## _cr10172 ## Source details **Canonical URL:** [_cr10172](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10172.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10172.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10172.pdf.json) --- ### Executive summary — Background and outlook - Sound macroeconomic management, supported by strong institutions and good governance, has sustained Botswana’s strong macroeconomic performance. - Real GDP growth averaged 4 percent over the past five years. - Average fiscal and current account surpluses were 5 and 11 percent of GDP, respectively, over this period. - The global economic crisis reduced demand for diamonds and contributed to a significant deterioration in the economic outlook: the economy is now projected to contract sharply in 2009. - Inflation has slowed considerably and is projected to fall to 7 percent by the end of 2009. - In the medium-term, real GDP is expected to rebound as diamond output recovers, and two large electricity generation projects begin production. ### Recent economic developments - Real GDP growth slowed to 2.9 percent in 2008; mining value added decreased by 3.7 percent in 2008. - Diamond mining was suspended from January through mid-April 2009 due to weak demand and inventory buildup. - Current account surplus reduced to 7 percent of GDP in 2008 (compared with an average surplus of 15.6 percent of GDP during 2005-2007). - International reserves declined from US$10 billion in mid-2008 to US$8.1 billion in March 2009, equivalent to 16 months of imports of goods and services. - Nonmining primary deficit (NMPD) amounted to 28.6 percent of non-mining GDP in 2008/09, up from 16.8 percent in 2007/08: - Spending surged to 63 percent of nonmining GDP from 52.5 percent in 2007/08. - Current expenditure rose 12.5 percent in real terms. - Development spending increased by 54 percent in real terms. - Increased spending reflected a public works program and measures to offset higher food prices. - NMPD projected broadly unchanged in 2009/10: - Original 2009/10 budget proposed a further real spending increase of 4 percent over the revised budget, which would have raised the NMPD to 34 percent of non-mining GDP. - Government plans to scale back recurrent spending by 7 percent and development spending by 5 percent; staff projects this would stabilize the NMPD at 28.3 percent of non-mining GDP. - Overall deficit of 11.1 percent of GDP expected to be fully financed by an AfDB budget support loan (US$1.5 billion). - Reserve coverage projected to decline in 2009 but remain comfortable; external debt remains relatively low but will increase considerably in 2009-10. ### Diamond sector (Box 1 findings) - Botswana: one of the world’s leading diamond producers with a market share of about 20 percent. - 2008 contributions: about 40 percent of fiscal revenues, 35 percent of GDP, and 62 percent of total exports. - Diamond Trading Company Botswana launched in 2008 to sort and aggregate diamonds locally. - Global financial crisis led to significant decline in demand in Q4 2008 and early 2009; Debswana suspended production in early 2009. - April 2009: Jwaneng, Orapa #1 and Letlhakane resumed at reduced capacity; Damtshaa and Orapa #2 remained closed through December. - Total diamond production in 2009 estimated at 20 million carats, nearly 40 percent less than in 2008. - Debswana expects output to return to full capacity by 2012, with considerable uncertainty about timing of sustained demand recovery. ### Inflation, monetary policy, and financial sector - Twelve-month inflation rate fell to 8.4 percent in May 2009 from 15 percent in mid-2008, largely reflecting reduced pressure on fuel and food prices. - Inflation expected to decline further toward the upper end of the BoB medium-term objective of 3–6 percent. - BoB reduced its main interest rate by 250 basis points since December 2008 to stimulate activity (other passages cite 400 basis points since December 2008). - Outstanding stock of Bank of Botswana Certificates (BoBCs) declined since mid-2008 due to increased issuance of government domestic debt and reduced foreign inflows. - Financial sector has thus far been relatively unscathed due to conservative lending and limited international exposure; commercial banks remain well-capitalized, liquid and profitable. - Nonperforming loans edged up modestly in late 2008 and early 2009; authorities closely monitoring loan portfolios and plan further supervisory steps for nonbank financial institutions. - Credit growth strong over the past two years but slowing; BoB has lowered interest rates in line with slowing inflation. ### Growth drivers, shocks, and macro projections (selected projections) - Real GDP (annual percentage change): 2007 4.4; 2008 2.9; 2009 -10.3; 2010 4.1; 2011 8.6; 2012 13.8; 2013 8.9; 2014 2.0. - Mineral (annual percentage change): 2007 -2.0; 2008 -3.7; 2009 -36.7; 2010 0.3; 2011 24.0; 2012 29.1; 2013 1.8; 2014 0.1. - Non-mineral (annual percentage change): 2007 9.0; 2008 7.2; 2009 4.9; 2010 5.5; 2011 3.5; 2012 7.7; 2013 12.3; 2014 2.8. - Diamond production (millions of carats): 2007 33.6; 2008 32.6; 2009 20.0; 2010 20.0; 2011 25.0; 2012 32.6; 2013 33.0; 2014 33.0. - Consumer prices (average): 2007 7.1; 2008 12.6; 2009 8.7; 2010 6.5; 2011 5.9; 2012 5.4; 2013 5.2; 2014 5.1. - Consumer prices (end of period): 2007 8.1; 2008 13.7; 2009 7.0; 2010 6.1; 2011 5.7; 2012 5.3; 2013 5.2; 2014 5.0. - Real GDP projected to contract by 10 percent in 2009 as diamond production declines; diamond output expected to fall by 40 percent in 2009. - Nonmining growth supported by large public infrastructure expenditures and expected at 5 percent in 2009. - Modest rebound projected for 2010; stronger recovery in 2011-12 as diamond output returns; two electricity projects (Morupule and Mmamabula) should boost growth after 2012. ### External position and external debt projections - Current account balance (percent of GDP): 2007 14.3; 2008 7.0; 2009 -8.2; 2010 -16.6; 2011 -11.4; 2012 -6.5; 2013 3.2; 2014 3.5. - Balance of payments (percent of GDP): 2007 14.1; 2008 8.2; 2009 0.9; 2010 -2.1; 2011 2.3; 2012 -0.1; 2013 1.4; 2014 1.6. - Change in reserves (increase –, US$ millions): 2007 -1,742; 2008 -1,100; 2009 -952; 2010 31; 2011 -268; 2012 7; 2013 -202; 2014 -232. - Gross official reserves (end of period, US$ millions): 2007 9,743; 2008 9,125; 2009 9,220; 2010 8,988; 2011 9,256; 2012 9,249; 2013 9,450; 2014 9,682. - Reserves in months of imports of goods and services: 2007 20.7; 2008 20.8; 2009 17.0; 2010 16.3; 2011 16.0; 2012 16.5; 2013 16.4; 2014 16.3. - Gross external debt at end-2008: $1,248 million (11.2 percent of GDP). Short-term debt: $250 million (2.3 percent of GDP). Public external debt at end-2008: 2.7 percent of GDP. - Baseline projection: gross external debt to increase to 48.1 percent of GDP by 2012, declining to 40.8 percent by 2014. External debt drivers include AfDB loan of US$1.5 billion and borrowing for Morupule (US$750 million) and Mmamabula (US$2.4 billion) projects. - External debt-to-exports ratio projected to peak at 121.1 percent in 2011 and decline to 86.5 percent by 2014. - Gross external financing need (US$ billions): 2008 -0.4; 2009 1.5; 2010 2.5; 2011 2.2; 2012 2.0; 2013 0.8; 2014 0.9. ### Public debt and debt sustainability (selected projections and scenarios) - At end-2008, public debt estimated at about P5.1 billion (5.6 percent of GDP); about 30 percent owed to bilateral and multilateral foreign creditors. - Baseline public debt-to-GDP ratio: - 2008: 5.6 percent of GDP - 2009: 20.8 percent of GDP - 2010: 24.4 percent of GDP - 2011: 21.7 percent of GDP - 2012: 18.3 percent of GDP - 2013: 16.0 percent of GDP - 2014: 15.0 percent of GDP - FY 2009/10 fiscal deficit projected at 11.1 percent of GDP; AfDB budget support loan expected to amount to about 13 percent of GDP and more than fully finance the FY 2009/10 deficit. - Key baseline macro and fiscal assumptions (selected): - Real GDP growth: 2008 2.9; 2009 -10.3; 2010 4.1; 2011 8.6; 2012 13.8; 2013 8.9; 2014 2.0. - Primary deficit (percent of GDP): 2008 2.4; 2009 9.5; 2010 9.5; 2011 4.7; 2012 0.9; 2013 -0.5; 2014 -0.7. - Revenue and grants (percent of GDP): 2008 32.7; 2009 34.1; 2010 33.0; 2011 33.9; 2012 33.1; 2013 32.2; 2014 32.4. - Primary (noninterest) expenditure (percent of GDP): 2008 35.1; 2009 43.6; 2010 42.5; 2011 38.6; 2012 34.1; 2013 31.7; 2014 31.7. - Average nominal interest rate on public debt (percent): 2008 8.5; 2009 6.2; 2010 3.2; 2011 5.0; 2012 6.3; 2013 6.4; 2014 6.3. - Alternative scenarios: - Historical 10-year averages scenario: public debt-to-GDP ratio would drop to zero by 2012. - No policy change (constant primary deficit at 9.5 percent of GDP): public debt rises to 48.2 percent of GDP by end of forecast period. ### Downside scenarios and risks - Two alternative downside scenarios considered: - (i) A larger reduction (54 percent) in diamond production in 2009 with a slower recovery in international demand. - (ii) The Mmamabula project does not move forward. - Both scenarios would significantly impact fiscal and external positions. - Authorities noted risk that recovery of diamond production to pre-crisis levels could take several years. - Fall in diamond production expected after 2020 clouds longer-term outlook and underscores need for diversification, improved competitiveness, and productivity. ### Fiscal policy recommendations and medium-term framework - Staff concerns about quality of expenditure and need to reduce it to sustainable levels over the medium term. - Authorities acknowledged scope to improve spending efficiency; noted exceptional circumstances in 2009 and that development spending would decline as projects complete. - Staff recommended an alternative fiscal rule based on the NMPD as a share of nonmining GDP rather than the current limit on overall expenditure relative to total GDP. - Authorities indicated a revision to their fiscal rule to incorporate a link to non-mining GDP was being considered, but did not commit to an NMPD