## 1. Medium-Term Economic and Financial Indicators

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### Executive summary — recent performance and challenges
- Real GDP growth averaged 4½ percent for the past four years and recovered to an estimated 5¾ percent in 2006/07.
- Growth picked up especially in the non-mineral economy.
- Inflation has fallen substantially and stabilized near the top of the Bank of Botswana (BoB) target range; BoB policy interest rate was lowered by 0.5 percent to 14½ percent in June; BoB objective cited as 4–7 percent.
- Continued high mineral prices contributed to fiscal and balance of payments surpluses; a fiscal surplus of 12 percent of GDP occurred in 2006/07 and staff project a surplus of 8 percent of GDP in 2007/08.
- Non-mineral indicators improved: private sector credit rose 19 percent in July 2007 year-on-year; M3 has grown steadily.
- External position strengthened: current account surplus of almost 19½ percent of GDP in 2006; international reserves increased to 25 months of prospective imports of goods and services by end-2006.
- Financial sector: sound and profitable but shallow; the stock of BoB certificates (BoBCs) expanded to about one-quarter of GDP; rising interest costs of BoBCs reached 3 percent of GDP in 2006.
- Structural and social challenges remain: incidence of poverty, unemployment, and HIV/AIDS remain high though declining; economy needs faster diversification away from diamonds given expected sharp decline in diamond production after 2020.

### Medium-term projections (2007–2011) — key indicators (as reported)
- Real GDP (annual percentage change): 2007: 4.3; 2008: 6.0; 2009: 3.8; 2010: 5.5; 2011: 6.9.
- Mineral GDP (annual percentage change): 2007: -4.3; 2008: 1.9; 2009: -2.7; 2010: 2.0; 2011: 4.0.
- Non-mineral GDP (annual percentage change): 2007: 10.4; 2008: 8.6; 2009: 7.6; 2010: 7.3; 2011: 8.3.
- Consumer prices (average): 2007: 7.0; 2008: 7.0; 2009: 6.1; 2010: 5.6; 2011: 5.0.
- Consumer prices (end of period): 2007: 7.4; 2008: 6.5; 2009: 5.8; 2010: 5.3; 2011: 5.0.
- Overall fiscal balance (deficit –) (percent of GDP): 2007: 8.0; 2008: 6.4; 2009: 5.0; 2010: 3.5; 2011: 2.3.
- Non-mineral primary balance (percent of non-mineral GDP): 2007: -17.6; 2008: -17.2; 2009: -17.0; 2010: -16.6; 2011: -16.7.
- Current account balance (percent of GDP): 2007: 20.4; 2008: 9.6; 2009: 8.8; 2010: 5.6; 2011: 5.5.
- Balance of payments (US$ millions): 2007: 17.2; 2008: 12.1; 2009: 11.2; 2010: 7.5; 2011: 7.1.
- Change in reserves (increase –) (US$ millions): 2007: -1,953; 2008: -1,507; 2009: -1,484; 2010: -1,071; 2011: -1,093.
- Gross official reserves (end of period) (US$ millions): 2007: 9,907; 2008: 11,414; 2009: 12,898; 2010: 13,968; 2011: 15,061.
- Reserves in months of imports of goods and services: 2007: 24.4; 2008: 26.9; 2009: 28.6; 2010: 29.4; 2011: 29.5.

### Risks to the medium-term outlook
- Commodity and demand risks:
  - Continued dependence on mineral exports and revenues exposes Botswana to significant declines in diamond, copper, or nickel prices or sales if global growth weakens.
  - Expected sharp decline in diamond production after 2020 requires much faster non-diamond growth to avoid economic contraction and to replace government share of diamond export revenues.
- Financial sector risks:
  - Pension and insurance sectors are lightly supervised; the NBFI regulatory authority is nascent.
  - Rapid growth in consumer lending introduces untested risks.
  - High interest burden from growing stock of BoBCs (BoBC interest costs reached 3 percent of GDP in 2006).
- Inflation risks:
  - Regional drought could push up food prices; power shortages could raise electricity prices; administrative price adjustments can produce one-off inflation effects.
  - These factors may make it difficult for BoB to reach its 3–6 percent medium-term inflation objective.

### Monetary and exchange rate policy issues
- The pula was substantially depreciated in nominal and real effective terms after devaluations in 2004 and 2005 and the 2005 shift to a crawling peg.
- The BoB set the rate of crawl at the difference between the inflation objective and forecast inflation of trading partners (authorities do not disclose crawl parameters).
- Fiscal restraint, capital account outflows, and tight monetary policy helped contain inflationary pressures; REER is about 10 percent below its pre-2004 peak and has stabilized close to equilibrium in the past year.
- Policy recommendation reported: further reduction in the rate of crawl, consistent with inflation differentials, would facilitate further interest rate reductions.
- BoBCs expansion to absorb excess liquidity has imposed a high interest cost on the BoB; commercial banks hold over half their assets in BoBCs.
- Monetary transmission and liquidity notes:
  - Recent lowering of the policy interest rate and slowing of the rate of crawl was appropriate to reduce high real interest rates that deter lending.
  - Systemic excess liquidity is impeding development of interbank markets and weakening the monetary policy transmission mechanism.
  - Improvements in treasury cash management and channeling significant part of diamond receipts directly to the BoB have reduced liquidity, but BoBC stock growth remains a concern.
  - Staff encouraged building the domestic bond market by regular issuance of government bonds to help create a meaningful yield curve.

### Fiscal policy priorities, sustainability benchmarks, and sovereign wealth options
- Short-term staff recommendation: aim for a surplus of at least 9-10 percent of GDP in 2007/08 through boosting recurrent revenues and restraining expenditures; authorities expected an overall surplus considerably higher than budgeted.
- Authorities have maintained surpluses in the overall and non-investment balances and limited public expenditures to less than 40 percent of GDP.
- Staff recommended NDP 10 target: reduce the non-mineral primary deficit (excludes revenues from nonrenewable resources and interest spending and receipts) to enhance longer-term fiscal sustainability.
- Permanent income approach (Box 1) findings:
  - Assumes diamond production sharply declines around 2021 and annuity from mineral wealth lasts until 2050; annuitized mineral revenue modeled to stay constant in terms of GDP.
  - Based on staff assumptions, the permanent income calculation indicates the spending ceiling should be reduced from 40 percent of GDP to 30 percent of GDP (this assumes spending limited to non-mineral revenues rising from current 22 percent of GDP to around 23½ percent in 2010/11 and annuitized mineral revenue of about 6⅓ percent of GDP).
- Benchmark scenarios (selected figures reported) for overall balance (percent of GDP) and non-mineral primary balance (percent of non-mineral GDP):
  - Staff projections: 2007 overall balance 1: -16.0; 2015 overall balance 1: -15.7; 2007 non-mineral primary balance 1: 8.0; 2015 non-mineral primary balance 1: -0.2.
  - Sustainability benchmark (a) Conservative assumptions: 2007 overall -8.2; 2015 overall -7.2; 2007 non-mineral primary 12.1; 2015 non-mineral primary 5.2.
  - Sustainability benchmark (b) Less conservative (baseline revenues and optimistic interest rate): 2007 overall -9.3; 2015 overall -8.3; 2007 non-mineral primary 11.3; 2015 non-mineral primary 4.4.
  - Sustainability benchmark (c) Less conservative—back-loaded adjustment: 2007 overall -17.2; 2015 overall -10.6; 2007 non-mineral primary 6.0; 2015 non-mineral primary 2.7.
  - Sustainability benchmark (d) Optimistic assumptions: 2007 overall -12.9; 2015 overall -11.4; 2007 non-mineral primary 8.9; 2015 non-mineral primary 5.9.
  - Notes: optimistic nominal interest rate assumed ~9¼ percent (real interest ~4½ percent); conservative nominal interest ~7¾ percent (real ~3 percent).
- Policy guidance:
  - Maintain fiscal surpluses over the medium term to sustain budgetary spending when diamond revenues decline.
  - Consider creating an explicit sovereign wealth fund to strengthen fiscal savings and channel returns on public financial assets back to government.
  - In NDP 10, set more ambitious goals for maintaining fiscal savings and boosting non-mineral revenues; justify any relaxation of spending/GDP share only if expenditures have returns higher than financial savings.
  - Preserve net government wealth by avoiding use of nonrecurring mineral revenues for recurring expenses; use nonrecurring revenues for capital spending (including public education and health).

