 million for 22 loans, of which US$54 million was canceled. - The last IDA credit was extended in 1974; the last IBRD loan was extended in 1987. - Currently, there are no active IBRD/IDA projects in Botswana. - Analytical and advisory focus since late 1980s due to no government need for external borrowing. - Recent activities: IDF grant for home-based care of AIDS patients (closed August 5, 1999); analysis of development impact of HIV/AIDS (2001); ESW on economic diversification and trade (2003); study on livestock subsector viability (mid-2004); Public-Private Infrastructure Advisory Facility study on regulatory reform (2003/04). - IFC: - Botswana joined IFC in 1979. - Cumulative IFC equity and loan commitments total US$10.72 million in five enterprises. - FY99 and FY00: two loan commitments amounting to US$1.75 million to Abercombie and Kent (Botswana). - FY01: quasi-equity investment of US$3 million in the African Banking Corporation. - FY03: US$2 million equity investment in Kalahari Diamonds Limited. - End of 2004: equity stake of US$3.97 million in a consumer finance company. - Advisory services on privatization; privatization mandate for Air Botswana in FY03/04; Foreign Investment Advisory Services review completed in 2004. - MIGA: - Botswana joined MIGA in 1988; MIGA has neither any exposure nor any active applications in Botswana. - MIGA and BEDIA signed a cooperation agreement in July 2003. ### Statistical issues — general - Core statistical data required for surveillance are reported with an acceptable degree of regularity and promptness; overall quality is adequate. - Time lag in compiling national accounts and labor market data needs reduction. - Different accounting periods persist: balance of payments compiled on a calendar-year basis; national accounts on July-June; budget on April-March — impeding integrated economic data preparation. - Data ROSC conducted in October 2001; priority recommendations included preparing GDDS metadata on current statistical production and dissemination practices and detailed plans for improvements; strengthening data sharing and coordination among major agencies to reconcile datasets with different accounting periods. - A factual update to the data ROSC and an update of the authorities’ response were disseminated in March and July 2004, respectively. ### National accounts and prices - Annual and quarterly national accounts are compiled primarily on concepts and definitions recommended by the 1968 System of National Accounts (SNA) using both production and expenditure approaches. - Authorities committed to strengthening national accounts data and moving to the 1993 SNA; receiving Fund technical assistance. - Differences in accounting periods and timing between national accounts, balance of payments, and government finance statistics impair estimate accuracy. - Staff encouraged harmonizing accounting periods over the medium term. - Data ROSC recommended advancing the program for implementing 1993 SNA with focus on conceptual adherence, initially limited to GDP estimates. - Consumer price index (CPI): - Comprehensive breakdown between urban and rural areas, and between tradables (domestic and imported) and nontradables. - Authorities intend to update weights based on the 2002/03 Household Income and Expenditure Survey (HIES) by the second quarter of 2005. - Producer price index: - ROSC recommended redesign to accord with international standards regarding sample size and validation procedures. - Recommendation to collect more comprehensive source data and adopt best practices for compilation. ### Labor statistics - Annual employment and wage information available but rarely reported to STA for publication in IFS. - Employment data collected periodically through HIES, Demographic Survey, and Labor Force Survey covering formal and informal sectors with different comprehensiveness. - Need for more frequent and coherent data provision to analyze employment/unemployment trends annually. - Example: 2002/03 HIES result was published 15 months after fieldwork completion. - Wage indicators (average monthly earnings) provided with considerable time lag. - Authorities plan to increase frequency of employment and unemployment data from biannual to quarterly over the medium term. ### Fiscal accounts - Central government finance data produced monthly with a lag of three to four weeks for MFDP use; reported for IFS publication with a two- to three-month lag. - Comprehensive annual government finance statistics on consolidated central government published with a 12-month lag in MFDP’s Annual Statements of Accounts. - No annual government finance data for publication in the GFS Yearbook have been reported since 1996. - Compilation largely based on IMF’s Government Finance Statistics Manual (GFSM 1986); covers all central government activities including balances of financial assets and liabilities. - Classification broadly consistent with GFSM 1986 with a few exceptions. - Published data audited by the Auditor General; accuracy and reliability favored over timeliness. - Data ROSC recommended dissemination of monthly budgetary central government statistics within one month of the reference period and central government debt data within one quarter. - Authorities intend to move to the 2001 GFSM in the course of the 2006/07 fiscal year. ### Monetary accounts - Bank of Botswana broadly follows the Monetary and Financial Statistics Manual (MFSM) methodology in compiling the monetary survey. - Following TA missions in August 2003 and August 2004, commercial banks began classifying accounts