target. - Staff recommended strengthening nonmining revenues over the medium term, including improving tax administration and considering raising the VAT and the fuel levy to regional rates as possible options. - To achieve fiscal sustainability, staff indicated the NMPD would need to be reduced to 8 percent in the longer term (PIH-based), but recommended reducing the NMPD to at least 14 percent of nonmining GDP within the next five years (compared to a baseline projection of 17.8 percent in 2015/16). - Staff encouraged development of a Medium-Term Expenditure Framework (MTEF) to improve public expenditure management and anchor budgets in a regularly updated macroeconomic framework. - Staff advised rein in growth in the public sector wage bill to create fiscal space for recurrent costs associated with completed projects. ### Banking sector responses, supervision, and FSAP implementation - Banks increased provisioning, focused on lending to established clients and tightened approval process for new clients. - Authorities agreed on need for closer monitoring of loan portfolios and more frequent on-site inspections. - Authorities conduct routine stress tests and developed guidelines on supervision of distressed banks. - Implementation of FSAP (2007) recommendations uneven; notable progress on nonbanking financial sector supervision. - NBFIRA began operating in April 2008 and expected to assume supervisory responsibilities for nonbank sector by end-2009. - NBFIRA intends to amend insurance and pension acts, design a risk-based framework for on-site inspection, and collect/analyze statutory returns for off-site inspections. - Systemic liquidity being addressed by increasing issuance of government debt and strengthening liquidity forecasting. - Authorities intend to amend the Banking Act to grant limited power to the BoB to vet “significant” and “controlling” shareholders. - Securities Bill expected to be tabled in Parliament before end-2009. - Financial Intelligence Agency Bill approved by Parliament in April 2009 and awaiting the President’s signature; Financial Intelligence Agency to be established at the Ministry of Finance and Development Planning by end-2009. - BoB does not yet have full power to supervise state-owned statutory banks; legislation for Saving and Credit Cooperatives still to be updated. - Assessment: Establishment of the NBFIRA is a welcome start; further capacity enhancements and technical assistance are essential to address remaining FSAP issues. ### Structural reforms, diversification, and investment climate - Sharp contraction in real GDP in 2009 underscores need to accelerate structural reforms to increase productivity and economic diversification. - Authorities’ diversification strategy focuses on: - Improving infrastructure in key sectors. - Investing in education and health to build human capital and boost productivity. - Diamond Hub to increase value-added in downstream activities (cutting, polishing, jewelry). - Morupule and Mmamabula power stations to use coal deposits to meet domestic demand and diversify exports. - Transport Hub to provide corridor to Namibia and improve transport links to tourist areas. - Agricultural Hub to improve agricultural productivity and diversity. - Strengthening investment climate: address structural competitiveness issues, improve access to land and provision of work permits for expatriates. - Progress on privatization limited; plans underway to privatize the National Development Bank and revise regulatory framework for parastatals. - HIV/AIDS remains a significant medium-term challenge: plans to increase access to Anti-Retroviral (ARV) treatment and expand public awareness campaigns. ### Data, statistics, and surveillance - Botswana has significantly improved economic statistics but scope remains for further improvements, especially timeliness. - Progress commended in balance of payments and national accounts; encouraged to move from GDDS to SDDS after enhancing capacity. - National accounts now prepared on a calendar basis; CPI rebased September 2006; WPI coverage limited. - Fiscal accounts generally follow GFSM 1986 but cover only budgetary central government; recommendation to compile GFS for extrabudgetary institutions and consolidated government. - Monetary accounts generally consistent with MFSM; some classification and presentation issues remain. - Balance of payments statistics follow BPM5 but ITRS data for services unreliable; gaps in portfolio investment and services recording identified. ### Bounds tests, sensitivity analyses, and IMF Board recommendations - Bounds tests show external debt-to-GDP ratio robust to growth and interest rate shocks but sensitive to current account and exchange rate shocks (30 percent depreciation) and combined shocks. - Selected sensitivity results: - One standard deviation worsening in real interest rate could increase debt-to-GDP by up to 3.4 percentage points relative to baseline. - One standard deviation worsening in 10-year historical average primary balance results in an 11.7 percentage points increase in debt-to-GDP ratio. - IMF Directors’ policy recommendations: - Scale back public sector wage bill to create fiscal space. - Consider a fiscal rule based on NMPD as a share of nonmining GDP rather than current ceiling on overall expenditure of 40 percent of GDP. - Develop an MTEF to improve public expenditure management. - Continue careful balancing of inflation risk in monetary policy; easing of monetary policy in 2009 welcomed. - Fiscal consolidation and structural reform needed to ensure medium-term external stability. - Consider greater exchange rate flexibility if inflation objective becomes primary monetary anchor. - Remain vigilant on banking-sector risks and enhance NBFIRA capacity; address remaining FSAP recommendations. - Accelerate economic diversification and ensure infrastructure, education, and health spending achieve commensurate outcomes. *Source: _cr10172 (IMF staff report and Botswana authorities; approved July 2, 2009).* ### Executive Summary ...................................................................................................... ### _cr10172 - Executive Summary ### Background and outlook - Sound macroeconomic management, supported by strong institutions and good governance, has sustained Botswana’s strong macroeconomic performance. - Real GDP growth averaged 4 percent over the past five years. - Average fiscal and current account surpluses were 5 and 11 percent of GDP, respectively, over this period. - The global economic crisis reduced demand for diamonds and contributed to a significant deterioration in the economic outlook: the economy is now projected to contract sharply in 2009. - Inflation has slowed considerably and is projected to fall to 7 percent by the end of 2009. - In the medium-term, real GDP is expected to rebound as diamond output recovers, and two large electricity generation projects begin production. ### Recent economic developments - Real GDP growth slowed to 2.9 percent in 2008, with mining value added decreasing by 3.7 percent in 2008. - Diamond mining was suspended from January through mid-April 2009 due to weak demand and inventory buildup. - The decline in diamond exports together with a large increase in public infrastructure-related imports reduced the current account surplus to 7 percent of GDP in 2008 (compared with an average surplus of 15.6 percent of GDP during 2005-2007). - International reserves declined from US$10 billion in mid-2008 to US$8.1 billion in March 2009, equivalent to 16 months of imports of goods and services. - The nonmining primary deficit (NMPD) amounted to 28.6 percent of non-mining GDP in 2008/09, up from 16.8 percent in 2007/08. - The larger deficit reflected a surge in spending to 63 percent of nonmining GDP from 52.5 percent in 2007/08. - Current expenditure rose 12.5 percent in real terms. - Development spending increased by 54 percent in real terms. - Increased spending also reflected a public works program to provide income support for vulnerable groups and measures to offset higher food prices. - The NMPD is projected to remain broadly unchanged in 2009/10. - The original 2009/10 budget proposed a further real spending increase of 4 percent over the revised budget, which would have raised the NMPD to 34 percent of non-mining GDP. - The government announced plans to scale back recurrent spending by 7 percent and development spending by 5 percent; staff projects this would stabilize the NMPD at 28.3 percent of non-mining GDP. - The overall deficit of 11.1 percent of GDP is expected to be fully financed by an AfDB budget support loan (US$1.5 billion). - External position and debt: - Reserve coverage is projected to decline in 2009, but should remain at a comfortable level. - External debt remains relatively low, but it will increase considerably in 2009-10. ### Diamond sector (Box 1 findings) - Botswana is one of the world’s leading diamond producers with a market share of about 20 percent. - In 2008 diamonds contributed about 40 percent of fiscal revenues, 35 percent of GDP, and 62 percent of total exports. - Diamond Trading Company Botswana was launched in 2008 to sort and aggregate diamonds locally. - The global financial crisis led to a significant decline in demand in Q4 2008 and early 2009; Debswana suspended production in early 2009. - In April 2009, mines at Jwaneng, Orapa #1 and Letlhakane resumed production at reduced capacity; Damtshaa and Orapa #2 remained closed through December. - Total diamond production in 2009 is estimated to be 20 million carats, nearly 40 percent less than in 2008. - Debswana expects output to return to full capacity by 2012, but there is considerable uncertainty about the timing of a sustained recovery in demand. ### Fiscal policy and recommendations - Staff raised concerns about the quality of expenditure and the need to reduce it to a more sustainable level over the medium term. - Authorities acknowledged scope to improve spending efficiency but emphasized