### Fiscal policy and revenue mobilization
- Creation of the Botswana Unified Revenue Service has unified and reinforced administration of VAT and income taxes.
- Higher cost recovery in parastatal utilities is helping consolidate the fiscal position and may spur efficiency.
- Authorities agreed with staff that if mineral revenues or SACU receipts decline, raising the VAT rate to the regional norm could be one option for offsetting revenue losses.
- Staff view: maintaining expenditures at about 30 percent of GDP, as in 2006/07, and continuing to build non-diamond revenues will strengthen fiscal sustainability.
- Public spending and wage policy:
  - Comprehensive review of public sector wages nearing completion should be used to rationalize wage policies.
  - Raising public sector productivity is a high priority; increased productivity would create room for anticipated increases in investment and HIV/AIDS-related spending.

### Sovereign wealth fund and Pula Fund arrangements
- Creation of an explicit sovereign wealth fund could:
  - Strengthen support for fiscal savings by linking fiscal surpluses now to more stable future spending when diamond revenues decline.
  - Require a comprehensive plan for management of sovereign wealth and highlight high costs of liquidity control.
- Alternative: improvements to transparency and institutional framework (e.g., limiting transfers of Pula Fund assets to the Liquidity Portfolio or the use of income on assets) could be achieved within current Pula Fund arrangements as part of the BoB balance sheet.
- Authorities elected to preserve existing institutional arrangements, noting flexibility to maneuver in case of possible simultaneous large external shocks given concentration of export earnings.

### Financial sector and structural reform priorities
- Financial sector status and key indicators:
  - Prudential indicators solid; banking system profitability among the world’s highest.
  - Financial depth remains low relative to comparable countries.
  - BoBCs stock ~ one-quarter of GDP; commercial banks hold over half their assets in BoBCs.
- Reform agenda and staff priorities:
  - Strengthen supervision of nonbank financial institutions (NBFIs) and build regulatory capacity of the NBFI authority.
  - Address rapid consumer lending growth risks.
  - Implement FSAP recommendations and develop a reform plan to strengthen oversight of pension and insurance sectors.
  - Draw up a comprehensive financial sector strategy reform plan using a high-level committee.
  - Get the NBFI Regulatory Authority running by the target of January 2008.
  - Further strengthen BoB’s powers to supervise statutory banks and banking groups and improve cooperation with domestic and cross-border supervisors.
  - Improve access to financial services by reforming public financial institutions through privatization and other means.
  - Continue steps to implement FATF recommendations on AML/CFT and set up the Financial Intelligence Unit.
- Box 3 (NBFI reform highlights):
  - New NBFI Regulatory Authority Act establishes a single NBFI regulatory agency.
  - Need to begin oversight of pension fund administrators and asset managers; monitor foreign asset holdings that currently stand at around 65 percent of total pension fund assets.
  - Oversight of insurance sector needs strengthening through analysis of statutory returns and regulations on intermediaries and issuance of market conduct guidelines.
  - NBFIs could play an important role in developing local financial markets; meeting pension funds’ hedging needs could offer opportunities to create futures and forward markets and help establish a benchmark yield curve.

### Banking sector soundness and FSAP findings
- The banking sector is sound and near-term risks are well contained, as the FSAP found.
- Priority actions:
  - Initiate the NBFI Regulatory Authority by January 2008.
  - Complete the legislative agenda for pension and insurance reform.
- Key prudential indicators (selected levels for 2006):
  - Regulatory Tier I capital to risk-weighted assets: 10.3 (2006).
  - Loans-to-assets: 36.9 (2006).
  - Nonperforming loans (NPLs)-to-gross loans: 0.9 (2006).
  - Liquid assets to total assets: 47.1 (2006).
  - Return on average assets: 6.1 (2006).
  - Return on average equity: 89.2 (2006).

### Structural reforms, investment climate, and statistics
- Structural reform priorities:
  - Privatize large parastatals with appropriate regulation.
  - Reform education and vocational training to reduce skills mismatch.
  - Complete foreign investment and competition policy reforms.
  - Liberalize administered prices where feasible and institute more regular price adjustments linked to market developments.
  - Improve statistical capacity and consider transforming the Central Statistical Office into an autonomous agency.
- Investment climate and projects:
  - Major mineral-linked projects: Diamond Trading Company (Botswana) downstream activities; Coal-based Mmamabula Export Power Station; expansion of Morupule Power Station; refinery at the Tati Nickel Mine.
  - Government commitments include constructing four dams, speeding rural electrification and rural telecommunication programmes, and connecting public facilities where backbone infrastructure exists.
- Statistical issues and recommendations:
  - National accounts, balance of payments and fiscal statistics need improved accuracy and harmonized accounting periods.
  - Recommendations include reconciling datasets, establishing institutional unit lists consistent with 1993 SNA, formalizing revision policies, conducting enterprise surveys, and compiling GFS for extrabudgetary institutions and consolidated general government.
  - Balance of payments statistics follow BPM5 but have data source and valuation discrepancies with national accounts.

### External sector, reserves, and debt indicators (selected)
- Exchange rate arrangements: crawling peg arrangement against a basket of currencies; as of September 30, 2007, US$1 = P6.06, and R1 = P0.88.
- End-of-year reserves (US$ millions): 5,339; 5,653; 6,278; 7,954; 9,907.
- Pula Fund (US$ millions): 4,332; 4,681; 4,533; 6,140; ...
- Other reserves (US$ millions): 1,006; 972; 1,745; 1,814; ...
- Reserves (months of imports of goods and services): 17.5; 18.3; 23.0; 25.0; 24.4.
- Balance of payments (percent of GDP): 1.9; -0.6; 13.2; 16.6; 17.2.
- Current account (percent of GDP): 5.6; 2.9; 14.4; 19.3; 20.4.
- Baseline external debt (percent of GDP, 2002–2007): 19.1; 14.7; 10.9; 12.0; 12.1; 12.1.
- Change in external debt (percent of GDP): -14.0; -4.4; -3.8; 1.0; 0.1; 0.0.
- External debt-to-exports ratio (in percent): 39.9; 33.3; 24.2; 23.5; 24.0; 22.9.
- Gross external financing need (in billions of US dollars): 0.5; 0.3; 0.8; -0.4; -0.5; -0.7.
- Gross external financing need (percent of GDP): 7.9; 4.2; 7.7; -4.0; -4.9; -6.0.

### Macro and fiscal historical highlights (selected)
- Real GDP growth (calendar year basis): 5.7; 6.2; 6.3; 3.8; 2.6; 5.0 (historic series and projections shown).
- GDP deflator in US dollars (change in percent): -7.1; 31.5; 11.3; 3.3; -1.8; 1.7.
- Nominal external interest rate (percent): 5.5; 5.6; 11.1; 6.8; 6.9; 7.3.
- Growth of exports (US$, percent): 6.0; 29.3; 20.9; 20.5; -0.3; 12.6.
- Growth of imports (US$, percent): 1.0; 28.9; 31.2; 1.3; -11.7; 16.5.
- Current account balance, excluding interest payments (percent of GDP): 5.2; 6.4; 4.3; 15.1; 20.1; 21.2.
- Net non-debt creating capital inflows (percent of GDP): -6.2; -2.7; -4.4; -2.7; -3.2; -2.7.
- Central government operations (percent of GDP) — total revenue and grants: 38.8; 37.5; 40.3; 42.5; 37.5; 41.1.
- Total expenditure and net lending (percent of GDP): 39.0; 36.3; 31.9; 30.7; 35.8; 33.1.
- Overall balance after grants (cash basis) (percent of GDP): -0.2; 1.2; 8.4; 11.8; 1.8; 8.0.
- Non-mineral primary balance (cash basis, percent of non-mineral GDP): -33.6; -27.2; -20.5; -15.3; -23.7; -17.6.
- Money and quasi-money (M2) 12-month change (percent): 17.6; 13.9; 10.6; 67.4; 23.6.
- Private sector credit to GDP (percent): 18.1; 20.0; 18.8; 19.6; 21.0.
- Key banking-sector prudential indicator example: Return on average equity: 89.2 (2006).