into resident and nonresident based on center of economic interest rather than nationality. - Monetary survey excludes three deposit-taking institutions (one merchant bank, one building society, and one savings bank), accounting for about five percent of system deposits. - Monetary data for IFS published on a regular basis; timeliness improved since 2002. - Data for monetary authorities are reported to STA with a longer lag (one additional month) than deposit money banks; published monetary data not fully aligned with IFS. - Authorities working on a format to eliminate discrepancies. ### External trade and balance of payments - Botswana reports balance of payments and international investment position data annually. - With Fund assistance during 1997 to 2000, Botswana established Balance of Payments Manual 5 as the basis for balance of payments statistics. - Delays in supplying source data, especially trade data, remain a major concern and lead to large revisions in published balance of payments data. - Balance of payments statistics compiled in conformity with internationally accepted frameworks, but estimation methods need updating. - Data ROSC recommended accelerated development of quarterly balance of payments statistics, with timely compilation of monthly merchandise trade statistics as an essential feature. *Source: _cr0666 - 1. The Fund takes this decision relating to Botswana’s exchange measure subject to* ### 10. Technical assistance in the context of the GDDS project for Anglophone Africa ### 10. Technical assistance in the context of the GDDS project for Anglophone Africa ### Technical assistance outcomes for Botswana - Enabled Botswana to establish a quarterly balance of payments framework. - Resolved discrepancies between the balance of payments and the national accounts. - Improved coverage of investment flows. - Resolved issues on SACU-related payments in the balance of payments. - Bank of Botswana advised the Fund that sufficient progress has been made in preparing reliable trade data and requested further technical assistance to: - introduce quarterly balance of payments estimates, and - extend survey-based techniques for estimating trade in services. ### Data availability and quality (selected items, as of April 21, 2005) - Exchange rates: Date of latest observation Mar. 2005; Date received 4/1/2005; Frequency of data M; Frequency of reporting M; Frequency of publication M. - International reserve assets and reserve liabilities of the monetary authorities: Date of latest observation Nov. 2004; Date received 2/4/2005; Frequency of data M; Frequency of reporting M; Frequency of publication M. - Reserve/base money: Date of latest observation Dec. 2004; Date received 4/5/2005; Frequency of data M; Frequency of reporting M; Frequency of publication M. - Broad money: Date of latest observation Dec. 2004; Date received 4/5/2005; Frequency of data M; Frequency of reporting M; Frequency of publication M. - Central bank balance sheet: Date of latest observation Dec. 2004; Date received 4/5/2005; Frequency of data M; Frequency of reporting M; Frequency of publication M. - Consolidated balance sheet of the banking system: Date of latest observation Feb. 2005; Date received 4/5/2005; Frequency of data M; Frequency of reporting (blank); Frequency of publication M. - Interest rates: Date of latest observation Feb. 2005; Date received 4/5/2005; Frequency of data M; Frequency of reporting M; Frequency of publication M. - Consumer price index: Date of latest observation Feb. 2005; Date received Apr. 2005; Frequency of data M; Frequency of reporting M; Frequency of publication M. - Revenue, expenditure, balance and composition of financing – central government: Latest observation 2002/03; Date received Sep. 2003; Frequency of data A/Q; Frequency of reporting Q; Frequency of publication Q. - External current account balance: Date of latest observation 2002; Date received Mar. 2004; Frequency of data A; Frequency of reporting A; Frequency of publication A. - Exports and imports of goods and services: Date of latest observation Q3 2004; Date received Jan. 2005; Frequency of data M/Q; Frequency of reporting M; Frequency of publication Q. - GDP/GNP: Date of latest observation Q1 2005; Date received Mar. 2005; Frequency of data AQ; Frequency of reporting AM; Frequency of publication AM. - Gross external debt: Date of latest observation Mar. 2003; Date received Mar. 2003; Frequency of data A/Q; Frequency of reporting A; Frequency of publication A. ### External Debt Sustainability Framework (2000–2010) — key projections and indicators - External debt (percent of GDP): 2000: 25.1; 2001: 22.9; 2002: 20.0; 2003: 13.8; 2004: 12.6; 2005: 10.0; 2006: 9.4; 2007: 9.4; 2008: 9.5; 2009: 9.5; 2010: 9.6. - Debt-stabilizing non-interest current account 7/: -0.7. - Change in external debt: 2000: 2.3; 2001: -2.2; 2002: -2.8; 2003: -6.2; 2004: -1.3; 2005: -2.6; 2006: -0.6; 2007: 0.0; 2008: 0.0; 2009: 0.1; 2010: 0.1. - Identified external debt-creating flows (4+8+9): 2000: -12.5; 2001: -11.4; 2002: -10.1; 2003: -18.3; 2004: -13.0; 2005: -10.2; 2006: -7.4; 2007: -6.1; 2008: -4.8; 2009: -2.9; 2010: -1.9. - Current account deficit, excluding interest payments: 2000: -11.9; 2001: -12.8; 2002: -3.3; 2003: -7.3; 2004: -11.1; 2005: -9.4; 2006: -6.7; 2007: -5.5; 2008: -4.3; 2009: -2.5; 2010: -1.5. - Deficit in balance of goods and services: 2000: -12.9; 2001: -10.4; 2002: -10.8; 2003: -12.3; 2004: -6.8; 2005: -7.9; 2006: -6.7; 2007: -5.4; 2008: -4.0; 2009: -2.6; 2010: -1.1. - Exports (percent of GDP): 2000: 57.1; 2001: 51.5; 2002: 