exceptional circumstances in 2009 and noted that development spending would decline as ongoing infrastructure projects are completed. - Staff recommended an alternative fiscal rule based on the nonmining primary deficit (NMPD) as a share of nonmining GDP rather than the current limit on overall expenditure relative to total GDP; this would provide a clearer indication of the underlying fiscal stance and medium-term fiscal sustainability. - The authorities indicated a revision to their fiscal rule to incorporate a link to non-mining GDP was being considered, but did not commit to an NMPD target. ### Monetary, exchange rate, and financial sector policies - Staff concurred with authorities that the weak outlook for growth and expected decline in inflation should allow further monetary policy easing. - Botswana continues to peg the pula to a basket of the rand and the SDR; the rate of crawl is determined on the basis of the difference between domestic inflation and trading partner inflation. - The real effective exchange rate stabilized since the shift to the crawling peg in May 2005, with modest appreciation in 2008 and early 2009 due to higher domestic inflation relative to trading partners. - The financial sector has weathered the global downturn thus far, although non-performing loans have edged up. - Authorities are closely monitoring banks’ loan portfolios and will take further steps to improve supervision of nonbank financial institutions. - Credit growth was strong over the past two years but appears to be slowing; the BoB has lowered interest rates in line with slowing inflation. ### Structural reforms and diversification - The sharp contraction in real GDP expected in 2009 underscores the need to accelerate structural reforms to increase productivity and economic diversification. - Authorities’ diversification strategy focuses on: - Improving infrastructure in key sectors. - Investing in education and health to build up human capital and boost productivity. *Source: _cr10172 - Executive Summary* ### 9. The twelve-month inflation rate fell to 8.4 percent in May 2009 from 15 percent ### _cr10172 - 9. The twelve-month inflation rate fell to 8.4 percent in May 2009 from 15 percent ### Inflation and monetary policy - The twelve-month inflation rate fell to 8.4 percent in May 2009 from 15 percent in mid-2008, mostly reflecting reduced pressure on fuel and food prices. - Inflation is expected to decline further toward the upper end of the Bank of Botswana’s (BoB) medium-term (three-year) inflation objective of 3–6 percent. - With inflationary pressures easing, the BoB reduced its main interest rate by 250 basis points since December 2008 to stimulate economic activity. - The outstanding stock of Bank of Botswana Certificates (BoBCs) has declined since mid-2008 due to increased issuance of government domestic debt and reduced foreign inflows. ### Financial sector developments - Thus far, the financial sector has been relatively unscathed by international turmoil due to conservative lending practices and limited international exposure; commercial banks remain well-capitalized, liquid and profitable. - Nonperforming loans are at very low levels despite a modest increase in late 2008 and early 2009; however, a weaker economy and rising unemployment could worsen asset quality. - The global financial crisis has adversely affected asset values held by domestic pension and insurance funds, but these funds remain financially sound and profitable. ### Outlook and key macroeconomic projections (Text Table 3 highlights) - Real GDP (annual percentage change): 2007 4.4; 2008 2.9; 2009 -10.3; 2010 4.1; 2011 8.6; 2012 13.8; 2013 8.9; 2014 2.0. - Mineral (annual percentage change): 2007 -2.0; 2008 -3.7; 2009 -36.7; 2010 0.3; 2011 24.0; 2012 29.1; 2013 1.8; 2014 0.1. - Non-mineral (annual percentage change): 2007 9.0; 2008 7.2; 2009 4.9; 2010 5.5; 2011 3.5; 2012 7.7; 2013 12.3; 2014 2.8. - Diamond production (millions of carats): 2007 33.6; 2008 32.6; 2009 20.0; 2010 20.0; 2011 25.0; 2012 32.6; 2013 33.0; 2014 33.0. - Consumer prices (average): 2007 7.1; 2008 12.6; 2009 8.7; 2010 6.5; 2011 5.9; 2012 5.4; 2013 5.2; 2014 5.1. - Consumer prices (end of period): 2007 8.1; 2008 13.7; 2009 7.0; 2010 6.1; 2011 5.7; 2012 5.3; 2013 5.2; 2014 5.0. - Overall fiscal balance (deficit –): 2007 4.8; 2008 -5.2; 2009 -11.1; 2010 -9.7; 2011 -4.5; 2012 -1.4; 2013 -0.3; 2014 -0.3. - Non-mineral primary balance (percent of nonmining GDP): 2007 -16.8; 2008 -28.6; 2009 -28.3; 2010 -26.7; 2011 -23.4; 2012 -21.4; 2013 -18.6; 2014 -18.5. - Current account balance (percent of GDP): 2007 14.3; 2008 7.0; 2009 -8.2; 2010 -16.6; 2011 -11.4; 2012 -6.5; 2013 3.2; 2014 3.5. - Balance of payments (percent of GDP): 2007 14.1; 2008 8.2; 2009 0.9; 2010 -2.1; 2011 2.3; 2012 -0.1; 2013 1.4; 2014 1.6. - Change in reserves (increase –, US$ millions): 2007 -1,742; 2008 -1,100; 2009 -952; 2010 31; 2011 -268; 2012 7; 2013 -202; 2014 -232. - Gross official reserves (end of period, US$ millions): 2007 9,743; 2008 9,125; 2009 9,220; 2010 8,988; 2011 9,256; 2012 9,249; 2013 9,450; 2014 9,682. - Reserves in months of imports of goods and services: 2007 20.7; 2008 20.8; 2009 17.0; 2010 16.3; 2011 16.0; 2012 16.5; 2013 16.4; 2014 16.3. ### Growth drivers and shocks - Real GDP is projected to contract by 10 percent in 2009 as diamond production declines. - Diamond output is expected to fall by 40 percent in 2009, reflecting a marked weakening in external demand since late 2008. - Nonmining growth is supported by large public expenditures for infrastructure projects and is expected at 5 percent in 2009. - A modest rebound is projected for 2010, with a stronger recovery in 2011-12 as diamond output returns to full capacity. - Two large electricity generation projects (Morupule and Mmamabula) should boost growth after 2012. ### External position and debt - Botswana’s current account balance is expected to shift to a deficit of 8.2 percent of GDP in 2009 and widen to 16.6 percent of GDP in 2010 because of lower diamond exports and higher imports for power station construction. - By 2013 the current account is expected to shift to a surplus as projects are completed and diamond production returns to full capacity. - Gross international reserves are projected to remain at least 16 months of import cover throughout the projection period. - External debt is expected to reach nearly 50 percent of GDP by 2012 to finance the two power stations, but would stay below 60 percent of GDP in stress-test scenarios. - Public debt would rise to 25 percent of GDP by 2010 before falling to 15 percent by 2014. - If growth and the primary balance return to recent levels, Botswana would be able to repay its public debt by 2012. ### Downside scenarios and risks - Staff considered two alternative scenarios with significant downside risks: - (i) A larger reduction (54 percent) in diamond production in 2009 with a slower recovery in international demand. - (ii) The Mmamabula project does not move forward. - Both scenarios would have a significant impact on the fiscal and external positions. - Authorities noted the risk that recovery of diamond production to pre-crisis levels could take several years. - The fall in diamond production expected after 2020 clouds the longer-term outlook and underscores the need for diversification, improved competitiveness, and productivity to reduce high structural unemployment. ### Fiscal policy recommendations and medium-term framework - Staff welcomed authorities’ intention to reduce expenditures from the original 2009/10 budget and to focus on improving spending efficiency. - Staff recommended strengthening nonmining revenues over the medium term, including improving tax administration and considering raising the VAT and the fuel levy to regional rates as possible options. - Staff recommended considering an alternative fiscal rule based on the NMPD as a share of nonmining GDP rather than the current ceiling on overall expenditure of 40 percent of GDP. - To achieve fiscal sustainability, staff indicated the NMPD would need to be reduced to 8 percent in the longer term (PIH-based), but recommended reducing the NMPD to at least 14 percent of nonmining GDP within the next five years (compared to a baseline projection of 17.8 percent in 2015/16). - Staff encouraged development of a Medium-Term Expenditure Framework (MTEF) to improve public expenditure management and anchor budgets in a regularly updated macroeconomic framework. ### Monetary and exchange rate policy discussions - Authorities and staff agreed there appears to be scope for the BoB to lower interest rates further provided government spending in 2009/10 is scaled back as planned. - The authorities indicated the crawling peg regime has continued to serve Botswana well and that they are strengthening their inflation forecasting model but are not yet ready to move to full-fledged inflation targeting. - Staff noted greater exchange rate flexibility would be required if the inflation objective were to become the primary monetary anchor over the medium-term. - Staff analysis suggests a modest overvaluation of the real exchange rate: econometric analysis indicates Botswana’s REER was overvalued by about 2 percent at the end of 2008; forward-looking current account sustainability suggests an overvaluation of 3-6 percent depending on trade elasticity assumptions. - Structural competitiveness measures show strengths in governance but weaknesses in declining labor productivity, high trading costs, business start-up difficulties, and underperforming travel and tourism. *Source: Botswana authorities; and IMF staff estimates and projections.