### Staff appraisal — key judgments and policy recommendations
- Recent economic developments positive; medium term looks bright.
- Non-diamond growth expected to remain strong; diamond production seems likely to continue at roughly its current level in the near term.
- High mineral prices and investment in electricity generation projected to sustain fiscal and balance of payments surpluses through 2011.
- Most obvious risk: possibility that diamond prices will drop.
- Recommendations:
  - Next NDP should reinforce the framework for non-mineral growth.
  - Maintain fiscal surpluses over the medium term to accumulate savings for the period when diamond revenues decline.
  - Consider creation of an explicit sovereign wealth fund to galvanize support for running fiscal surpluses and improve institutional framework; transparency and institutional improvements can also be achieved with the Pula Fund remaining within the BoB.
  - Strengthen financial sector supervision, particularly of NBFIs and the sizable pension and insurance sectors; build on the FSAP to formulate a reform plan.
  - Accelerate privatization of large parastatals with appropriate regulation; reform education and vocational training; complete initiatives on foreign investment and competition policy; liberalize administered prices where appropriate; improve statistics for policy analysis.
  - Consider amending the BoB Act to provide a firmer legal foundation for the price stability objective.

*Source: IMF staff report — 1. Medium-Term Economic and Financial Indicators (pages excerpted).*

### 1. Medium-Term Economic and Financial Indicators...............................................................7

### 1. Medium-Term Economic and Financial Indicators...............................................................7

### Executive summary — recent performance and challenges
- Growth has picked up, especially in the non-mineral economy; real GDP growth averaged 4½ percent for the past four years and recovered to an estimated 5¾ percent in 2006/07.
- Inflation has fallen substantially and stabilized near the top of the Bank of Botswana (BoB) target range; BoB policy interest rate was lowered by 0.5 percent to 14½ percent in June; BoB objective cited as 4–7 percent.
- Continued high mineral prices are contributing to fiscal and balance of payments surpluses; a fiscal surplus of 12 percent of GDP occurred in 2006/07 and staff project a surplus of 8 percent of GDP in 2007/08.
- Non-mineral indicators improved: private sector credit rose 19 percent in July 2007 year-on-year; M3 has grown steadily.
- External position strengthened: current account surplus of almost 19½ percent of GDP in 2006; international reserves increased to 25 months of prospective imports of goods and services by end-2006.
- Financial sector: sound and profitable but shallow; the stock of BoB certificates (BoBCs) expanded to about one-quarter of GDP; rising interest costs of BoBCs reached 3 percent of GDP in 2006.
- Structural and social challenges remain: incidence of poverty, unemployment, and HIV/AIDS remain high though declining; economy needs faster diversification away from diamonds given expected sharp decline in diamond production after 2020.

### Medium-term projections (2007–2011) — key indicators (as reported)
- Real GDP (annual percentage change): 2007: 4.3; 2008: 6.0; 2009: 3.8; 2010: 5.5; 2011: 6.9.
- Mineral GDP (annual percentage change): 2007: -4.3; 2008: 1.9; 2009: -2.7; 2010: 2.0; 2011: 4.0.
- Non-mineral GDP (annual percentage change): 2007: 10.4; 2008: 8.6; 2009: 7.6; 2010: 7.3; 2011: 8.3.
- Consumer prices (average): 2007: 7.0; 2008: 7.0; 2009: 6.1; 2010: 5.6; 2011: 5.0.
- Consumer prices (end of period): 2007: 7.4; 2008: 6.5; 2009: 5.8; 2010: 5.3; 2011: 5.0.
- Overall fiscal balance (deficit –) (percent of GDP): 2007: 8.0; 2008: 6.4; 2009: 5.0; 2010: 3.5; 2011: 2.3.
- Non-mineral primary balance (percent of non-mineral GDP): 2007: -17.6; 2008: -17.2; 2009: -17.0; 2010: -16.6; 2011: -16.7.
- Current account balance (percent of GDP): 2007: 20.4; 2008: 9.6; 2009: 8.8; 2010: 5.6; 2011: 5.5.
- Balance of payments (US$ millions): 2007: 17.2; 2008: 12.1; 2009: 11.2; 2010: 7.5; 2011: 7.1.
- Change in reserves (increase –) (US$ millions): 2007: -1,953; 2008: -1,507; 2009: -1,484; 2010: -1,071; 2011: -1,093.
- Gross official reserves (end of period) (US$ millions): 2007: 9,907; 2008: 11,414; 2009: 12,898; 2010: 13,968; 2011: 15,061.
- Reserves in months of imports of goods and services: 2007: 24.4; 2008: 26.9; 2009: 28.6; 2010: 29.4; 2011: 29.5.

Sources and notes reported in the text:
- Year beginning July 1; based on data included in the February 2007 National Accounts Stats Brief from the Central Statistics Office.
- Non-mineral primary balance computed as difference between non-mineral revenue and expenditure (excluding interest receipts and interest payments), divided by non-mineral GDP.
- Reserves months based on imports of goods and services for the following year.

### Risks to the medium-term outlook
- Commodity and demand risks:
  - Continued dependence on mineral exports and revenues exposes Botswana to significant declines in diamond, copper, or nickel prices or sales if global growth weakens.
  - Expected sharp decline in diamond production after 2020 requires much faster non-diamond growth to avoid economic contraction and to replace government share of diamond export revenues.
- Financial sector risks:
  - Pension and insurance sectors are lightly supervised; the NBFI regulatory authority is nascent.
  - Rapid growth in consumer lending introduces untested risks.
  - High interest burden from growing stock of BoBCs (BoBC interest costs reached 3 percent of GDP in 2006).
- Inflation risks:
  - Regional drought could push up food prices; power shortages could raise electricity prices; administrative price adjustments can produce one-off inflation effects.
  - These factors may make it difficult for BoB to reach its 3–6 percent medium-term inflation objective.

### Monetary and exchange rate policy issues
- The pula was substantially depreciated in nominal and real effective terms after devaluations in 2004 and 2005 and the 2005 shift to a crawling peg.
- The BoB set the rate of crawl at the difference between the inflation objective and forecast inflation of trading partners (authorities do not disclose crawl parameters).
- Fiscal restraint, capital account outflows, and tight monetary policy helped contain inflationary pressures; REER is about 10 percent below its pre-2004 peak and has stabilized close to equilibrium in the past year.
- Policy recommendation reported: further reduction in the rate of crawl, consistent with inflation differentials, would facilitate further interest rate reductions.
- BoBCs expansion to absorb excess liquidity has imposed a high interest cost on the BoB; commercial banks hold over half their assets in BoBCs.