52.3; 2003: 46.6; 2004: 47.4; 2005: 44.9; 2006: 44.0; 2007: 43.1; 2008: 42.1; 2009: 41.3; 2010: 40.5. - Imports (percent of GDP): 2000: 44.2; 2001: 41.2; 2002: 41.5; 2003: 34.4; 2004: 40.6; 2005: 37.0; 2006: 37.3; 2007: 37.7; 2008: 38.1; 2009: 38.7; 2010: 39.4. - Net non-debt creating capital inflows (negative): 2000: -1.0; 2001: -0.7; 2002: -7.6; 2003: -5.5; 2004: -1.1; 2005: -1.1; 2006: -1.0; 2007: -0.9; 2008: -0.9; 2009: -0.8; 2010: -0.8. - Automatic debt dynamics 1/: 2000: 0.4; 2001: 2.1; 2002: 0.8; 2003: -5.5; 2004: -0.7; 2005: 0.3; 2006: 0.3; 2007: 0.3; 2008: 0.4; 2009: 0.4; 2010: 0.4. - Contribution from nominal interest rate: 2000: 1.6; 2001: 1.3; 2002: 1.1; 2003: 0.8; 2004: 1.3; 2005: 0.7; 2006: 0.7; 2007: 0.7; 2008: 0.7; 2009: 0.7; 2010: 0.7. - Contribution from real GDP growth: 2000: -1.6; 2001: -1.3; 2002: -1.1; 2003: -0.9; 2004: -0.6; 2005: -0.4; 2006: -0.3; 2007: -0.3; 2008: -0.3; 2009: -0.3; 2010: -0.3. - Contribution from price and exchange rate changes 2/: 2000: 0.5; 2001: 2.1; 2002: 0.8; 2003: -5.3; 2004: -1.4; 2005: ... (table continues). - Residual, incl. change in gross foreign assets (2-3): 2000: 14.8; 2001: 9.2; 2002: 7.2; 2003: 12.1; 2004: 11.7; 2005: 7.6; 2006: 6.8; 2007: 6.1; 2008: 4.8; 2009: 3.0; 2010: 1.9. - External debt-to-exports ratio (in percent): 2000: 43.9; 2001: 44.4; 2002: 38.3; 2003: 29.7; 2004: 26.5; 2005: 22.3; 2006: 21.5; 2007: 21.9; 2008: 22.5; 2009: 23.0; 2010: 23.6. - Gross external financing need (in billions of US dollars) 4/: 2000: 0.0; 2001: 0.1; 2002: 0.5; 2003: 0.3; 2004: 0.1; 2005: 0.4; 2006: 0.7; 2007: 0.9; 2008: 1.1; 2009: 1.5; 2010: 1.8. - Gross external financing need (in percent of GDP): 2000: 0.5; 2001: 1.6; 2002: 8.7; 2003: 3.9; 2004: 1.5; 2005: (table continues). ### Key macroeconomic assumptions (historical averages and projections) - Real GDP growth (in percent) — historical average 7.6; standard deviation 5.2; projected average 5.0; projected standard deviation 6.6; selected projections: 2005: 4.9; 2006: 5.8; 2007: 1.0; 2008: 3.8; 2009: 3.6; 2010: 3.6; later years: 3.5, 3.4, 3.3, 3.5. - GDP deflator in US dollars (change in percent) — historical average -2.3; standard deviation -7.9; projected average -3.2; projected standard deviation 36.4; selected projections: 2004: 11.3; 2005: 0.9; 2006: 14.0; 2007: 12.0; subsequent years: 3.0, 3.6, 3.5, 3.3, 3.2, 4.8. - Nominal external interest rate (in percent): historical average 7.2; standard deviation 5.1; projected average 5.1; projected standard deviation 5.6; selected projections: 2004: 11.0; 2005: 6.9; 2006: 1.7; 2007: 6.9; 2008: 7.0; 2009: 7.5; 2010: 7.9; later: 8.3, 7.7, 7.6. - Growth of exports (US dollar terms, in percent): historical average -0.8; standard deviation -10.8; projected average 6.1; projected standard deviation 27.3; selected projections: 2004: 18.6; 2005: 8.9; 2006: 17.3; 2007: 10.3; 2008: 4.5; 2009: 5.0; 2010: 4.7. - Growth of imports (US dollar terms, in percent): historical average -3.1; standard deviation -7.9; projected average 5.3; projected standard deviation 18.2; selected projections: 2004: 37.9; 2005: 9.3; 2006: 17.1; 2007: 6.1; 2008: 7.4; 2009: 8.5; 2010: 8.2. - Current account balance, excluding interest payments: historical values 11.9, 12.8, 3.3, 7.3, 11.1, 10.0 (table entries); projections and scenario details continue in the table. ### Alternative scenarios and stress tests (selected outcomes) - A1. Key variables are at their historical averages in 2005-09 5/: Debt-stabilizing non-interest current account 7/: 10.0; and a sequence of values including 4.7, -1.2, -8.5, -17.6, -27.9, -2.5 (table entries). - A2. Country-specific shock in 2005, with reduction in GDP growth (relative to baseline) of one standard deviation 6/: sequence includes 10.0, 9.2, 8.9, 8.7, 8.4, 8.2, -0.9. - Bound tests include shocks such as: - B1. Nominal interest rate at historical average plus two standard deviations in 2005 and 2006: sequence includes 10.0, 9.8, 10.0, 10.0, 10.1, 10.1, -0.7. - B6. One time 30 percent nominal depreciation in 2005: sequence includes 10.0, 16.2, 18.5, 20.4, 21.6, 22.4, -0.9. - Footnotes define formulas for automatic debt dynamics and contributions from price and exchange rate changes (see table footnotes 1–4). ### Public Sector Debt Sustainability Framework (1999/00–2009/10) — selected projections - Public sector debt (percent of GDP): 1999/00: 10.1; 2000/01: 8.8; 2001/02: 7.8; 2002/03: 10.6; 2003/04: 12.0; 2004/05: 10.2; 2005/06: 6.2; 2006/07: 5.0; 2007/08: 3.1; 2008/09: 2.8; 2009/10: 2.5. - Debt-stabilizing primary balance 10/: -0.2. - Change in public sector debt: 1999/00: 0.8; 2000/01: -1.3; 2001/02: -1.0; 2002/03: 2.8; 2003/04: 1.4; 2004/05: -1.9; 2005/06: -4.0; 2006/07: -1.1; 2007/08: -2.0; 2008/09: -0.3; 2009/10: -0.2. - Identified debt-creating flows (4+7+12): 1999/00: -7.2; 2000/01: -9.2; 2001/02: 4.6; 2002/03: 1.4; 2003/04: -2.2; 2004/05: 1.9; 2005/06: -0.4; 2006/07: 1.8; 2007/08: 2.7; 2008/09: 3.5; 2009/10: 4.1. - Primary deficit: 1999/00: -6.8; 2000/01: -9.4; 2001/02: 3.1; 2002/03: 3.9; 2003/04: 1.9; 2004/05: 3.3; 2005/06: 1.0; 2006/07: 2.2; 2007/08: 3.0; 2008/09: 3.7; 2009/10: 4.3. - Revenue and grants (percent of GDP): 1999/00: 49.7; 2000/01: 50.7; 2001/02: 40.5; 2002/03: 40.1; 2003/04: 39.3; 2004/05: 39.2; 2005/06: 41.6; 2006/07: 40.8; 2007/08: 40.1; 2008/09: 39.6; 2009/10: 39.0. - Primary (noninterest) expenditure (percent of GDP): 1999/00: 42.9; 2000/01: 41.3; 2001/02: 43.7; 2002/03: 44.0; 2003/04: 41.1; 2004/05: 42.5; 2005/06: 42.6; 2006/07: 43.0; 2007/08: 43.2; 2008/09: 43.3; 2009/10: 43.4. - Residual, including asset changes (2-3): 1999/00: 