* ### 25. To mitigate against risks from the deteriorating economy, banks have increased ### _cr10172 - 25. To mitigate against risks from the deteriorating economy, banks have increased ### Banking sector responses and supervision - Banks have increased their provisioning, focused on lending to established clients and tightened the approval process for new clients. - Authorities concurred with staff on the need for closer monitoring of loan portfolios and more frequent on-site inspections. - The authorities conduct routine stress tests and have developed guidelines on supervision of distressed banks. - The global financial crisis has not had a significant adverse impact on the banking sector to date, but the authorities will need to remain vigilant. - The sizable contraction in 2009 can be expected to increase stress on the banking system. ### Progress on FSAP (2007) recommendations - Implementation has been uneven, with notable progress on supervision of the nonbanking financial sector. - The Nonbank Financial Institutions Regulatory Authority (NBFIRA) began operating in April 2008. - The Bank of Botswana (BoB) is planning to transfer various supervisory responsibilities for nonbank financial institutions to the NBFIRA by end-2009. - NBFIRA intends to: amend the insurance and pension acts; design a risk-based framework for on-site inspection; and collect and analyze statutory returns for off-site inspections. - Box 5 findings (implementation plans and status): - Systemic liquidity being addressed by (i) increasing issuance of government debt and (ii) strengthening the liquidity forecasting framework. - Authorities intend to amend the Banking Act to grant limited power to the BoB to vet “significant” and “controlling” shareholders. - Cooperation with cross-border supervisors has improved; internal guidelines drafted for dealing with problem banks and contingency plans for crisis management. - A Securities Bill is expected to be tabled in Parliament before end-2009. - Anti-money laundering issues are being tackled through a Financial Intelligence Agency Bill that makes financing of terrorism a financial offence; the bill was approved by Parliament in April 2009 and is awaiting the President’s signature. - The BoB will be closely monitoring compliance as part of their effort to address recommendations from the 2007 World Bank AML/CFT mission. - A Financial Intelligence Agency is to be established at the Ministry of Finance and Development Planning by end-2009. - The BoB does not yet have full power to supervise stated-owned statutory banks. - Legislation to improve the institutional basis and financial soundness of Saving and Credit Cooperatives is still to be updated. - Assessment: The establishment of the NBFIRA is a welcome start, but further steps to enhance its capacity are essential, including through technical assistance, given the sizable reform agenda ahead. Remaining FSAP issues should also be addressed. ### Medium-term diversification strategy - The sharp diamond-related contraction in real GDP highlights the need for greater economic diversification. - Current downturn offers a window of opportunity to accelerate structural reforms. - Box 6: Authorities’ strategy centers on infrastructure investment to facilitate development of key sectors: - Mining and energy: - The Diamond Hub seeks to increase value-added in downstream activities such as cutting, polishing, and jewelry making. - The planned Morupule and Mmamabula power stations aim to take advantage of Botswana’s coal deposits to meet domestic electricity demand and further diversify exports. - Education and health: - Authorities intend to strengthen human capital and productivity by improving access to education and the quality of tertiary instruction in key areas such as science, technology and medicine. - Transport, agriculture and tourism: - The Transport Hub aims to provide a corridor to Namibia and improve transport links to tourist areas. - The Agricultural Hub aims to improve agricultural productivity and diversity. - A number of new lodge sites have been awarded and the marketing activities of the Tourism Board expanded to support the tourist sector. ### Investment climate, privatization, and HIV/AIDS - Strengthening the investment climate remains a key priority. - Staff encouraged authorities to address structural aspects of competitiveness where Botswana lags behind other countries and improve access to land and provision of work permits for expatriates. - Progress on privatization has been limited in recent years, but plans are underway to privatize the National Development Bank and revise the regulatory framework to facilitate privatization of several parastatals. - HIV/AIDS remains a significant medium-term challenge despite some progress toward reducing incidence. - Authorities plan to further increase access to Anti-Retroviral (ARV) treatment and expand a public awareness campaign. - Reducing the high HIV/AIDS prevalence rate will be key to improving labor productivity. ### Data and statistics - Botswana has significantly improved the quality of economic statistics in recent years, but there is scope for further improvements, especially regarding timeliness. - Staff commended progress in balance of payments and national accounts data and encouraged completing remaining steps to move from the General Data Dissemination System (GDDS) to the Special Data Dissemination Standard (SDDS). - Authorities emphasized intention to move to SDDS but indicated a need to further enhance capacity to meet SDDS requirements on an ongoing basis. ### Staff appraisal: outlook, fiscal and monetary policy, and reforms - Near-term macroeconomic outlook is uncertain, with significant downside risks. - Diamond exports are expected to be sluggish through at least 2010, with large fiscal and external deficits likely to persist for the next several years. - A protracted recovery in diamond demand would add to pressure on the external and fiscal positions. - The two electricity generation projects should boost output as they come online in 2012–13, but the fall in diamond production expected after 2020 clouds the longer-term outlook. - Fiscal concerns: - The marked increase in expenditures in the last two years raises concerns about the quality of spending and fiscal sustainability. - A large part of the increase in expenditure reflects outlays for infrastructure investment, which should facilitate a return to a more sustainable level of spending as these projects are completed. - Authorities will need to rein in growth in the public sector wage bill to create fiscal space for recurrent costs associated with completed projects. - On current policies the fiscal position would deviate substantially from the recommended sustainability benchmark, suggesting the need for a larger than currently envisaged fiscal adjustment in the medium term. - An alternative fiscal rule based on the NMPD as a share of nonmining GDP could be considered; the NMPD provides a clearer picture of the underlying fiscal stance and is a better indicator of longer-term fiscal sustainability. - Monetary policy: - The weak outlook for growth and easing of inflationary pressures should allow further monetary policy easing in 2009. - A further increase in international fuel prices could limit the downward trend in inflation, but domestic price pressures remain limited and food prices should continue to moderate. - The limited scope for real exchange rate adjustment, given the large share of imported inflation, highlights the need for fiscal consolidation to ensure medium-term external stability. - Structural reform imperative: - The abrupt contraction in real GDP in 2009 underscores the need to accelerate economic diversification. - Authorities have significantly increased spending on infrastructure, education and health; it will be important to ensure outcomes are commensurate with these additional expenditures. - It is critical to move quickly on key structural reforms to reduce the cost of doing business and enhance productivity. *Source: _cr10172 - 25. To mitigate against risks from the deteriorating economy, banks have increased (IMF content).* ### 38. It is proposed that the next Article IV consultation be held on the standard 12-month ### _cr10172 - 38. It is proposed that the next Article IV consultation be held on the standard 12-month ### Recommendation on Article IV consultation - It is proposed that the next Article IV consultation be held on the standard 12-month cycle. ### National income and prices (selected indicators, 2007–2014) - Real GDP (annual percentage change): 4.4, 2.9, -10.3, 4.1, 8.6, 13.8, 8.9, 2.0 - Mineral real GDP (annual percentage change): -2.0, -3.7, -36.7, 0.3, 24.0, 29.1, 1.8, 0.1 - Non-mineral real GDP (annual percentage change): 9.0, 7.2, 4.9, 5.5, 3.5, 7.7, 12.3, 2.8 - Consumer prices (average): 7.1, 12.6, 8.7, 6.5, 5.9, 5.4, 5.2, 5.1 - Consumer prices (end of period): 8.1, 13.7, 7.0, 6.1, 5.7, 5.3, 5.2, 5.0 - Nominal GDP (billions of pula) 1/: 75.7, 91.2, 80.1, 87.1, 98.0, 116.8, 133.9, 142.5 - Mineral: 30.6, 37.6, 20.3, 21.7, 29.8, 41.1, 44.5, 47.3 - Non-mineral 2/: 45.2, 53.6, 59.8, 65.4, 68.2, 75.7, 89.4, 95.2 ### External sector (selected indicators, 2007–2014) - Exports of goods and services, f.o.b. (US$) (annual percentage change): 10.6, -0.4, -35.8, 5.3, 16.9, 19.3, 22.9, 3.8 - Diamonds (annual percentage change): -2.3, -6.1, -44.6, 1.8, 30.3, 32.2, 2.8, 1.5 - Imports of goods and services, f.o.b. (annual percentage change): 29.2, 26.2, -6.6, 23.6, 1.7, 4.9, -3.3, 3.2 - Terms of trade (annual percentage change): 1.0, 7.9, -16.5, -0.3, -1.9, 0.2, 0.4, 0.4 - Current account balance (US$ millions): 1,766, 945, -868, -1,841, -1,336, -867, 465, 527 - Balance of payments (percent of GDP): 14.1, 8.2, 0.9, -2.1, 2.3, -0.1, 1.4, 1.6 - End-of-year gross official reserves (US$ millions): 9,743; 9,125; 9,220; 8,988; 9,256; 9,249; 9,450; 9,682 - In months of imports of goods and services (based on following year): 20.7, 20.8, 17.0, 16.3, 16.0, 16.5, 16.4, 16.3 - Change in reserves (increase –) (US$ millions): -1,742, -1,100, -952, 31, -268, 7, -202, -232 - Pula Fund (US$ millions): 6,614; 6,866; .................. - Liquidity portfolio/ other reserves (US$ millions): 3,130; 2,259; .................. ### Central government finance (selected fiscal indicators) - Total revenue and grants (percent of GDP, calendar/fiscal