### Fiscal policy priorities and sustainability benchmarks
- Short-term staff recommendation: aim for a surplus of at least 9-10 percent of GDP in 2007/08 through boosting recurrent revenues and restraining expenditures; authorities expected an overall surplus considerably higher than budgeted.
- Authorities have met fiscal goals: maintaining surpluses in the overall and non-investment balances and limiting public expenditures to less than 40 percent of GDP.
- Staff recommended NDP 10 target: reduce the non-mineral primary deficit (excludes revenues from nonrenewable resources and interest spending and receipts) to enhance longer-term fiscal sustainability.
- Permanent income approach (Box 1) used to benchmark sustainable spending:
  - Calculation assumes diamond production sharply declines around 2021 and annuity from mineral wealth lasts until 2050; annuitized mineral revenue modeled to stay constant in terms of GDP.
  - Based on staff assumptions, the permanent income calculation indicates the spending ceiling should be reduced from 40 percent of GDP to 30 percent of GDP (this assumes spending limited to non-mineral revenues rising from current 22 percent of GDP to around 23½ percent in 2010/11 and annuitized mineral revenue of about 6⅓ percent of GDP).
- Benchmark scenarios for overall balance (percent of GDP) and non-mineral primary balance (percent of non-mineral GDP) — selected figures reported:
  - Staff projections: 2007 overall balance 1: -16.0; 2015 overall balance 1: -15.7; 2007 non-mineral primary balance 1: 8.0; 2015 non-mineral primary balance 1: -0.2.
  - Sustainability benchmarks (illustrative scenarios):
    - (a) Conservative assumptions: 2007 overall -8.2; 2015 overall -7.2; 2007 non-mineral primary 12.1; 2015 non-mineral primary 5.2.
    - (b) Less conservative assumptions (baseline revenues and optimistic interest rate): 2007 overall -9.3; 2015 overall -8.3; 2007 non-mineral primary 11.3; 2015 non-mineral primary 4.4.
    - (c) Less conservative—back-loaded adjustment: 2007 overall -17.2; 2015 overall -10.6; 2007 non-mineral primary 6.0; 2015 non-mineral primary 2.7.
    - (d) Optimistic assumptions: 2007 overall -12.9; 2015 overall -11.4; 2007 non-mineral primary 8.9; 2015 non-mineral primary 5.9.
  - Notes on scenarios: optimistic interest rate assumption refers to a nominal interest rate of around 9¼ percent (real interest ~4½ percent); conservative nominal interest around 7¾ percent (real ~3 percent). Revenue projections assume slow increase in non-mineral revenues and decline in mineral revenues in terms of GDP; expenditure projections assume capital expenditure and health and other critical areas increase in terms of GDP.

Policy guidance distilled from discussions:
- Maintain fiscal surpluses over the medium term to sustain budgetary spending when diamond revenues decline.
- Consider creating an explicit sovereign wealth fund to strengthen fiscal savings and channel returns on public financial assets back to government.
- In NDP 10, set more ambitious goals for maintaining fiscal savings and boosting non-mineral revenues; justify any relaxation of spending/GDP share only if expenditures have returns higher than financial savings.
- Preserve the net wealth of the government by avoiding use of nonrecurring mineral revenues for recurring expenses; use nonrecurring revenues for capital spending (including public education and health).
- Strengthen financial sector supervision, particularly of NBFIs and the sizable pension and insurance sectors; build on the FSAP to formulate a reform plan.
- Advance structural reforms: accelerate privatization of large parastatals with appropriate regulation; reform education and vocational training to address skills mismatch; complete initiatives on foreign investment and competition policy; liberalize administered prices to improve efficiency; improve statistics for policy analysis.

### Financial sector and structural reform priorities
- Financial sector status:
  - Prudential indicators solid; banking system profitability among the world’s highest.
  - Financial depth remains low relative to comparable countries.
  - BoBCs stock ~ one-quarter of GDP; commercial banks hold over half their assets in BoBCs.
- Reform agenda:
  - Strengthen supervision of nonbank financial institutions (NBFIs) and build regulatory capacity of the NBFI authority.
  - Address rapid consumer lending growth risks.
  - Implement FSAP recommendations and develop a reform plan to strengthen oversight of pension and insurance sectors.
- Structural reforms to raise productivity and employment:
  - Privatize large parastatals with proper regulation.
  - Reform education and vocational training to reduce skills mismatch.
  - Complete foreign investment and competition policy reforms.
  - Liberalize administered prices where feasible.
  - Improve statistical capacity.

*Source: IMF staff report — 1. Medium-Term Economic and Financial Indicators (pages excerpted).*

### 11.      The authorities agreed that increasing non-mineral revenues is essential. The

### _cr0858 - 11.      The authorities agreed that increasing non-mineral revenues is essential. The

### Fiscal policy and revenue mobilization
- Creation of the Botswana Unified Revenue Service has unified and reinforced administration of the value-added tax (VAT) and income taxes.
- Higher cost recovery in parastatal utilities is helping consolidate the fiscal position and may spur efficiency in services.
- Authorities agreed with staff that if mineral revenues or SACU receipts decline, raising the VAT rate to the regional norm could be one option for offsetting the revenue losses.
- Recommendation: Continued efforts to build non-diamond revenues are essential to strengthen fiscal sustainability.

### Public spending and wage policy
- Continued rationalization of public spending is a government priority.
- Comprehensive review of public sector wages nearing completion should be used to rationalize wage policies.
- Raising public sector productivity is a high priority; this motivated the recent reorganization of the Ministry of Finance.
- Increased productivity would create room for anticipated increases in investment and HIV/AIDS-related spending.
- Staff view: Maintaining expenditures at about 30 percent of GDP, as in 2006/07, and continuing to build non-diamond revenues will strengthen fiscal sustainability.

### Sovereign wealth fund and Pula Fund arrangements
- Staff noted the creation of an explicit sovereign wealth fund could have benefits:
  - Strengthen support for fiscal savings by linking fiscal surpluses now to more stable future spending when diamond revenues decline.
  - Emphasize the importance of a comprehensive plan for management of sovereign wealth and highlight high costs of liquidity control.
- Alternative: Improvements to transparency and institutional framework (e.g., limiting transfers of Pula Fund assets to the Liquidity Portfolio or the use of income on assets) could be achieved with the current Pula Fund arrangements as part of the BoB balance sheet.
- Authorities elected to preserve existing institutional arrangements, noting flexibility to maneuver in case of possible simultaneous large external shocks given concentration of export earnings.

### Monetary and exchange rate policy objectives
- Since the devaluations in 2004 and 2005, the policy mix of fiscal restraint, tight monetary policy and the crawling peg exchange rate regime has stabilized the REER, bringing inflation down.
- Current monetary policy targets a specific range for inflation, and exchange rate policy seeks REER stability.
- Staff noted trade-offs: in a small, open economy it is not possible to set the nominal exchange rate, the inflation rate, and the real exchange rate independently for long.
- Recommendation: The choice of a nominal anchor should be guided by economy characteristics, nature of likely shocks, and relative strength of foreign and domestic determinants of inflation.
- Staff: An inflation objective is a possible anchor for Botswana but achieving it would require some nominal exchange rate flexibility in case of external shocks.
- Staff recommended considering a firmer legal foundation for the price stability objective by amending the BoB Act.

### Exchange rate assessment (Box 2 summary)
- Three complementary approaches used to assess the REER:
  - Econometric analysis of behavioral determinants (real interest rate differential; terms of trade; government consumption; relative productivity) indicates by 2006 Botswana’s REER was roughly in line with its equilibrium value.
  - Forward-looking assessment of external sustainability: sustainable current account balance computed as difference between mineral exports and the annuity value of projected mineral exports. Results show current account is close to or slightly below its long-run sustainable value, suggesting a small overvaluation. Projected lower surpluses in 2007–11 reflect imports for infrastructure and mining projects. Sensitivity: lower discount rate or lower diamond exports increases the gap.
  - Economic indicators analysis: REER overvaluation from 2000–2004 mainly resulted from a pronounced dip in productivity relative to trading partners. The 2004 and 2005 devaluations and move to a crawling peg reversed the overvaluation in the CPI-based REER and boosted export profitability, especially in non-mining sectors. Productivity gains have been modest; export volume growth has slowed and the share of exports of goods and services in GDP has remained flat.
- Policy implication: Measures to improve labor productivity and the business environment are crucial for diversification.

### Debt sustainability and balance sheet risks
- Debt sustainability analysis shows little risk of debt distress.
- It indicates Botswana’s external debt would remain below 50 percent of GDP in the stress-test scenarios (Appendix).

### Monetary transmission, liquidity, and domestic debt market
- Recent combination of lowering the policy interest rate and slowing the rate of crawl was appropriate because containing inflation came at the cost of high real interest rates that deter lending.
- Further slowing of the rate of crawl will help reduce inflationary pressures and facilitate additional gradual reduction of interest rates, supporting non-mineral activities while relieving pressures on the BoB balance sheet.
- The still low ratio of credit to GDP suggests considerable scope for noninflationary monetary deepening.
- Systemic excess liquidity is impeding development of interbank markets and has weakened the monetary policy transmission mechanism.
- Improvements (treasury cash management, channeling significant part of diamond receipts directly to the BoB, supporting reforms) have reduced liquidity, but growth of the BoBC stock continues to raise concerns.
- Staff welcomed authorities’ intention to roll over the medium-term government bond due in 2008 and encouraged consideration of FSAP recommendations to:
  - Further streamline liquidity management within the BoB.
  - Build the domestic bond market by regular issuance of government bonds to help create a meaningful yield curve.