7.9; 2000/01: 7.9; 2001/02: -5.6; 2002/03: 1.4; 2003/04: 3.6; 2004/05: -3.7; 2005/06: -3.6; 2006/07: -2.9; 2007/08: -4.6; 2008/09: -3.8; 2009/10: -4.4. - Public sector debt-to-revenue ratio 1/: 1999/00: 20.3; 2000/01: 17.3; 2001/02: 19.3; 2002/03: 26.5; 2003/04: 30.6; 2004/05: 25.9; 2005/06: 14.8; 2006/07: 12.3; 2007/08: 7.6; 2008/09: 7.0; 2009/10: 6.5. - Gross financing need 5/ (in percent of GDP): 1999/00: -5.8; 2000/01: -8.3; 2001/02: 4.1; 2002/03: 4.8; 2003/04: 2.9; 2004/05: 4.6; 2005/06: 2.1; 2006/07: 2.9; 2007/08: 3.6; 2008/09: 4.3; 2009/10: 4.8. - Gross financing need (in billions of U.S. dollars): 1999/00: -0.3; 2000/01: -0.5; 2001/02: 0.2; 2002/03: 0.3; 2003/04: 0.2; 2004/05: (table continues). ### Key macroeconomic and fiscal assumptions (public debt framework) - Real GDP growth (in percent) — historical average 6.0; standard deviation 7.0; projected average 5.2; projected standard deviation 5.4; selected projections: 2004: 6.2; 2005: 5.7; 2006: 0.9; 2007: 4.6; 2008: 3.8; 2009: 3.6; 2010: 3.5. - Average nominal interest rate on public debt (in percent) 6/: historical average 4.7; standard deviation 3.4; projected average 3.9; projected standard deviation 3.3; selected projections: 2004: 5.1; 2005: 5.3; 2006: 1.6; 2007: 7.5; 2008: 6.9. - Average real interest rate (nominal rate minus change in GDP deflator, in percent): historical average -2.6; standard deviation -4.1; projected average -2.8; projected standard deviation -5.0; selected projections include 2004: 1.5; 2005: -2.6; 2006: 3.4; 2007: 1.8. - Nominal appreciation (increase in US dollar value of local currency, in percent): 1999/00: -3.7; 2000/01: -13.6; 2001/02: -23.2; 2002/03: 27.7; 2003/04: 23.1; 2004/05: -4.1; 2005/06: 17.2; 2006/07: 5.1; 2007/08: 8.5. - Change in implicit GDP deflator (in percent): historical averages and projections include 7.3, 7.5, 6.7, 8.3, 3.6, 7.9, 3.7, 5.7, 6.4, 6.4, 6.1, 5.9, 6.2, 6.1. - Growth of real primary spending (deflated by GDP deflator, in percent): 1999/00: 8.7; 2000/01: 3.1; 2001/02: 11.1; 2002/03: 6.3; 2003/04: -0.7; 2004/05: 5.7; 2005/06: 9.4; 2006/07: 8.1; 2007/08: 4.1; 2008/09: 4.5; 2009/10: 3.9. ### Recent economic developments and policies (staff supplement, June 17, 2005) - Inflation: Headline inflation fell to 6.2 percent in April (from 6.5 percent in March), just above the Bank of Botswana’s inflation target range of 3–6 percent. - Food price inflation moderated to 2.5 percent year-on-year from 3.0 percent in March. - Administered fuel prices, which directly affect nearly a quarter of the consumer price index, were raised by an average of about 5 percent in early May. - Fiscal outlook (through February 2005): Budget deficit for 2004/05 (April–March) expected to be considerably smaller than the 4.1 percent of GDP projected earlier. - Preliminary staff estimates indicate an overall deficit on the order of about 1 percent of GDP. - Both current and capital spending running well below earlier projections. - Lower spending partly due to a mandated 5 percent across-the-board reduction in recurrent expenditure and slower-than-expected implementation of investment projects. - Mineral revenue and domestic tax collections were somewhat below earlier projections. - Staff’s view: significant fiscal adjustment will be required over the medium term to achieve broad budget balance. - Exchange rate policy change (May 29 announcement): - The pula was devalued by 12 percent against the currency basket effective the following business day. - Exchange rate regime changed to a continuously adjusted “crawling peg” aligned with expected inflation differential between Botswana and major trading partner countries. - The spread between the buy and sell rates of the pula was widened from 0.125 percent to 0.5 percent to encourage interbank market development. - Impact assessment (staff): - Direct inflation pass-through from the devaluation estimated at 4–6 percentage points over the next 12 months. - Further knock-on effects of 1–2 percentage points from the exchange rate crawl, which could push inflation up to the 10 percent level over the next 12 months. - Impact on growth and exports expected to be modest due to structural factors in key sectors (diamonds, beef, textiles, tourism). - Production of import substitutes (e.g., poultry and bricks) could rise more significantly in the near term. - Staff’s preliminary assessment suggests a broadly neutral effect on the 2005/06 budget relative to the staff report projection: - Revenues expected to be positively affected due to large foreign currency component. - Pressures on spending could be significant because high-priority expenditure items (e.g., antiretroviral drugs) are imported and government-financed projects have a high import component. - Private sector reaction: business community, wage earners, and foreign investors were surprised and expressed uncertainty about the rationale and implementation of the crawling peg and implications for inflation. - Authorities’ rationale: devaluation aimed at reversing the erosion in international competitiveness to enhance growth, poverty reduction, and employment generation; move made mindful of favorable balance of payments prospects and benign 2005 inflation outlook, with focus on medium- to long-term growth. *Prepared by the African Department (in consultation with the Policy Development and Review Department). Approved by Sharmini Coorey and Anthony Boote. June 17, 2005.