context noted in tables): 4.5, 5.7, -13.1, 12.5, 16.4, 16.3, 9.9, 6.4 (table presentation varies by series) - Total expenditure and net lending (percent of GDP): 25.8, 40.6, 1.4, 8.4, 2.0, 6.9, 6.4, 6.3 - Total revenue and grants (millions of pula, fiscal table 2007/08–2013/14): 28,629; 30,269; 24,393; 26,316; 29,613; 34,475; 40,085; 44,059 - Total expenditure and net lending (millions of pula): 24,822; 34,894; 37,787; 35,365; 38,340; 39,093; 41,798; 44,475 - Overall balance (millions of pula): 3,808; -4,625; -13,394; -9,049; -8,727; -4,618; -1,713; -416 - Non-mineral primary balance (memorandum, fiscal series): -7,929; -15,784; -20,989; -17,340; -17,668; -16,384; -16,949; -16,891 ### Sectoral GDP and savings-investment balances (millions of pula; percent of GDP) - Consumption (millions of pula): 46,969; 57,858; 62,857; 68,767; 74,852; 82,480; 91,181; 97,597 - Public consumption (millions of pula): 14,726; 18,185; 19,556; 21,265; 23,436; 25,287; 26,934; 28,605 - Private consumption (millions of pula): 32,243; 39,674; 43,302; 47,502; 51,417; 57,193; 64,247; 68,991 - Gross investment (millions of pula): 19,614; 29,596; 28,663; 38,494; 39,984; 46,834; 42,154; 43,919 - Net exports of goods and services (millions of pula): 9,145; 3,759; -11,433; -20,132; -16,747; -12,562; 550; 973 - Gross domestic savings (millions of pula): 28,759; 33,355; 17,229; 18,362; 23,237; 34,272; 42,703; 44,891 - GDP at market prices (millions of pula): 75,728; 91,213; 80,087; 87,130; 98,089; 116,752; 133,885; 142,488 ### Monetary survey and banking system (selected indicators) - Net foreign assets (millions of pula, 2004–2009 series): 25,269; 35,903; 48,812; 60,589; 72,831; 73,283 - Bank of Botswana net foreign assets (millions of pula): 24,001; 34,372; 47,720; 58,392; 68,414; 69,614 - Money and quasi-money (M2) (annual percentage change): 31.2, 21.1, 14.9, 14.5, 12.3, 10.9, 9.8, 13.2 - Credit to the private sector (annual percentage change): 25.7, 26.6, 14.0, 9.7, 8.6, 7.8, 7.7, 7.5 - Money plus quasi-money (M2) (end of period, millions of pula): 13,262; 14,674; 24,568; 32,226; 39,039; 44,842 - Velocity (non-mineral GDP relative to M2): 1.4, 1.4, 1.3, 1.3, 1.2, 1.2, 1.3, 1.2 - Banking prudential indicators (selected 2004–2009) - Regulatory capital to risk-weighted assets (percent): 16.9, 17.3, 16.8, 17.2, 18.0, 17.4, 17.5, 16.9, 18.5 - Nonperforming loans (NPLs)-to-gross loans (percent): 0.8, 0.9, 0.9, 2.0, 2.5, 2.3, 2.2, 1.6, 2.9 - Return on average assets (percent): 5.0, 5.5, 6.1, 2.6, 0.7, 1.6, 2.3, 2.9, 0.7 - Liquid assets to total assets (percent): 21.8, 26.1, 47.1, 47.2, 44.6, 60.6, 58.4, 50.5, 38.4 - Loans-to-deposits (percent): 71.2, 68.7, 46.7, 44.5, 43.5, 43.8, 45.0, 46.5, 53.2 ### Development, competitiveness, and social indicators (selected) - Millennium Development Goals table excerpts include: - Malnutrition prevalence, weight for age (percent of children under 5): 17.2; 12.5; 10.7; 26.6 (various series) - Literacy rate, youth total (percent of people ages 15–24): 89; 94; 72 (various series) - Immunization, measles (percent of children ages 12–23 months): 87, 89, 90, 90, 73 (series) - Prevalence of HIV, total (percent of population ages 15–49) 4/: 17.6, 5 (table context varies) - GNI per capita, Atlas method (current US$): 2,560; 3,040; 3,310; 6,120; 951 - Competitiveness rankings (2008–09 sources) - Global Competitiveness Index Ranking: Botswana: 72, 81, 55, 56 (series) - Ease of Doing Business Ranking: Botswana: 44, 48, 52, 38 (series) - Number of Countries in indices: 117; 125; 130; 134 (Global Competitiveness); 175; 175; 181; 181 (Doing Business) ### Institutional and metadata notes - Relations with the Fund: The last Article IV consultation was concluded in December 2007. - Botswana subscribes to the General Data Dissemination System (GDDS). - Tables use calendar year and fiscal year conventions as noted (e.g., fiscal year begins on April 1; national accounts data presented on a calendar year basis in Table 2). - Sources cited in tables: Botswana authorities; Central Statistics Office; Bank of Botswana; Ministry of Finance and Development Planning; IMF staff estimates and projections; World Bank, World Development Indicators, 2009. *Prepared by the African Department; Approved by Saul Lizondo and Dhaneshwar Ghura; July 2, 2009.* ### 1. Common Indicators Required for Surveillance ...................................................................11 ### 1. Common Indicators Required for Surveillance ### I. Relations with the Fund (As of April 30, 2009) - Membership status: Joined July 24, 1968; VIII. - General resources account (SDR (million); Percent of Quota) - Quota: 63.00; 100.00 - Fund holdings of currency: 54.53; 86.56 - Reserve position in Fund: 8.48; 13.45 - SDR department (SDR (million); Percent of Quota) - Net cumulative allocation: 4.36; 100.00 - Holdings: 39.66; 909.81 - Outstanding purchases and loans: None - Financial arrangements: None - Project obligations to Fund: None - Implementation of HIPC initiative: None - Exchange rate arrangements: - The exchange rate of the Botswana pula is a crawling peg arrangement against a basket of currencies. - As of May 31, 2009, US$1 = P6.88; R1 = P0.84. - Botswana accepted the obligations of Article VIII, Sections 2, 3, and 4 as of November 17, 1995, and maintains an exchange rate system free of restrictions in the making of transfers and payments of current account transactions. - Article IV consultation: - Botswana is on a standard 12-month consultation cycle. - The last Article IV consultation was concluded by the Executive Board on December 7, 2007. Directors agreed with the thrust of the staff appraisal. - Technical assistance assignments/projects (selected entries): - MFD: 1997 Central banking advisor; 1999–2000 Banking supervision advisor. - STA: 1997 Balance of payments advisor. - Technical assistance missions (selected entries and dates): - 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 VAT; September 2000 Implementation of VAT next steps; February 2002 Tax administration (SADC Region); November 2004 Public expenditure management. - LEG: January 2006 Review of amended VAT provisions; July 2006 Review of central bank law; June 2007 Review of VAT laws. - STA: May 2001 Inspection for visit of long-term balance of payments advisor; April 2002 ROSC data module; July 2002 BOP statistics: peripatetic visit; August 2003 Monetary and financial statistics using the GDDS; June 2004 GDDS project for Anglophone Africa: National accounts statistics; August 2004 Follow-up mission: Money and banking statistics; October 2004 GDDS: National accounts mission; June 2005 Follow-up on monetary and financial statistics using the GDDS; August 2005 Follow-up mission: GDDS quarterly balance of payments statistics; March 2006 GDDS project for Anglophone Africa: balance of payments statistics; March 2006 GDDS project for Anglophone Africa: national accounts statistics; October 2006 ROSC data module covering GDDS and Data Quality Assessment Framework (DQAF); October 2007 Monetary and Financial Statistics; November 2007–November 2008 Real Sector Statistics (Resident Regional Advisor); November 2008 Money and Banking Statistics; February 2009 Phase II SDDS- Balance of Payments Statistics; June 2009–June 2010 Real Sector Statistics (Resident Regional Advisor). - MCM: January, March 2007 IMF-World Bank Financial Sector Assessment Program (FSAP); December 2008 Inflation forecasting and modeling; January 2009 Risk Management Framework; February 2009, April 2010 Payments Systems (LT Resident Expert Assignment); July 2009 Monetary Operations. ### II. JMAP: BOTSWANA—WORLD BANK AND IMF WORK PROGRAMS (As of June 9, 2009) - World Bank indicative work program (selected items and timing): - Country Partnership Strategy: Bank Board Q4, FY09 (discussed). - Electricity Program: Morupule B Generation and Transmission Power Project (SIL/PCG) FY10; Mmamabula IPP Power Project PRG (TBD) FY11 (TBD). - HIV/AIDS Project: Bank Board Q1, FY09 (approved). - Integrated Transport Project: Bank Board Q4, FY09 (approved). - DPL (Budget Support): FY10. - Wildlife Conflict Management and Biodiversity Conservation for Improved Rural Livelihoods Project (Global Environment Facility): Q2, FY10. - Statistics/Capacity-building: Strengthening Monitoring and Evaluation capacity for Vision 2016 Council (IDF Grant) FY10; Strengthening Institute & Accountants (IDF Grant) FY10; Strengthening Statistical Capacity for Poverty Analysis FY09. - Carbon Finance Assistance Program: FY10. - Post ICA Follow-up/Financial Systems Stability Assessment (TA): FY10. - Water Sector: FBSA Technical Advisory Services (Phases 1 & 2) FY09/FY10; expected delivery FY10. - PER/PFM Reform (TA): FY11. - Development Policy Review (DPR): FY10. - Skills Gap/Labor Markets: FY10. - Macro-Modeling (TA): FY10. - Capacity building in NBFI (TA): FY10. - Strategic Issues in Competitiveness Study: FY10. - Issues Notes on Accrual Accounting: FY10. - IMF work program in the next 12 months (selected items): - STA TA on monetary and balance of payments statistics: Ongoing. - MCM TA on monetary and financial sector issues, including: revision of the Bank of Botswana Act and the Banking Act; macroeconomic modeling; payment systems modernization: Ongoing FY 2010. - FAD TA on tax administration and public financial management: Expected FY 2010. - LEG TA on tax administration and income tax law reform: Expected FY 2010. - Article IV consultation: May 2009. - Coordination requests: - Fund request to Bank: Periodic update on progress. - Bank request to Fund: Periodic macro update. ### III. Statistical Issues — Findings and Recommendations - General: - Data provision is adequate to conduct surveillance, but there are some shortcomings. The accuracy of data, particularly for the national accounts and balance of payments, needs improvement. - National accounts are now prepared on a calendar basis rather than the July-June schedule. Historical data have been adjusted accordingly. - ROSC reassessment: - A ROSC reassessment took place October 31–November 