### Financial sector and structural reforms
- Botswana’s financial sector is generally sound and seeking to meet international norms; FSAP shows short-term risks appear contained and prudential indicators are sound.
- Botswana is generally observing international standards in transparency of monetary and financial policies, banking supervision, and payments systems, and has begun to strengthen oversight of the NBFIs.
- Recent growth in unsecured household credit and in collateralized mortgages has outpaced growth in business lending, representing a significant untested risk, though asset quality measures are currently satisfactory and banks are improving credit risk analysis.
- Staff priorities urged to authorities:
  - Drawing up a comprehensive financial sector strategy reform plan using a high-level committee to guide and monitor the reform process.
  - Getting the NBFI Regulatory Authority running, as planned, by the target of January 2008 (Box 3).
  - Further strengthening the BoB’s powers to supervise statutory banks and banking groups and improving cooperation between the BoB and domestic and cross-border supervisors in neighboring countries.
  - Improving access to financial services by reforming the panoply of public financial institutions through privatization and other means.
  - Continuing steps to implement FATF recommendations on AML/CFT and setting up the Financial Intelligence Unit.
- Box 3 (NBFI reform highlights):
  - New NBFI Regulatory Authority Act establishes a single NBFI regulatory agency.
  - FSAP underlines implementation challenges: extensive legal reform agenda; need to improve basic reporting and regulatory surveillance of NBFIs.
  - Need to begin oversight of pension fund administrators and asset managers; monitor foreign asset holdings that currently stand at around 65 percent of total pension fund assets.
  - Oversight of insurance sector needs strengthening through analysis of statutory returns and regulations on intermediaries and issuance of market conduct guidelines.
  - NBFIs could play an important role in developing local financial markets; meeting pension funds’ hedging needs could offer opportunities to create futures and forward markets and help establish a benchmark yield curve.

### Structural reforms, investment climate, and statistics
- Structural reforms essential to increase productivity, promote diversification and job creation, and improve policy analysis.
- Authorities facilitating expansion of downstream diamond and copper activities; investments to address regional power shortage will promote diversification.
- Authorities should move ahead with privatization of large parastatals as soon as an appropriate regulatory framework is in place.
- Improving skills match through reform of education and vocational training is important.
- Strengthening the investment climate remains a priority; recent initiatives include a new foreign direct investment strategy and competition policy and implementation of a number of FIAS recommendations to reduce time to register a business, acquire a business license, and get connected to utilities.
- Authorities committed to addressing concerns about access to land and work and residence permits for expatriates.
- Administered prices for a range of non-tradables may lead to market distortions and cloud the monetary transmission mechanism; staff and authorities agreed liberalizing prices by instituting more regular price adjustments linked to market developments would be useful.
- Economic statistics generally adequate for surveillance, but the recent Data Quality Assessment and ROSC found weaknesses in all key sectors.
- Authorities participate in the GDDS and plan transformation of the Central Statistical Office into an autonomous agency with more skilled staff.

### Staff appraisal — key judgments and risks
- Recent economic developments positive; medium term looks bright.
- Non-diamond growth expected to remain strong and diamond production seems likely to continue at roughly its current level.
- Inflation has fallen substantially, though it is still at risk.
- High mineral prices are contributing to solid fiscal and balance of payments surpluses; continued and prospective development of minerals and significant investment in electricity generation are projected to sustain fiscal and balance of payments surpluses through 2011.
- Most obvious risk: possibility that diamond prices will drop.
- Diversification is progressing but a faster move away from diamonds is needed to address the sharp decline in diamond production that may occur after 2020.
- Recommendation: Next NDP will need to reinforce the framework for non-mineral growth.
- Maintaining fiscal surpluses over the medium term is essential to accumulate savings for the period when diamond revenues decline.
- Creation of an explicit sovereign wealth fund could be considered to galvanize support for running fiscal surpluses and improve institutional framework, though transparency and institutional improvements can be achieved with the Pula Fund remaining within the BoB.
- Striking an appropriate balance between monetary and exchange rate policy objectives is critical:
  - Devaluation provided a competitive boost to exports but associated high interest rates have raised the cost of capital.
  - Reducing the nominal interest rate and slowing the rate of crawl were appropriate; further slowing of the crawl, consistent with narrowing inflation differentials, will allow additional scope for interest rate reductions.
  - The REER has stabilized in the past year at close to its equilibrium value.

*Source: _cr0858 - 11.      The authorities agreed that increasing non-mineral revenues is essential. The (IMF staff chapter).*

### 31.      The banking sector is sound and near-term risks are well contained, as the FSAP

### The banking sector is sound and near-term risks are well contained, as the FSAP

### Banking sector soundness and financial sector reform
- The banking sector is sound and near-term risks are well contained, as the FSAP found.
- Priority actions:
  - Initiate the NBFI Regulatory Authority by January 2008.
  - Complete the legislative agenda for pension and insurance reform.

### Structural reform, productivity, and statistics
- Continued structural reform and improvements in statistics are essential.
- Key reform areas highlighted:
  - Privatization, properly regulated.
  - Reducing the skills mismatch through education reform.
  - Further improvements in the business environment, especially completing the drafting of an effective foreign direct investment strategy and competition policy.
  - Liberalizing administered prices to enhance efficiency.
  - Further development of the statistical data base to support sound policy analysis.
- Expected outcomes:
  - These reforms will help raise productivity and attract investment.
  - Stronger growth in the non-mineral economy will also generate employment.

### External payments and transfers
- Botswana has not enacted any restrictions on the making of payments and transfers for current international transactions since its last Article IV consultation.
- In August 2007 it removed its one multiple currency practice.

*Source: _cr0858 - 31. The banking sector is sound and near-term risks are well contained, as the FSAP*

### 34.      It is recommended that the next Article IV consultation be held on the standard

### _cr0858 - 34.      It is recommended that the next Article IV consultation be held on the standard

### Article IV consultation timing and Fund relations
- It is recommended that the next Article IV consultation be held on the standard 12-month cycle.
- Botswana is on a standard 12-month consultation cycle. The last Article IV consultation was concluded by the Executive Board on December 13, 2006.
- Relations with the Fund: The last Article IV consultation was concluded in December 2006.
- Exchange rate arrangements: The exchange rate of the Botswana pula is a crawling peg arrangement against a basket of currencies.
  - As of September 30, 2007, US$1 = P6.06, and R1 = P0.88.
- Multiple currency practice (MCP): Directors urged removal of an MCP relating to exchange rate guarantees on one loan. This MCP was eliminated on August 8, 2007, with the conversion of the outstanding loan under the Foreign Exchange Risk Sharing scheme to a pula loan.

### External sector and reserves (selected indicators)
- End-of-year reserves (US$ millions): 5,339; 5,653; 6,278; 7,954; 9,907.
- Pula Fund (US$ millions): 4,332; 4,681; 4,533; 6,140; ...
- Other reserves (US$ millions): 1,006; 972; 1,745; 1,814; ...
- Reserves (months of imports of goods and services): 17.5; 18.3; 23.0; 25.0; 24.4.
- Balance of payments (percent of GDP): 1.9; -0.6; 13.2; 16.6; 17.2 (for successive years shown in Table 6).
- Current account (percent of GDP): 5.6; 2.9; 14.4; 19.3; 20.4 (for successive years shown in Table 6).

### External debt and sustainability (selected indicators)
- Baseline external debt (percent of GDP): 19.1; 14.7; 10.9; 12.0; 12.1; 12.1 (2002–2007).
- Change in external debt (percent of GDP): -14.0; -4.4; -3.8; 1.0; 0.1; 0.0.
- Identified external debt-creating flows (percent of GDP): -8.9; -13.7; -9.6; -17.8; -22.6; -23.7.
- External debt-to-exports ratio (in percent): 39.9; 33.3; 24.2; 23.5; 24.0; 22.9.
- Gross external financing need (in billions of US dollars): 0.5; 0.3; 0.8; -0.4; -0.5; -0.7.
- Gross external financing need (percent of GDP): 7.9; 4.2; 7.7; -4.0; -4.9; -6.0.