* ### 9. With regard to the exchange rate regime change, the authorities acknowledged ### _cr0666 - 9. With regard to the exchange rate regime change, the authorities acknowledged ### Exchange rate regime change: authorities' view - The fixed peg "had provided a credible nominal anchor and achieved a measure of success," but "had not adequately stabilized the real effective exchange rate." - Sizeable periodic adjustments in the exchange rate level "had therefore been necessary over the years," and these adjustments "had tended to be disruptive to economic activity." - The crawling peg would involve "continuous and more predictable adjustments in the exchange rate level," and would "therefore facilitate a more stable economic environment for growth and investment." - The authorities stated the devaluation "was not an intrinsic element of the regime change," but that it would put the regime "on a solid foundation by eliminating the cumulative overvaluation of the pula." 17 ### Staff cautions and guidance on monetary framework - Staff cautioned against using monetary and exchange rate policy to pursue multiple objectives and stressed the need to define a nominal anchor for prices. - Staff warned that "the rate of crawl itself could translate quickly to inflation given Botswana’s highly open economy (see paragraph 8 of the staff report) and in the absence of a clearly defined nominal anchor." - Staff strongly encouraged the authorities to pre-announce the rate of crawl "in order to guide monetary policy and anchor inflation expectations." - Staff noted the rate of crawl must be "low enough to be consistent with maintaining low inflation." - The authorities indicated the BoB’s current inflation target range "could possibly play a role in anchoring expectations," but that the matter was still under review and they remained open to staff advice. ### Causes of real exchange rate strength and structural policy implications - Staff noted Botswana’s strong real exchange rate "to a large extent reflected a strong diamond sector (see Box 1 of the staff report)—possibly compounded in recent years by fiscal deficits." - Concerns about competitiveness of the small non-diamond private sector and the need to sustain high growth are better addressed through structural reform, including: - diversify the economic base, - develop the private sector, - improve labor force skills, - attract foreign direct investment. - Relevant discussion referenced paragraphs 39–43 of the staff report. ### Macroeconomic policy needs to support the regime - Staff emphasized the need for tighter macroeconomic policies "in order to contain inflation as well as to lend credibility to the new exchange rate regime." - Specific policy prescriptions included: - interest rates would need to be raised, - fiscal policy tightened to achieve balance in 2005/06. 18 - A coordinated set of monetary, fiscal, and structural policies was required, including steps to reassure the private business community that the BoB has sufficient operational independence to pursue low inflation. - The authorities stated policy responses were still being formulated but committed to timely policy action to minimize second-round effects on inflation. - The BoB expected to set out implications for monetary policy in its mid-year policy statement, which "might be advanced from its usual late July time frame." - The Ministry of Finance and Development Planning indicated it "remained committed to achieving a balanced budget in the current fiscal year." ### Implementation, market development, and future options - Adoption of the crawling peg and widening of the trading band around the pula was described as "a first step toward greater exchange rate flexibility." - The BoB has identified additional changes in practices and regulations to foster development of the interbank foreign exchange market and is discussing implementation with commercial banks. - The authorities will "continue to explore their options with regard to the monetary policy framework," including whether pre-conditions can be put in place for an eventual move to formal inflation targeting. ### Staff appraisal: priorities and actions - With inflation still above the authorities’ target range and "in light of the April interest rate cut," there is a need for decisive policy action to contain inflationary pressures from the recent devaluation. - Priority recommendations: - tighten monetary policy promptly, including through higher interest rates, "to minimize the second round effects on inflation"; - redouble efforts to achieve fiscal balance in 2005/06, "in particular through cuts in nonessential expenditure," to minimize upward pressures on aggregate demand and the real exchange rate. - Staff supports sustaining growth and reiterates that medium- to long-term competitiveness outside the diamond sector requires deeper structural reform to raise productivity. - The authorities "also need to move quickly to put in place a supportive policy and operational framework to establish a clear nominal anchor and to lend credibility to the new more flexible exchange rate regime." - Early establishment of such a framework will "enhance transparency and smooth the transition toward greater exchange rate" flexibility. *Source: _cr0666 - 9. With regard to the exchange rate regime change, the authorities acknowledged* ### Box 2 of the staff report, the need for significant adjustment remains owing to the erosion of ### Box 2 of the staff report, the need for significant adjustment remains owing to the erosion of mineral revenue and to accommodate higher HIV/AIDs expenditure ### Key macroeconomic findings and projections (2004–2005) - Real GDP (annual percentage change): 4.1 (Est.), 