13, 2006; report and authorities’ response 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; support greater use of preliminary data by formalizing revision policies and implementing regular revision cycles. - GDDS and SDDS preparation: - Botswana participates in the Fund’s GDDS Project for Anglophone African Countries and in monetary and financial statistics modules funded by DFID. - Recent advances: publication of the National Summary Data Page on the BoB website and dissemination of advance release calendars for key macroeconomic data. - National accounts and prices: - National accounts: now principally based on concepts and definitions of the 1993 SNA, but some changes needed for full observance (classification and sector breakdowns still broadly in line with 1968 SNA). - Recommendation: conduct comprehensive enterprise surveys every few years and introduce estimates for the informal sector. - CPI: comprehensive, provides breakdowns urban/rural and tradable/nontradable. Rebased CPI (September 2006) broadly conforms with 1993 SNA and CPI Manual, but deviations remain in imputation of rents and owner-occupied housing. HIES used for weights. - WPI: mission recommended development of concepts and definitions; current WPI measures prices of only six product groups and is not representative of industrial production. - Fiscal accounts: - Central government finance statistics generally follow GFSM 1986 methodology but cover only budgetary central government activities; no fiscal statistics for extrabudgetary institutions or consolidated central government. - Transactions recorded on a cash basis consistent with GFSM 1986. Detail on some components of current spending is lacking. - ROSC recommendation: at least annual compilation and dissemination of GFS for extrabudgetary institutions and consolidated general government. - Authorities have yet to decide on a “migration path” to GFSM 2001 methodology. - Authorities regularly report monthly data on budgetary central government for inclusion in the IFS, but no data are reported for inclusion in the Government Finance Statistics Yearbook. - Periodicity meets GDDS standards except for timeliness. - Monetary accounts: - BoB’s compilation of the depository corporations survey is generally consistent with MFSM; survey covers BoB and other depository corporations (excludes Savings and Credit Cooperatives). - Classification and sectorization largely consistent with MFSM, except for classification of financial derivatives. - Some nonbudgetary central government units are classified as nonfinancial public corporations; accrued interest not consistently presented with underlying instrument. - Monetary data for IFS reported regularly using Standardized Report Forms, but central bank data reported with a longer lag than other depository corporations. - External sector statistics: - Balance of payments statistics follow BPM5 concepts and definitions; institutional classifications generally follow BPM5. - ITRS data, used mostly for services, have become unreliable; alternative data sources are needed. - Methods for estimating missing data and calculating flows from stock data are inadequate. - BOP statistics are compiled and published in BoB’s monthly statistical bulletin and Annual Report, meeting GDDS periodicity and timeliness, although only annual BOP statistics are reported to STA. - Discrepancies with national accounts on imports, exports, and SACU-related payments due to different data sources and valuation methods. - Recent TA mission identified gaps in recording of portfolio investments and services. ### IV. Common Indicators Required for Surveillance — Selected Table Entries (As of June 10, 2009) - Exchange rates: Date of Latest Observation Mar. 2009; Date Received 6/10/2009; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - International reserve assets and reserve liabilities of the monetary authorities 4/: Date of Latest Observation Mar. 2009; Date Received 6/10/2009; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Reserve/base money: Date of Latest Observation Mar. 2009; Date Received 6/10/2009; Frequency of Data 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: Date of Latest Observation Mar. 2009; Date Received 6/10/2009; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Central bank balance sheet: Date of Latest Observation Mar. 2009; Date Received 6/10/2009; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Consolidated balance sheet of the banking system: Date of Latest Observation Mar. 2009; Date Received 6/10/2009; Frequency of Data M; Frequency of Reporting M. - Interest rates 5/: Date of Latest Observation Mar. 2009; Date Received 6/10/2009; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Consumer price index: Date of Latest Observation Apr. 2009; Date Received May 2009; Frequency of Data 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 6/—general government 7/: Date of Latest Observation NA; Date Received NA; Data Quality—Methodological Soundness: LO, LNO, LNO, LOLO, O, LO, LO, LNO. - Revenue, expenditure, balance and composition of financing 6/—central government: Date of Latest Observation Mar. 2009; Date Received May 2009; Frequency of Data A/Q; Frequency of Reporting Q; Frequency of Publication Q. - External current account balance: Date of Latest Observation 2008; Date Received May 2009; Frequency of Data 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. - Exports and imports of goods and services: Date of Latest Observation 2009 Q1; Date Received May 2009; Frequency of Data M/Q; Frequency of Reporting M; Frequency of Publication Q. - GDP/GNP: Date of Latest Observation 2008; Date Received May 2009; Frequency of Data A/Q; Frequency of Reporting A/Q; Frequency of Publication A/Q; Data Quality—Methodological Soundness: LO, LO, LNO, LO; Data Quality—Accuracy and Reliability: LO, LO, LNO, LO, LO. - Gross external debt: Date of Latest Observation Dec. 2008; Date Received May 2009; Frequency of Data A/Q; Frequency of Reporting A; Frequency of Publication A. Notes (as presented in table): - 1/ Daily (D), weekly (W), monthly (M), quarterly (Q), annually (A), irregular (I), and not available (NA). - 2/ Assessment from ROSC published on April 6, 2007 based on mission during October 31-November 13, 2006. Assessment scale: fully observed (O), largely observed (LO), largely not observed (LNO), not observed (NO), not available (NA). - 3/ Same as footnote 2, but referring to source data, techniques, validation, and revision studies. - 4/ Includes reserve assets pledged or otherwise encumbered as well as net derivative positions. - 5/ Both market-based and officially determined, including discount, money market, treasury bill, note, and bond rates. - 6/ Foreign, domestic bank, and domestic nonbank financing. - 7/ The general government consists of the central government (budgetary funds, extra-budgetary funds, and social security funds) and state and local governments. - 8/ Including currency and maturity composition. ### V. Public Sector Debt Sustainability Analysis - Main finding: - The public sector debt sustainability analysis (DSA) shows little risk of debt distress, even under various stress tests. - Key observations: - Despite the sizeable increase in public debt expected during 2009-10, the DSA indicates that Botswana’s public debt would remain sustainable over the medium term. - Continued large fiscal deficit over the medium term would worsen the debt indicators considerably, underscoring the need for fiscal measures. *IMF staff report content (as provided in the source).* ### 1. At end-2008, Botswana’s public debt is estimated at about P5.1 billion, (5.6 percent ### _cr10172 - 1. At end-2008, Botswana’s public debt is estimated at about P5.1 billion, (5.6 percent ### Overview - At end-2008, Botswana’s public debt is estimated at about P5.1 billion, (5.6 percent of GDP). - About 30 percent of the debt is owed to bilateral and multilateral foreign creditors; the remainder is domestic debt. - Botswana historically has a low level of public debt due to sound fiscal policies, fiscal surpluses, and accumulation of government reserves. - The global financial crisis and lower demand for diamonds contributed to a sharp decline in government mineral revenues and a significant rise in public spending. ### Baseline fiscal and debt projections (2008–2014) - Fiscal deficit in FY 2009/10 projected at 11.1 percent of GDP. - Budget support loan from the African Development Bank (AfDB) expected to amount to about 13 percent of GDP and more than fully finance the FY 2009/10 deficit. - Debt-to-GDP ratio projected path: - 2008: 5.6 percent of GDP - 2009: 20.8 percent of GDP - 2010: 24.4 percent of GDP - 2011: 21.7 percent of GDP - 2012: 18.3 percent of GDP - 2013: 16.0 percent of GDP - 2014: 15.0 percent of GDP - Projection drivers: rising external debt and a decline in GDP by 10.3 percent in 2009. - Public sector debt-to-revenue ratio projected to increase from 17.1 percent in 2008 to 46.4 percent of GDP by 2014. - Key baseline macro and fiscal assumptions (selected): - Real GDP growth (in percent): 2008: 2.9; 2009: -10.3; 2010: 4.1; 2011: 8.6; 2012: 13.8; 2013: 8.9; 2014: 2.0 - Primary deficit (percent of GDP): 2008: 2.4; 2009: 9.5; 2010: 9.5; 2011: 4.7; 2012: 0.9; 2013: -0.5; 2014: -0.7 - Revenue and grants (percent of GDP): 2008: 32.7; 2009: 34.1; 2010: 33.0; 2011: 33.9; 2012: 33.1; 2013: 32.2; 2014: 32.4 - Primary (noninterest) expenditure (percent of GDP): 2008: 35.1; 2009: 43.6; 2010: 42.5; 2011: 38.6; 2012: 34.1; 2013: 31.7; 2014: 31.7 - Average nominal interest rate on public debt (in percent): 2008: 8.5; 2009: 6.2; 2010: 3.2; 2011: 5.0; 2012: 6.3; 2013: 6.4; 2014: 6.3 - Inflation rate (GDP deflator, in percent): 2008: 17.0; 2009: -2.1; 2010: 4.5; 2011: 3.7; 2012: 4.6; 2013: 5.3; 2014: 4.4 - Growth of real primary spending (deflated by GDP deflator, in percent): 2008: 17.5; 2009: 11.3; 2010: 1.6; 2011: -1.6; 2012: 0.5; 2013: 1.3; 2014: 2.1 ### Alternative scenarios (Table 1 summaries) - Scenario with key variables