### Macroeconomic baseline assumptions (selected)
- Real GDP growth (percent, calendar year basis): 5.7; 6.2; 6.3; 3.8; 2.6; 5.0 (historic series and projections shown).
- GDP deflator in US dollars (change in percent): -7.1; 31.5; 11.3; 3.3; -1.8; 1.7.
- Nominal external interest rate (percent): 5.5; 5.6; 11.1; 6.8; 6.9; 7.3.
- Growth of exports (US$, percent): 6.0; 29.3; 20.9; 20.5; -0.3; 12.6.
- Growth of imports (US$, percent): 1.0; 28.9; 31.2; 1.3; -11.7; 16.5.
- Current account balance, excluding interest payments (percent of GDP): 5.2; 6.4; 4.3; 15.1; 20.1; 21.2.
- Net non-debt creating capital inflows (percent of GDP): -6.2; -2.7; -4.4; -2.7; -3.2; -2.7.

### Fiscal and public finance (selected)
- Central government operations (percent of GDP) — historical and projected series are provided in the chapter (Tables 5a/5b, 9a/9b).
- Total revenue and grants (percent of GDP, sample years): 38.8; 37.5; 40.3; 42.5; 37.5; 41.1.
- Total expenditure and net lending (percent of GDP, sample years): 39.0; 36.3; 31.9; 30.7; 35.8; 33.1.
- Overall balance (deficit –) (percent of GDP, sample years): -0.2; 1.2; 8.4; 11.8; 1.8; 8.0.
- Non-mineral primary balance (percent of non-mineral GDP, sample years): -33.6; -27.2; -20.5; -15.3; -23.7; -17.6.

### Monetary, banking, and financial sector highlights
- Money and quasi-money (M2) 12-month change (percent, sample years): 17.6; 13.9; 10.6; 67.4; 23.6.
- Net foreign assets (12-month % change, sample years): -19.7; 1.3; 42.1; 36.0; 30.0.
- Private sector credit to GDP (percent): 18.1; 20.0; 18.8; 19.6; 21.0.
- Gross official reserves (end of period, US$ millions): 5,339; 5,653; 6,278; 7,954; 9,907.
- Key banking-sector prudential indicators (Table 7, selected levels for 2006):
  - Regulatory Tier I capital to risk-weighted assets: 10.3 (2006).
  - Loans-to-assets: 36.9 (2006).
  - Nonperforming loans (NPLs)-to-gross loans: 0.9 (2006).
  - Liquid assets to total assets: 47.1 (2006).
  - Return on average assets: 6.1 (2006).
  - Return on average equity: 89.2 (2006).

### Technical assistance and capacity engagement
- Technical assistance assignments/projects (selected departments and dates include MFD 1997, 1999–2000; STA 1997).
- Technical assistance missions (selected):
  - MFD: missions in January 2001; February 2001; December 2001; August 2002; July 2004; August 2004.
  - FAD: November 1997; September 2000; February 2002; November 2004.
  - LEG: January 2006; July 2006; June 2007.
  - STA: multiple missions from May 2001 through October 2006.
  - MCM: January, March 2007 IMF-World Bank Financial Sector Assessment Program (FSAP).

*Prepared by the African Department (Informational Annex to the Staff Report for the 2007 Article IV Consultation).*

### 1. Botswana became a member of the International Bank for Reconstruction and

### _cr0858 - 1. Botswana became a member of the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA) in 1968

### IBRD/IDA membership, historical lending, and shift in engagement
- Botswana became a member of the IBRD and IDA in 1968.
- Cumulative commitments from IDA to Botswana: US$17 million for six development credits for infrastructural development and the livestock sector. The last credit was extended in 1974.
- Cumulative commitments from the IBRD to Botswana: US$281 million for 22 loans, of which US$54 million was canceled.
- IBRD loan purposes included infrastructure development, the financial sector, land management, livestock development, and education and health projects. The last loan was extended in 1987.
- Since the late 1980s, the Government has not required external borrowing due to a strong financial and international reserve position based on diamond mining receipts.
- As lending phased out, the Bank’s involvement shifted to limited analytical and advisory services.

### New partnership requests and proposed operations
- Government requests for two IBRD loans:
  - HIV/AIDS project: about US$56 million; scheduled for delivery in the fourth quarter of fiscal year 2008.
  - Integrated transport project: about US$110 million; scheduled for delivery in the first quarter of fiscal year 2009.
- Botswana’s upper middle-income status excludes it from IDA concessional resources; Government requested that the HIV/AIDS operation be financed using an IBRD “buy-down” (donor resources lower the cost of an IBRD loan).
- Donor funds release contingent on project performance with jointly agreed indicators and targets.
- European Commission (EC) interest: suggested new funds of approximately US$20.6 million to support the buy-down (final amounts to be confirmed).
- Given expected EC contribution and Government preference for a 0 percent interest rate, a project size of approximately US$56 million is proposed over a five-year period.
- Additional Bank engagements under discussion or preparation:
  - IBRD Partial Risk Guarantee (PRG) and possibly an IBRD loan in the energy sector.
  - US$5 million GEF grant–financed project on wildlife management and biodiversity conservation.
- A first-ever Interim Strategy for Botswana (24 months, Board in March 2008) will underpin new lending operations and the growing partnership.

### Recent World Bank analytical work and capacity support
- Recent analytical work includes:
  - Export Diversification Report in FY05
  - ROSC on Accounting and Auditing
  - Livestock Sector Development Strategy
  - Poverty and Social Impact Analysis in fiscal year 2006
  - Investment Climate Assessment in fiscal year 2007 (with some follow-up planned for fiscal year 2008)
- Through trust funds, the Bank supports Botswana in statistical capacity building and monitoring and evaluation.
- Carbon Finance Assist (World Bank Institute climate change capacity building) is launching technical assistance.

### IFC and MIGA engagement, private sector initiatives
- Botswana joined IFC in 1979.
- Cumulative IFC equity and loan commitments: US$10.72 million in five tourism, financial, and mining enterprises.
- Specific IFC commitments and investments:
  - Fiscal years 1999 and 2000: two loan commitments amounting to US$1.75 million to Abercombie and Kent (Botswana) for accommodation and tourism services in the Okavango Delta.
  - Fiscal year 2001: quasi-equity investment of US$3 million in the African Banking Corporation.
  - Fiscal year 2003: US$2 million equity investment in Kalahari Diamonds Limited.
  - End of 2004: equity stake of US$3.97 million in Letshego.
- Ongoing/planned IFC activities:
  - Negotiating a US$20 million investment in African Banking Corporation to support regional expansion.
  - Mandate signed to provide Letshego with additional funding through a US$20 million local currency loan.
- Advisory roles:
  - IFC advised on privatization; in fiscal year 2004 received privatization mandate for Air Botswana from the Public Enterprises Evaluation and Privatization Agency.
  - IFC Advisory Services selected as Transaction Advisor for structuring a public-private partnership for the proposed Botswana International University of Science and Technology.
  - Early-stage engagement on privatization of Botswana Telecommunications Corporation.
- Foreign Investment Advisory Service completed a 2004 review of commercial law, administrative and registration costs, and investment barriers.
- Botswana joined MIGA in 1988; MIGA has no exposure and no active applications in Botswana.