3.7 (Staff Report), 3.6 (Revised). - Consumer prices (end of year): 7.8 (Est.), 6.5 (Staff Report), 8.1 (Revised). - Nominal GDP (in billions of pula): 44.3 (Est.), 48.9 (Staff Report), 51.2 (Revised). - Net foreign assets (annual percentage change): 1.1 (Est.), 4.5 (Staff Report), 6.4 (Revised). - Money and quasi money (M2, annual percentage change): 16.0 (Est.), 10.9 (Staff Report), 13.7 (Revised). - Gross investment (percent of GDP): 27.9 (Est.), 27.2 (Staff Report), 27.5 (Revised). - Of which: public: 10.1 (Est.), 10.2 (Staff Report), 10.4 (Revised). - Gross national savings (percent of GDP): 37.7 (Est.), 38.9 (Staff Report), 40.3 (Revised). - Of which: public: 9.4 (Est.), 8.5 (Staff Report), 9.1 (Revised). - Saving-investment balance: 9.8 (Est.), 11.7 (Staff Report), 12.8 (Revised). - Central government finance (percent of GDP): - Total revenue and grants: 39.2 (Est.), 41.6 (Staff Report), 43.0 (Revised). - Total expenditure and net lending: 40.4 (Est.), 43.3 (Staff Report), 44.3 (Revised). - Current expenditure: 31.9 (Est.), 33.3 (Staff Report), 33.2 (Revised). - Capital expenditure: 9.0 (Est.), 10.2 (Staff Report), 11.3 (Revised). - Net lending: -0.5 (Est.), -0.3 (Staff Report), -0.3 (Revised). - Overall balance (including grants): -1.1 (Est.), -1.7 (Staff Report), -1.2 (Revised). - External sector: - External current account balance (deficit -): 9.5 (Est.), 8.5 (Staff Report), 9.3 (Revised). - External public debt: 4.5 (Est.), 2.6 (Staff Report), 2.6 (Revised). - (In percent of total exports): 9.5 (Est.), 5.9 (Staff Report), 5.9 (Revised). - Gross official reserves (in millions of U.S. dollars; end of period): 5,667 (Est.), 5,925 (Staff Report), 5,987 (Revised). - (In months of imports of goods and services): 18.5 (Est.), 18.2 (Staff Report), 18.6 (Revised). ### Medium-term fiscal projections and scenarios (2004/05–2009/10) Baseline scenario (total revenue and grants and key components, percent of GDP): - Total revenue and grants: 39.2 (2004/05), 43.0 (2005/06), 40.6 (2006/07), 39.7 (2007/08), 39.3 (2008/09), 38.9 (2009/10). - Of which: mineral revenue: 17.8 (2004/05), 22.1 (2005/06), 21.3 (2006/07), 20.5 (2007/08), 20.0 (2008/09), 19.3 (2009/10). - domestic revenue: 9.7 (2004/05), 9.3 (2005/06), 10.0 (2006/07), 10.3 (2007/08), 10.5 (2008/09), 10.7 (2009/10). - Total expenditure and net lending: 40.4 (2004/05), 44.3 (2005/06), 42.5 (2006/07), 42.3 (2007/08), 42.8 (2008/09), 43.1 (2009/10). - Of which: HIV/AIDS: 1.4 (2004/05), 1.4 (2005/06), 1.6 (2006/07), 1.7 (2007/08), 2.2 (2008/09), 2.5 (2009/10). - Overall surplus or deficit (-): -1.1 (2004/05), -1.2 (2005/06), -1.9 (2006/07), -2.7 (2007/08), -3.5 (2008/09), -4.2 (2009/10). - Domestic Financing: 1.3 (2004/05), 3.0 (2005/06), 2.1 (2006/07), 2.7 (2007/08), 3.5 (2008/09), 4.2 (2009/10). - Government deposits at BoB: 21.5 (2004/05), 16.1 (2005/06), 12.0 (2006/07), 7.9 (2007/08), 3.6 (2008/09), 0.0 (2009/10). Alternative scenario (percent of GDP): - Total revenue and grants: 39.2 (2004/05), 42.2 (2005/06), 40.9 (2006/07), 40.5 (2007/08), 40.9 (2008/09), 40.3 (2009/10). - Of which: mineral revenue: 17.8 (2004/05), 21.7 (2005/06), 20.7 (2006/07), 19.8 (2007/08), 19.1 (2008/09), 18.4 (2009/10). - domestic revenue: 9.7 (2004/05), 9.2 (2005/06), 11.0 (2006/07), 11.9 (2007/08), 12.9 (2008/09), 13.5 (2009/10). - Total expenditure and net lending: 40.4 (2004/05), 42.3 (2005/06), 41.1 (2006/07), 40.4 (2007/08), 40.7 (2008/09), 40.4 (2009/10). - Of which: HIV/AIDS: 1.4 (2004/05), 1.4 (2005/06), 1.4 (2006/07), 1.7 (2007/08), 2.0 (2008/09), 2.3 (2009/10). - Overall surplus or deficit (-): -1.1 (2004/05), -0.1 (2005/06), -0.1 (2006/07), 0.1 (2007/08), 0.2 (2008/09), -0.1 (2009/10). - Domestic financing: 1.3 (2004/05), 1.9 (2005/06), 0.3 (2006/07), -0.1 (2007/08), -0.2 (2008/09), 0.1 (2009/10). - Government deposits at BoB: 21.5 (2004/05), 16.1 (2005/06), 13.8 (2006/07), 12.6 (2007/08), 11.6 (2008/09), 10.2 (2009/10). ### Context, risks, and near-term developments - Botswana’s diamond sector presently contributes about one third of GDP and 75 percent of exports. - HIV/AIDS prevalence has risen over the past decade, eroding social indicators (e.g., life expectancy and mortality rates) and intensifying expenditure pressures. - Real GDP growth: decelerated to 5.7 percent in 2003/04 (July–June), from 7.8 percent in 2002/03; expected to slow to 4–5 percent in 2004/05. - Inflation: picked up in late 2004 (peak of 8.0 percent in January), fell to 6.2 percent in April; Bank of Botswana lowered inflation target to 3–6 percent in February 2005. - Bank of Botswana (BoB) policy rates and targets: - Bank rate: maintained at 14.25 percent from late 2003 until late April 2005, then lowered to 14 percent. - Private sector credit growth target: lowered to 10-13 percent in February 2005, from 12–15 percent. - External performance: - Current account surplus: about 9½ percent of GDP in 2004, up from 6½ percent of GDP in 2003. - Foreign reserves: US$5.7 billion at end-2004 (about 18½ months of imports). ### Policy recommendations and staff/Directors’ advice - Fiscal policy: - Significant additional fiscal adjustment will be needed to maintain budget balance over the medium term. - Set out clearer road maps for expenditure reprioritization and public sector reform, including a reduction in the public sector wage bill. - Strengthen budget systems and capacity to track expenditure in priority areas, particularly on HIV/AIDS. - Integrate a comprehensive strategy for HIV/AIDS into the medium-term budgetary framework. - On the revenue side: strengthen tax administration, improve tax