at their historical 10-year averages: - Public debt-to-GDP ratio would drop to zero by 2012 under this scenario. - This reflects strong economic growth and the prudent fiscal stance in the recent past. - No policy change scenario (constant primary deficit at 9.5 percent of GDP for the projection period): - Public debt rises to 48.2 percent of GDP by the end of the forecast period, underscoring the need to reduce expenditures to sustainable levels. ### Identified debt-creating flows and financing needs (selected table entries) - Change in public sector debt (percent of GDP): 2008: 0.4; 2009: 15.2; 2010: 3.5; 2011: -2.7; 2012: -3.4; 2013: -2.3; 2014: -0.9 - Identified debt-creating flows (4+7+12, percent of GDP): 2008: 2.4; 2009: 10.7; 2010: 8.4; 2011: 3.0; 2012: -1.4; 2013: -1.8; 2014: -0.7 - Primary deficit (percent of GDP): see “Key baseline assumptions” above. - Automatic debt dynamics (percent of GDP): 2008: 0.0; 2009: 1.2; 2010: -1.1; 2011: -1.6; 2012: -2.3; 2013: -1.3; 2014: 0.0 - Residual, including asset changes (percent of GDP): 2008: -2.0; 2009: 4.5; 2010: -4.9; 2011: -5.7; 2012: -2.0; 2013: -0.5; 2014: -0.2 - Gross financing need (percent of GDP): 2008: 2.9; 2009: 10.5; 2010: 11.8; 2011: 7.2; 2012: 3.3; 2013: 1.6; 2014: 1.3 - Gross financing need (in billions of U.S. dollars): 2008: 0.4; 2009: 1.1; 2010: 1.3; 2011: 0.8; 2012: 0.4; 2013: 0.2; 2014: 0.2 ### Bound tests and sensitivity analysis - Bounds tests show debt-to-GDP ratio increases between 3 to 12 percentage points of GDP depending on the shock. - Specific sensitivity results: - A one standard deviation worsening in the real interest rate could increase the debt-to-GDP ratio by up to 3.4 percentage points relative to baseline. - A one standard deviation worsening in the 10-year historical average primary balance results in an 11.7 percentage points increase in the debt-to-GDP ratio. - Scenario table excerpts (public sector debt in percent of GDP under shocks): - B1. Real interest rate at historical average plus one standard deviation: 2008: 25.1; 2009: 23.2; 2010: 20.4; 2011: 18.6; 2012: 18.4 - B2. Real GDP growth at historical average minus one standard deviation: 2008: 25.1; 2009: 23.4; 2010: 21.3; 2011: 20.5; 2012: 21.9 - B3. Primary balance at historical average minus one standard deviation: 2008: 26.8; 2009: 26.5; 2010: 25.1; 2011: 24.9; 2012: 26.7 - Combined shocks and one-time shocks (30 percent real depreciation; 10 percent of GDP increase in other debt-creating flows) show larger increases in debt ratios in respective years. ### External debt sustainability - Gross external debt at end-2008: $1.2 billion (11.2 percent of GDP). - Short-term debt accounted for one-fifth of total external debt at end-2008. - Public external debt at end-2008: 2.7 percent of GDP. - Baseline projections for gross external debt (percent of GDP): - Projected increase to 48.1 percent of GDP by 2012. - Projected decline to 40.8 percent of GDP by 2014. - Drivers of external debt increase: - New AfDB loan of US$1.5 billion. - External borrowing related to Morupule (US$750 million) and Mmamabula (US$2.4 billion) power plant projects. - Projected 10.3 percent contraction in real GDP in 2009 due to lower diamond production. - Current account expectations: - Current account surplus excluding interest payments expected to turn into a deficit during 2009-11 due to a drop in external demand for diamonds in 2009 and a rise in imports related to power plant projects. - Current account surpluses expected during 2013-14, reflecting recovery in the diamond sector and electricity exports to South Africa. - External debt-to-export ratio projections: - Peak of 121.1 percent in 2011. - Decline to 86.5 percent by 2014. *Source: IMF country desk data and staff estimates as presented in the Public Sector Debt Sustainability Framework and External Debt Sustainability Analysis for Botswana (2004–2014).* ### 3. The bounds tests suggest that Botswana’s external debt position would remain ### 3. The bounds tests suggest that Botswana’s external debt position would remain ### Bounds-test conclusions - External debt-to-GDP ratio is robust to growth and interest rate shocks. - External debt-to-GDP ratio is more sensitive to: - a current account shock, - an exchange rate shock (a 30 percent depreciation), - a combination of growth, interest rate, and current account shocks. ### Key external debt indicators (2008) - Gross external debt (in millions of U.S. dollars): 1,248 - Gross external debt (in percent of GDP): 11.2 - Public debt (in millions of U.S. dollars): 295 - Public debt (in percent of GDP): 2.7 - Short-term debt (in millions of U.S. dollars): 250 - Short-term debt (in percent of GDP): 2.3 - Gross official reserves (in millions of U.S. dollars): 9,125 - Ratio to short-term debt: 36.5 - Ratio to reserve money: 3.3 - Memorandum items: - GDP at current market prices (in million U.S. dollars): 11,101 - Reserve money (in million U.S. dollars): 2,745 - Sources: Bank of Botswana and Fund staff estimates. ### Projections and dynamics (selected figures, 2004–2014 baseline series) - Debt-stabilizing non-interest current account (long-run constant balance): 0.7 - Baseline: External debt (in percent of GDP) by year: - 2004: 11.9 - 2005: 13.7 - 2006: 12.5 - 2007: 10.2 - 2008: 9.3 - 2009: 22.6 - 2010: 36.5 - 2011: 47.7 - 2012: 48.1 - 2013: 43.0 - 2014: 40.8 - Change in external debt (selected years): - 2004: -3.8 - 2005: 1.8 - 2006: -1.2 - 2007: -2.3 - 2008: -1.0 - 2009: 13.4 - 2010: 13.9 - 2011: 11.2 - 2012: 0.3 - 2013: -5.1 - 2014: -2.1 - Identified external debt-creating flows (4+8+9) (selected years): - 2004: -10.8 - 2005: -18.0 - 2006: -22.6 - 2007: -19.0 - 2008: -7.6 - 2009: 7.4 - 2010: 12.1 - 2011: 4.6 - 2012: -2.5 - 2013: -8.6 - 2014: -6.0 - Current account deficit, excluding interest payments (selected years): - 2004: -4.7 - 2005: -15.9 - 2006: -18.1 - 2007: -15.2 - 2008: -7.8 - 2009: 7.1 - 2010: 15.0 - 2011: 8.8 - 2012: 3.3 - 2013: -6.6 - 2014: -6.8 - Residual, including change in gross foreign assets (2-3) (selected years): - 2004: 7.0 - 2005: 19.8 - 2006: 21.3 - 2007: 16.8 - 2008: 6.6 - 2009: 5.9 - 2010: 1.8 - 2011: 6.6 - 2012: 2.8 - 2013: 3.5 - 2014: 3.8 - External debt-to-exports ratio (in percent) (selected years): - 2004: 27.0 - 2005: 26.7 - 2006: 26.6 - 2007: 21.5 - 2008: 21.3 - 2009: 64.0 - 2010: 102.4 - 2011: 121.1 - 2012: 116.1 - 2013: 92.6 - 2014: 86.5 - Gross external financing need (in billions of US dollars) (selected years): - 2004: 0.7 - 2005: -0.5 - 2006: -0.4 - 2007: -0.1 - 2008: -0.4 - 2009: 1.5 - 2010: 2.5 - 2011: 2.2 - 2012: 2.0 - 2013: 0.8 - 2014: 0.9 - Gross external financing need (in percent of GDP) (selected years): - 2004: 6.9 - 2005: -4.7 - 2006: -3.7 - 2007: -0.8 - 2008: -3.3 - 2009: 13.8 - 2010: 22.9 - 2011: 19.1 - 2012: 15.0 - 2013: 5.6 - 2014: 5.9 ### Key macroeconomic assumptions underlying the baseline (selected series) - Real GDP growth (in percent): - 2004: 6.0 - 2005: 1.6 - 2006: 5.1 - 2007: 4.4 - 2008: 2.9 - 2009: -10.3 - 2010: 4.1 - 2011: 8.6 - 2012: 13.8 - 2013: 8.9 - 2014: 2.0 - GDP deflator in US dollars (change in percent) (selected years): - 2004: 17.0 - 2005: 1.3 - 2006: 3.7 - 2007: 4.6 - 2008: 6.0 - 2009: -12.0 - 2010: 0.2 - 2011: -2.5 - 2012: -0.2 - 2013: 0.7 - 2014: 0.1 - Nominal external interest rate (in percent) (selected years): - 2004: 10.0 - 2005: 6.5 - 2006: 7.0 - 2007: 7.7 - 2008: 8.8 - 2009: 9.3 - 2010: 7.2 - 2011: 7.4 - 2012: 7.7 - 2013: 7.9 - 2014: 7.9 - Growth of exports (US dollar terms, in percent) (selected years): - 2004: 20.9 - 2005: 19.7 - 2006: -0.3 - 2007: 10.6 - 2008: -0.4 - 2009: -35.8 - 2010: 5.3 - 2011: 16.9 - 2012: 19.3 - 2013: 22.9 - 2014: 3.8 - Growth of imports (US dollar terms, in percent) (selected years): - 2004: 31.5 - 2005: -2.3 - 2006: -3.3 - 2007: 29.2 - 2008: 26.2 - 2009: -6.6 - 2010: 23.6 - 2011: 1.7 - 2012: 4.9 - 2013: -3.3 - 2014: 3.2 - Current account balance, excluding interest payments (in percent of GDP) (selected years): - 2004: 4.7 - 2005: 15.9 - 2006: 18.1 - 2007: 15.2 - 2008: 7.8 - 2009: -7.1 - 2010: -15.0 - 2011: -8.8 - 2012: -3.3 - 2013: 6.6 - 2014: 6.8 - Net non-debt creating capital inflows (in percent of GDP) (selected years): - 2004: 4.3 - 2005: 2.4 - 2006: 4.2 - 2007: 3.7 - 2008: -0.3 - 2009: 2.0 - 2010: 3.6 - 2011: 3.8 - 2012: 3.2 - 2013: 1.5 - 2014: 1.6 ### Bound tests: scenario results (external debt in percent of GDP) - B1. Nominal interest rate at historical average plus one standard deviation: - 2004–2008 sample: 22.6, 36.7, 48.1, 48.7, 43.9, 42.1, 1.1 (series as presented) - B2. Real GDP growth at historical average minus one standard deviation: - 22.6, 36.8, 48.5, 49.3, 44.9, 43.6, 1.4 - B3. Non-interest current account at historical average minus one standard deviation: - 22.6, 38.9, 52.4, 54.9, 52.0, 52.7, 1.4 - B4. Combination of B1–B3 using 1/2 standard deviation shocks: - 22.6, 37.9, 50.7, 52.4, 48.9, 48.9, 1.6 - B5. One-time 30 percent real depreciation in 2006: - 22.6, 46.4, 58.6, 58.2, 54.0, 53.5, 0.7 ### Figure notes and interpretation - Figure 1 shows external debt in percent of GDP under baseline and various shocks (interest rate, growth, current account, combined, and a one-time 30 percent real depreciation). - Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. - One-time real depreciation of 30 percent occurs in 2009 (figure notes). ### IMF Executive Board assessment: substantive findings and policy recommendations - Findings: - Sound macroeconomic management, strong institutions, and good governance underpinned rapid growth and large fiscal and external surpluses. - Real GDP growth averaged nearly 10 percent per year from 1960 through 2008; real per capita income rose from US$250 in 1960 to US$4,800 in 2008 (in constant 2000 US$). - International reserves amounted to 21 months of imports of goods and services by end-2008. - After robust growth, real GDP growth slowed to 2.9 percent in 2008 due to a decline in mining output. - Current account surplus fell to 7 percent of GDP in 2008 from an average surplus of 15.6 percent of GDP during 