### Statistical issues, data quality, and dissemination
- Overall assessment:
  - Data provision is adequate for surveillance but accuracy needs improvement, particularly national accounts and balance of payments.
  - Differing accounting periods hinder accuracy and integration: balance of payments compiled on a calendar-year basis, national accounts on a July-June schedule, and the budget on an April-March schedule.
- ROSC reassessment (October 31-November 13, 2006; report published April 6, 2007) cross-cutting recommendations:
  - Monitor consistency of main macroeconomic datasets and reconcile differences regularly.
  - Establish a list of institutional units consistent with sectorization in the 1993 SNA to be applied across all datasets.
  - Support greater use of preliminary data by formalizing revision policies and implementing regular revision cycles.
- Participation in Fund initiatives:
  - Botswana is one of 22 countries in the Fund’s General Data Dissemination System (GDDS) Project for Anglophone African Countries.
  - Participating in monetary and financial statistics modules of the Anglophone Africa project (funded by DFID).
- National accounts and prices:
  - National accounts principally based on 1993 SNA concepts, but some classification and sector breakdowns still broadly in line with 1968 SNA.
  - Need to harmonize accounting periods over the medium term.
  - Recommendation to conduct comprehensive enterprise surveys every few years and introduce informal sector estimates.
  - Consumer Price Index: comprehensive with urban/rural and tradable/nontradable breakdowns; rebased CPI (September 2006) broadly conforms with 1993 SNA and CPI Manual but deviations remain for imputation of rents and owner-occupied housing.
  - Wholesale Price Index (WPI) not representative of industrial production (measures prices of only six product groups); recommendation to develop concepts and decide on producing an output index (PPI), Intermediate Consumption Index or Supply Price Index.
- Fiscal accounts:
  - Central government finance statistics generally follow GFSM 1986 but cover only budgetary central government activities; extrabudgetary institutions and consolidated central government not compiled.
  - Transactions recorded on a cash basis consistent with GFSM 1986.
  - Recommendation to compile and disseminate GFS for extrabudgetary institutions and consolidated general government at least annually.
  - Authorities have yet to decide on a migration path to GFSM 2001 methodology.
- Monetary accounts:
  - Bank of Botswana compilation of the depository corporations survey generally consistent with MFSM methodology.
  - Classification and sectorization largely consistent with MFSM except for financial derivatives; some nonbudgetary central government units classified as nonfinancial public corporations; accrued interest not consistently presented with underlying instrument.
  - Monetary data reported regularly using Standardized Report Forms; central bank data reported to STA with a longer lag than for other depository corporations.
- External sector statistics:
  - Balance of payments statistics follow BPM5 concepts, structure and definitions; institutional classifications generally follow BPM5.
  - ITRS data used mostly for services have become unreliable; alternative data sources needed.
  - Methods for estimating missing data and calculating flows from stock data are inadequate.
  - Balance of payments statistics compiled and published in BoB monthly bulletin and Annual Report, meeting GDDS periodicity and timeliness, although only annual BOP statistics are reported to STA.
  - Discrepancies exist with national accounts on imports, exports, and SACU-related payments due to different data sources and valuation methods.

### Table of Common Indicators Required for Surveillance (as of October 23, 2007) — selected items
- Exchange rates: Date of latest observation Sept. 2007; Date received 10/12/2007; 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 May 2007; Date received 8/10/2007; Frequency M; Frequency of reporting M; Frequency of publication M.
- Reserve/base money: July 2007; Date received 10/19/2007; Frequency M; Frequency of reporting M; Frequency of publication M; Data quality – methodological soundness: O, O, LO, O; Data quality – accuracy and reliability: LNO, O, LO, LO, LO.
- Broad money: July 2007; Date received 10/19/2007; Frequency M; Frequency of reporting M; Frequency of publication M.
- Central bank balance sheet: July 2007; Date received 10/19/2007; Frequency M; Frequency of reporting M; Frequency of publication M.
- Consolidated balance sheet of the banking system: July 2007; Date received 10/19/2007; Frequency M; Frequency of reporting M.
- Interest rates: Aug. 2007; Date received 10/19/2007; Frequency M; Frequency of reporting M; Frequency of publication M.
- Consumer price index: Aug. 2007; Date received Oct. 2007; Frequency M; Frequency of reporting M; Frequency of publication M; Data quality – methodological soundness: O, LO, O, O; Data quality – accuracy and reliability: LO, LO, LO, LO, O.
- Revenue, expenditure, balance and composition of financing – central government: Aug. 2007; Date received Oct. 2007; Frequency A/Q; Frequency of reporting Q; Frequency of publication Q.
- External current account balance: 2006; Date received Oct. 2007; Frequency A; Frequency of reporting A; Frequency of publication A; Data quality – methodological soundness: O, O, O, LO; Data quality – accuracy and reliability: LO, LO, LNO, O, LO.
- GDP/GNP: 2006; Date received May 2007; Frequency A/Q; Frequency of reporting A/M; Frequency of publication A/M; Data quality – methodological soundness: LO, LO, LNO, LO; Data quality – accuracy and reliability: LO, LO, LNO, LO, LO.
- Gross external debt: Mar. 2003; Date received Mar. 2003; Frequency A/Q; Frequency of reporting A; Frequency of publication A.

### Statement by Botswana authorities (Peter Gakunu and Ita Mary Mannathoko) — key messages and economic outlook
- Appreciation expressed for constructive analysis and dialogue during Article IV consultation, Bank of Botswana seminar, the FSAP assessment, and Deputy Managing Director Mr. Kato’s participation.
- Background on performance:
  - Effective resource management, good governance and prudent macroeconomic policies contributed to sustained growth.
  - Standard and Poors and Moody’s have consistently given strong ratings.
  - August 2007: Moody’s retained Botswana’s sovereign credit ratings of A2, Prime-1 and A1 for government debt, long term foreign currency debt, and short term foreign currency debt, respectively; upgraded foreign currency outlook from “stable” to “positive”.
  - Various international indices place Botswana among the top in Africa on competitiveness, public institutions quality, sustainable development, governance, economic freedom and openness.
  - Authorities note the economy still lags comparators in many areas and taxpayers expect government to enable quality of life commensurate with upper middle income status.
- Recent economic developments and outlook:
  - Macroeconomic stability preserved; inflation dropped from a high of 14.2 percent in April 2006 to 7.3 percent in October 2007.
  - Inflationary pressures expected to remain due to rising world petroleum prices and food shortages from drought and new bio-fuel demand.
  - Greater real exchange rate stability attained, closer to long run equilibrium.
  - Strengthening financial position with growing reserves following balance of payments and fiscal surpluses.
  - 2006 current account surplus: over 19 percent of GDP.
  - 2007/08 likely another fiscal surplus given projected SACU revenues and recent gains from improved tax collection.
  - Real sector: high growth of 9.2 percent in year ending June 2005 followed by temporary decline; growth estimated to have picked up to 5.8 percent in 2006/07 as new investments in mining, electricity, manufacturing and tourism come on stream.
  - Prospects for economic diversification away from diamond mining have improved.
- Social indicators and labor market:
  - Over decade ending 2005/06, annual average employment growth rate: 4.7 percent; unemployment rate dropped from 21.5 percent to 17.6 percent.
  - Poverty levels declined from 47 percent in 1994 to 30 percent in 2004.
  - HIV infection levels: 17.1 percent of the population overall (15–49 age cohort lower than neighboring states).
  - Authorities remain concerned that these rates remain high and are committed to policies and projects to increase productive employment and avoid adverse social effects from a large young population without productive occupation.

*Source: IMF staff report content provided in the supplied PDF excerpt.*

### 4. Performance on the Sustainable Growth and Economic Diversification Program

### 4. Performance on the Sustainable Growth and Economic Diversification Program

### Vision 2016, NDP 9, and diversification goals
- Vision 2016 target: a diversified economy in which agriculture, industry, mining and services are all productive and vital components of economic activity; development is sustainable; and diversification is structured to substantially raise broad-based incomes.
- Objective: accelerate remaining reforms and implement productive development projects to place the non-mining economy on a higher growth trajectory, reduce unemployment (especially among the youth), and raise welfare and household income levels to the Vision’s targeted level within a decade.
- Implementation vehicle: consecutive national development plans; current plan is NDP 9 with structural reforms targeted at supporting private sector-led investment and growth.