compliance, broaden the tax base; further develop the institutional structure of the Botswana Unified Revenue Service; consider stronger legal sanctions against tax evaders; consider establishing a large taxpayers unit; consider an increase in the value-added tax rate. - Monetary and exchange rate policy: - The recent devaluation of the pula and move to a “crawling peg” arrangement should be accompanied by supportive measures to minimize near-term costs and enhance long-term benefits. - Pre-announce the rate of crawl—set at a pace consistent with maintaining low inflation—to provide a credible nominal anchor. - Ensure fiscal and monetary policies are closely coordinated and kept consistent with the rate of crawl. - With inflation still above the target range and in light of the April interest rate cut, Directors urged decisive policy action to contain inflationary pressures from the devaluation; in particular, monetary policy should be tightened expeditiously, including through higher interest rates. - Efforts should be stepped up to achieve fiscal balance in 2005/06, through cuts in nonessential expenditure, to minimize upward pressures on aggregate demand and the real exchange rate. - Going forward, greater exchange rate flexibility will require development of tools and institutions for effective monetary policy management. - Financial sector and structural reforms: - Banking sector generally sound; prudential supervision broadly adequate. - Expedite action on establishing a financial supervisory agency for nonbank financial institutions. - Continue efforts to bring the AML/CFT regime more in line with international standards. - Participate in the Financial Sector Assessment Program at an early opportunity. - Accelerate structural reforms to promote private sector development and diversification: remove labor market rigidities; deepen labor market reforms; comprehensive reform of legal and regulatory framework to support public/private partnerships and the Privatization Master Plan. - Continue trade liberalization: negotiate free trade agreements, lower tariffs, remove nontariff barriers; eliminate the multiple currency practice arising from the Foreign Exchange Risk-Sharing Scheme in 2006. ### Executive Board and authorities’ positions - Executive Directors: - Commended Botswana’s sound policies, prudent diamond resource management, and commitment to good governance. - Emphasized need for diversification and stronger efforts to prevent and combat HIV/AIDS. - Highlighted need for significant fiscal adjustment, expenditure reprioritization, tax administration improvements, and tighter coordination of fiscal and monetary policy consistent with the crawling peg. - Botswana authorities (right of reply): - Asserted the PIN did not fully reflect the economic situation; argued there was no need for the significant fiscal adjustment called for by the Board. - Stated the final budget for 2004/05 was in approximate balance and affirmed commitment to maintain a balanced budget over the cycle. - Described the May 2005 devaluation as a measured reaction to a serious overvaluation of the pula intended to support competitiveness and diversification; noted subsequent monetary policy adjustments were made. - Supported continued structural reform but questioned the claim that comprehensive legal and regulatory reform was a necessary precursor to privatization, citing the Botswana Privatisation Masterplan published in August 2005. *Source: IMF staff report excerpts, Box 2 and associated tables and Public Information Notice (PIN) summary, as provided in the unit.* ### Introduction and Background ### Introduction and Background ### Key points - The Botswana authorities express appreciation for Fund management and staff advice during the 2005 Article IV consultation discussions and for Fund technical assistance. - Botswana achieved continued macroeconomic stabilization and a positive growth path over the last three decades despite initial adverse conditions. - Botswana obtained high sovereign credit ratings from Moody’s and Standard and Poor’ in the A grade for a third year in a row; these are the highest in Africa. - Authorities acknowledge development challenges: economic diversification, HIV/AIDS pandemic, poverty reduction to meet the Millennium Development Goals (MDGs) and Vision 2016 objectives. - The ruling party was re-elected and formed a new government in late 2004 and re-committed to sound macroeconomic policies. ### Recent Economic Developments and Prospects - Economic growth continued in 2003/04 but at a lower pace than previous years; growth expected to decelerate further in 2004/05. - Economic performance expected to fall slightly in 2004 to 4 percent compared to 5.7 percent the year before, due largely to declines in mining and non-mining sectors. - Fiscal position expected to improve with the budget deficit set at 0.5 percent of GDP in fiscal year 2005/06. - Fiscal performance to be supported by an expected improvement in mineral receipts and improvement in tax administration. - Employment: about 11 000 formal sector jobs were added in 2004 (double the additional formal sector jobs added in the previous year). - Unemployment estimated at 23.8 percent and remains a major challenge. - Growth forecast in the medium term: between 5-6 percent as projected in the ninth National Development Plan (NDP 9). - Authorities committed to regional economic integration and further developing the country as a regional financial hub. - Botswana Development Corporation (BDC) promoting projects in concrete crushing, electrical cable