2005–2007. - Nonmining primary deficit (NMPD) increased to 28.6 percent of non-mining GDP in 2008/09 from 16.8 percent in 2007/08. - Inflation: 12-month inflation fell to 8.4 percent in May 2009 from 15 percent in mid-2008. - The Bank of Botswana reduced its main interest rate by 400 basis points since December 2008. - Financial sector has weathered the downturn so far, though non-performing loans edged up in late 2008 and early 2009. - Notable progress on supervision of the nonbanking financial sector, including establishment of NBFIRA; remaining FSAP recommendations to address. - Policy recommendations and advice from Directors: - Scale back the public sector wage bill to create fiscal space for recurrent costs associated with completed infrastructure projects and for social spending. - Consider a fiscal rule based on the nonmining primary deficit as a share of nonmining GDP rather than the present rule limiting overall expenditure relative to GDP. - Develop a Medium-Term Expenditure Framework to improve public expenditure management and increase spending efficiency. - Continue to weigh carefully the balance of inflation risk in monetary policy decisions; the easing of monetary policy in 2009 was welcomed. - Fiscal consolidation and structural reform are needed to ensure medium-term external stability and competitiveness, given limited scope for real exchange rate adjustment. - Consider greater exchange rate flexibility over the medium term if the inflation objective becomes the primary monetary policy anchor. - Remain vigilant regarding banking-sector risks as the contraction in 2009 could increase stress on bank balance sheets. - Enhance NBFIRA capacity, including through technical assistance, and address remaining FSAP recommendations. - Accelerate economic diversification, ensure infrastructure, education, and health spending achieve commensurate outcomes, and accelerate structural reforms to reduce the cost of doing business and enhance productivity. ### Selected economic indicators (annual and levels; selected entries) - Real GDP growth (annual percent, selected years): - 2005: 1.6 - 2006: 5.1 - 2007: 4.4 - 2008: 2.9 - 2009 (Proj.): -10.3 - Consumer prices (average): - 2005: 8.6 - 2006: 11.6 - 2007: 7.1 - 2008: 12.6 - 2009 (Proj.): 8.7 - Nominal GDP (billions of pula) (calendar year): - 2005: 52.4 - 2006: 65.7 - 2007: 75.7 - 2008: 91.2 - 2009 (Proj.): 80.1 - Diamond production (millions of carats) (selected years): - 2006: 31.8 - 2007: 34.3 - 2008: 33.6 - 2009 (Proj.): 32.6 - 2010 (Proj.): 20.0 - Central government finance (percent of GDP, selected items and years): - Total revenue and grants (2005): 39.9; (2006): 40.2; (2007): 36.0; (2008): 34.2; (2009 Proj.): 32.2 - Total expenditure and net lending (2005): 31.6; (2006): 28.9; (2007): 31.2; (2008): 39.5; (2009 Proj.): 43.2 - Overall balance (deficit –) (selected years): 8.3; 11.2; 4.8; -5.2; -11.1 - Non-mineral primary balance (percent of non-mineral GDP) (selected years): -20.5; -14.8; -16.8; -28.6; -28.3 - External sector (selected items): - Current account balance (percent of GDP) (selected years): 15.2; 17.2; 14.3; 7.0; -8.2 - External public debt (percent of GDP) (selected years): 4.2; 3.3; 2.5; 2.3; 11.7 - Gross official reserves (end of period, in millions of US dollars) (selected years): - 2005: 6,278 - 2006: 7,954 - 2007: 9,743 - 2008: 9,125 - 2009 (Proj.): 9,220 - Gross official reserves in months of imports of goods and services: - 2005: 21.7 - 2006: 21.3 - 2007: 20.7 - 2008: 20.8 - 2009 (Proj.): 17.0 *Sources: Bank of Botswana and Fund staff estimates; IMF staff estimates and projections.* ### Introduction ### _cr10172 - Introduction ### Recent economic developments and outlook - Botswana has been "hard hit by the effects of the global recession," primarily transmitted through the diamond sector, which "continues to be the mainstay of the economy." - Growth indicators: - Growth slowed from "an average of 4 percent over the last five years to about 3 percent in 2008." - "Value added in diamond mining falling significantly in the last quarter." - "Total production for the year is projected at only half of that realized in 2008" for 2009, after activities were suspended during the first four months of 2009 because of weak demand. - "A sharp economic contraction, coupled with the widening of the fiscal and external deficits, is expected in 2009." - Sources of short-term demand support: - "Construction activities emanating from a number of ongoing government infrastructure projects" are expected to dampen the slowdown. - Inflation: - Inflation has "for the most part, remained above the Central Bank target range of 3-6 percent." - In 2008 inflation was driven largely by "high fuel and food prices." - Since then, "inflation has been on a downward trend and is expected to continue to move towards the upper end of the target." - Fiscal and external outlook: - "Fiscal performance has deteriorated, with the overall balance shifting into deficit in FY2008/09" due to lower revenues and high public spending. - The overall fiscal deficit is "expected to widen in FY 2009/10" as government revenue is adversely affected and "SACU revenue possibly declines." - "The overall budget deficit of some 11 percent of GDP is expected to be financed largely by an AfDB budget support loan." - Balance of payments: "expected to deteriorate in 2009 and 2010, with the current account balance shifting to deficit" because of lower diamond exports and increased imports for power projects. - Medium-term external outlook: "The situation is expected to improve in the medium term as the demand for diamonds recovers and capital imports level off." - International reserves: "expected to remain comfortable, at 16 months of import cover or higher during the short to medium term." ### Macroeconomic policies Fiscal policy - Authorities' stance and actions: - "Committed to sound fiscal policies" that previously led to surpluses and reserve accumulation. - Aware of "the need to contain spending in order to ensure fiscal sustainability" but view "increased spending at this time" as beneficial to mitigate the diamond-sector contraction. - Infrastructure spending is considered "temporary and is expected to fall as the ongoing projects are completed." - Authorities "have scaled down current expenditures from the original 2009/10 budget." - Examining "options for more cost effective public service delivery" to contain recurrent spending. - Open to "revising their fiscal rule to incorporate a link to non-mining GDP," to be considered as part of "National Development Plan 10 (NDP 10)." - On revenue, plan to "concentrate on improving tax administration in order to strengthen nonmining tax revenues over the medium term." Monetary policy and financial sector issues - Monetary policy goals and stance: - Continue to "aim at containing inflation within the medium-term target range of 3-6 percent." - The Bank of Botswana is mindful of "the need to support domestic demand in response to the global recession." - "The easing of inflation, although still above the target range, has allowed some loosening of monetary policy." - Authorities "have continued to strengthen their inflation forecasting model, but do not plan to move to a full fledged inflation targeting framework immediately." - Financial sector health and supervision: - "The effect of the global financial crisis on the financial sector has thus far been minimal." - "Commercial banks continue to be well capitalized, liquid and profitable." - "Non-performing loans are low but could rise as economic conditions deteriorate." - Authorities are "closely monitoring the situation and have developed supervision guidelines for distressed banks." - Progress on FSAP recommendations: implementing improvements "notably on improving supervision of nonbank financial sector." - "The Nonbank Financial Institutions Regulatory Authority (NBFIRA) has been established and is expected to assume supervisory responsibilities for the nonbank sector by the end of the year." - Authorities "are committed to the implementation of the remaining FSAP recommendations." ### Growth policies - Strategic priorities: - "Diversification of the economy, with the aim of boosting growth and reducing vulnerability to external shocks, is high on the authorities’ development agenda." - Short-term measure: "increased spending on infrastructure to boost domestic demand and dampen the effects of the global economic downturn." - Medium-term plan: - The new development plan "NDP 10" implementation is "expected to begin in April next year." - Main emphases of NDP 10: "economic diversification, job creation and poverty alleviation." - Diversification strategy will concentrate on: - "infrastructure investment and development of the agriculture, transport, tourism, education and health sectors" - "downstream activities in the diamond sector" - "improvement of the energy sector" - Authorities will "enhance the investment climate by addressing the structural aspects of competitiveness." ### Key policy recommendations and commitments (implicit in authorities' positions) - Maintain prudent macroeconomic management to preserve stability and promote sustainable growth. - Use temporary infrastructure spending to support demand while containing recurrent expenditure. - Improve public expenditure efficiency and scale down nonessential current spending (already scaled down from original 2009/10 budget). - Consider revising the fiscal rule to link to non-mining GDP as part of NDP 10. - Strengthen tax administration to raise nonmining tax revenues over the medium term. - Continue to target inflation within 3-6 percent while allowing measured monetary easing to support demand. - Strengthen financial-sector supervision, implement remaining FSAP recommendations, and operationalize NBFIRA to supervise the nonbank sector. *IMF Article IV mission: Botswana authorities' summary and staff discussions as presented in the Introduction.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10172.pdf_