### Mineral-linked projects and private-sector activity
- Major new mineral-linked projects underway:
  - Diamond Trading Company (Botswana) and associated down-stream manufacturing activities.
  - Coal-based Mmamabula Export Power Station: fast-tracked with all agreements concluded and implementation scheduled to start within the year.
  - Preparatory work for expansion of Morupule Power Station: construction expected to start at year-end.
  - Major new refinery at the Tati Nickel Mine to process raw material and add value (analogous to diamond polishing downstream processing).
- Observation: while large investments are financed by the private sector in the mineral sector and by the public sector in infrastructure, many smaller private-sector investments indicate renewed confidence in the Botswana economy.

### Infrastructure and public service delivery
- Government commitments:
  - Construct four dams.
  - Speed-up implementation of rural electrification and rural telecommunication programmes.
  - Connect all public facilities in villages where there is backbone telecommunication infrastructure.
- Phasing approach: authorities are phasing construction activities to ensure cost-effective and timely completion.

### Addressing implementation constraints
- Historical bottlenecks delaying project implementation:
  - Environmental Impact Assessments requirements.
  - Slow land allocation.
  - Poor performance of some contractors and service providers.
  - Slow project design and tendering procedures.
- Measures underway:
  - Ongoing capacity development in line Ministries.
  - Closer monitoring of project implementation.
  - Liberalizing project implementation procedures to enable agencies to augment capacity by employing rated international construction companies and skilled experienced manpower.

### Fiscal policy: surpluses, Fiscal Rule, and savings
- Near-term fiscal outlook: authorities expect fiscal surpluses in the near term.
- NDP 10 considerations: increased attention to framework for non-mineral growth with possibility of a reduction in the non-mineral primary deficit.
- Fiscal Rule: expenditure smoothed to a stable level over time to achieve current goals in the growth and diversification program.
- Data and forward analysis:
  - Authorities concur more analysis should be done for NDP 10 to incorporate updated projections of future mineral receipts.
  - Once mineral revenues or SACU receipts decline, options to offset losses will be explored; this may include another VAT increase.
- Revenue and spending measures:
  - Continue improving tax compliance and enhancing non-mineral revenue collection.
  - Rationalization of public spending continues; opportunity to rationalize wage policies as part of current review of public sector wages.
- Long-term savings:
  - Pula Fund has served well to date.
  - Authorities agree to review current work on sovereign wealth funds; one Deputy Governor participated in recent IMF seminar on this subject.

### Monetary, exchange rate, and financial sector policies
- Real effective exchange rate (REER): stabilized close to its equilibrium value in the past year as a result of fiscal restraint and tight monetary policy.
- Policy concerns:
  - Need appropriate balance between monetary and exchange rate objectives to support competitiveness.
  - Systemic excess liquidity and rising stock of Bank of Botswana certificates remain a challenge.
  - Government’s rolling over of the Pula bond in 2008 is a step to address excess liquidity.
- Financial sector status:
  - Banking industry is financially sound, solvent, profitable and liquid.
  - Banks maintain prudential ratios in excess of current statutory requirements and have low ratios of non-performing loans.
  - Sector remains shallow with indicators well below those of comparator countries.
- Regulatory and development agenda:
  - Rapid expansion in the non-bank financial sector requires sizable financial sector regulation and development.
  - Authorities are beginning to put in place systems and a broad reform plan.
  - An autonomous Financial Supervisory Authority has been set up to regulate and supervise non-bank financial institutions.
  - Authorities appreciate the Fund and the Bank’s work in the recent FSAP assessment and hope to continue to draw on IMF Technical Assistance.

### Structural reforms to raise productivity and competitiveness
- Business environment and regulatory reforms:
  - Progress on reforms recommended by the FIAS report of the World Bank.
  - Simplified company registration procedures; reduction in time to register a company.
  - Industrial Development Act amended to reduce waiting period for licenses to one week.
  - Copyright and Neighbouring Rights Act amended to better protect artists against piracy and infringements.
  - Legislative reforms and computerization in land management and allocation.
  - Market access being enhanced through bilateral and multilateral trade negotiations, with recognition of competitiveness challenges where reciprocity is required.
- Public sector efficiency measures:
  - Introduction of Public Private Partnership (PPP) approaches.
  - Outsourcing of some public services to the private sector.
  - Rationalization of some public enterprises to avoid duplication of roles.
  - Commitment to privatization and commercialization in line with the Privatization Policy Master Plan, with emphasis on proper consultation and transparency.
- Other efficiency measures:
  - Review of administered prices to assess appropriateness of market-linked adjustment mechanisms.
  - Example of a one-off price increase: re-introduced school fees for those above a stipulated income level under the government’s cost-sharing scheme.
  - Consideration to transform the Central Statistics Office into a more efficient, autonomous agency.

### Key statistics and recent macro performance (selected from staff report)
- Real GDP growth:
  - 2003: 3.1
  - 2004: 9.2
  - 2005: -0.8
  - 2006: 5.8 (Prel.)
  - 2007: 4.3 (Proj.)
- Minerals: 0.3 (2003); 18.1 (2004); -4.4 (2005); 5.7 (2006 prel.); -4.3 (2007 proj.)
- Non-minerals: 5.0 (2003); 3.3 (2004); 1.8 (2005); 5.8 (2006 prel.); 10.4 (2007 proj.)
- Consumer prices (end of period): 6.4 (2003); 7.9 (2004); 11.3 (2005); 8.5 (2006 prel.); 7.4 (2007 proj.)
- Broad money growth (M3): 17.6 (2003); 13.9 (2004); 10.6 (2005); 67.4 (2006 prel.); 23.6 (2007 proj.)
- Government operations (percent of GDP):
  - Total revenue and grants: 38.8 (2003); 37.5 (2004); 40.3 (2005); 42.5 (2006 prel.); 41.1 (2007 proj.)
  - Total expenditure and net lending: 39.0 (2003); 36.3 (2004); 31.9 (2005); 30.7 (2006 prel.); 33.1 (2007 proj.)
  - Overall balance after grants (cash basis): -0.2 (2003); 1.2 (2004); 8.4 (2005); 11.8 (2006 prel.); 8.0 (2007 proj.)
  - Non-mineral primary balance (cash basis, as a percent of non-mineral GDP): -33.6 (2003); -27.2 (2004); -20.5 (2005); -15.3 (2006 prel.); -17.6 (2007 proj.)
- External sector (percent of GDP):
  - Balance of payments (including official transfers; deficit -): 1.9 (2003); -0.6 (2004); 13.2 (2005); 16.6 (2006 prel.); 17.2 (2007 proj.)
  - Current account balance (including official transfers; deficit -): 5.6 (2003); 2.9 (2004); 14.4 (2005); 19.3 (2006 prel.); 20.4 (2007 proj.)
  - Outstanding medium- and long-term public debt: 5.4 (2003); 4.3 (2004); 4.1 (2005); 3.5 (2006 prel.); 2.7 (2007 proj.)
  - Real effective exchange rate (annual average percentage change): 3.3 (2003); -5.4 (2004); -3.0 (2005); -2.6 (2006 prel.); ... (2007 proj.)
  - Gross official reserves (in millions of U.S. dollars): 5,339 (2003); 5,653 (2004); 6,278 (2005); 7,954 (2006 prel.); 9,907 (2007 proj.)
  - Reserves (in months of prospective imports of goods and services): 17.5 (2003); 18.3 (2004); 23.0 (2005); 25.0 (2006 prel.); 24.4 (2007 proj.)
- Source attribution for these statistics: Botswana authorities and staff estimates and projections.

### Conclusion and Fund dialogue
- Near-term outlook: significant investments will come on stream in infrastructure, education and mineral sectors, supporting higher sustainable growth and diversification in line with NDP 9.
- Authorities acknowledge stimulus may not fully offset slower than targeted growth during first half of NDP 9.
- Continued commitments:
  - Raising productivity.
  - Ensuring efficient investments.
  - Maintaining macroeconomic stability.
- IMF relationship: recent dialogue between authorities and staff has been fruitful; authorities strongly committed to measures to address economic challenges and expect continued IMF technical assistance to strengthen systems and implementation capacity.

*Source: IMF staff report (2007 Article IV Consultation with Botswana) — Chapter 4 and associated Public Information Notice (PIN) No. 08/13 (February 8, 2008).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr0858.pdf_