manufacturing, plastic recycling, and others. ### Fiscal Policy - Fiscal strategy premised on achieving a balanced budget while allowing minimum and manageable budget deficits under unique circumstances. - Challenges to fiscal position: gradual slowdown of the diamond sector, projected further declines in SACU receipts, and increased expenditure on HIV/AIDS. - Budget deficit estimated at 0.5 percent of GDP in the 2005/2006 fiscal year. - A new budget introduced to capture all expenditures and align them with NDP 9 objectives. - Rolling out the Budget Accounting and Budgeting System to improve public sector productivity. - Introduction of Performance Management System (PMS) and computerization of government activities. - Establishment of a Unified Revenue Service (BURS) to improve revenue administration capacity. ### Monetary, Exchange Rate and Financial Sector Issues - Monetary stance anchored on the exchange rate peg; authorities exploring strengthening the monetary policy framework including a possible move to inflation targeting. - Objectives of inflation targeting: arrest inflationary pressures, maintain competitiveness, and rein in macroeconomic stability. - Efforts to improve understanding of monetary policy transmission mechanisms and to develop short-term inflation forecasting capacity. - Effects of the devaluation were temporary and did not cause significant disruption. - Inflation has been declining since November 2004; six month annualized average inflation hovering around 5 percent. - Authorities achieved their inflation rate target of 4-7 percent and lowered the bank rate from 14.25 to 14 percent. - Financial sector: authorities addressing a sizeable deficit on the capital and financial account. - Domestic bond market development ongoing; economy experiencing excess liquidity arising from privatization of the public pension system. - Bank of Botswana issuing central bank certificates to deal with excess liquidity. - Government established the International Financial Services Centre (IFSC) to attract sustainable investments. - Intention to establish a Financial Supervisory authority for non-banks; Financial Sector Reform and Strengthening Initiative recommendations under consideration by the Ministry of Finance and Development Planning. - Completed draft AMLC/CFT strategy to align framework with international standards; authorities are considering applying for an FSAP. ### Structural Issues - Commitment to structural reforms to transform the economy and set a sustainable growth path. - National Employment, Manpower and Incomes Council reconstituted with a broader reform agenda to oversee NDP 9 structural reform process. - Announcement of a Privatization Master Plan and other initiatives to improve public enterprise performance; privatization to be orderly and to garner political consensus. - Measures to improve tax administration and revenue collection: extensive follow-up on tax evaders and improvements to the legal framework, audit, and enforcement procedures. - Support for small scale enterprises through the Citizens Entrepreneurial Development Agency (CEDA). - Government reviewed the Revised National Policy on Incomes, Employment, Prices and Profits of 1990 in 2004 and is considering study recommendations before presentation to Parliament. - Commitment to attract Foreign Direct Investments (FDI): adopted a Foreign Direct Investment Strategy, a new Competition Policy, and revisions to the legal operating environment. - Implementing recommendations of the FIAS study on administrative barriers to investment; several legislative reforms are being introduced, reviewed, or modernized. ### Health and HIV/AIDS - Millennium Development Goals Status Report launched in September 2004 indicated substantial work needed on health, notably HIV/AIDS and malaria. - Authorities committed to providing comprehensive and accessible health care nationwide and to reducing mother-to-child HIV infection by 2015. - Comprehensive strategy to address the pandemic includes catering for orphans, sourcing and distribution of drugs, provision of food for affected vulnerable groups, clothing and school uniforms. - Latest official statistics: incidence of HIV/AIDS among those 18 months of age and older is 17.3 percent; incidence for population aged 15 to 49 years is 25.3 percent. - Rising mortality rate being addressed through country-wide health services expansion, new facility construction, upgrading existing facilities, and intensified training of nationals in the health sector. ### Other Issues - Poverty: 23.4 percent of the population below the poverty line. - Government established a Rural Development Council guided by the Revised National Policy for Rural Development and supported by a substantial allocation of the development budget to address rural poverty and fund rural development institutions. Conclusion - Authorities recognize changing and challenging economic and international environments, including decline in the contribution of the diamond sector and deteriorating social indicators exacerbated by HIV/AIDS. - Authorities embarked on a broad-based structural reform agenda, realigned the budget with a focus on social issues and poverty reduction while ensuring balance to avoid long-term threats to the economy. - Emphasis on prioritizing government expenditure, fostering prudent fiscal management of public resources given the limited resource envelope, promoting growth, and diversifying the economy. *Source: _cr0666 - Introduction and Background* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr0666.pdf_