## _cr10280

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### Staff appraisal and summary
- Botswana’s economy is rebounding after a significant setback following the global financial crisis.
- Policy stance:
  - Macroeconomic policies are being redirected from short-term demand management toward medium-term considerations.
  - Substantial fiscal consolidation will be needed as recovery proceeds to put public finances back on a sustainable footing and to safeguard external stability.
  - Anchoring inflation expectations is important because inflation has not yet been brought down sustainably within the authorities’ objective range of 3-6 percent.
- Medium-term projection:
  - Staff projects that real GDP growth will average about 6 percent over the medium term, driven by gradual recovery of diamond production and investment in the power sector.
- Reform priorities:
  - Do more with less: strengthen public financial management through a transition to program-based budgeting and a medium-term expenditure framework.
  - Let the private sector lead: implement cross-cutting structural reforms, safeguard power generation investments, consider privatization of selected parastatals, greater use of public–private partnerships, and rationalization of commercial services.

### I. Context: Emerging from recession
- Recent performance and near-term outlook:
  - Economy contracted by 3.7 percent in the crisis year (2009).
  - Nonmining sector grew by 6.2 percent in 2009.
  - Overall GDP growth projected to reach 8.4 percent in 2010, led by a rebound in diamond production.
  - Nonmineral GDP growth expected to slow to 4.8 percent in 2010.
  - Inflation breached the Bank of Botswana’s objective of 3–6 percent due to VAT, electricity tariffs and administered price increases; inflation is expected to fall within the objective band in mid-to-late 2011.
  - Current account balance set to improve gradually as diamond market recovery boosts export receipts.
- Risks to the outlook:
  - Diamond production recovery tied to consumption in advanced markets; risk of a double-dip recession in advanced economies could cause further collapse, while rising demand from China and India could drive stronger recovery.
  - Developments in South Africa will affect SACU revenue-sharing receipts and prospects for power-sector investment.
  - Domestic risk: resilience of the nonmining private sector to fiscal tightening depends on the government’s ability to enhance spending efficiency.
- Electricity capacity (key facts):
  - Botswana imports about 80 percent of its electricity, mainly from South Africa.
  - The Morupule plant (25 years old) is being expanded; production is expected to begin in 2012.
  - Further investments (e.g., Mmamabula) depend on power purchase agreements with South Africa’s state-owned utility; such agreements are uncertain and not included in the staff baseline.
- Social indicators:
  - National HIV prevalence: 17.6 percent (2008 Botswana AIDS Impact Study).
  - Poverty (2002/03 HIES): 30.3 percent.
  - Unemployment (2005/06 Labor Force Survey): 17.5 percent.
  - A new HIES is being conducted this year.

### II. Fiscal policy: restoring sustainability after the crisis
- Recent fiscal dynamics:
  - Development spending more than doubled in real terms in the past three years.
  - Nonmineral primary deficit rose from 16.7 percent of nonmineral GDP in 2007/08 to 32.9 percent in 2009/10.
- Staff fiscal objective:
  - Reduce the nonmineral primary deficit to about 11–12 percent of nonmineral GDP to preserve mineral wealth and avoid sharp future adjustment.
- Adjustment composition and measures:
  - Bulk of adjustment will need to come from lower public spending.
  - SACU revenues may recover but likely not to pre-crisis boom levels.
  - Options to boost non-SACU tax revenues: increase specific duties on fuel; broaden the VAT base by reducing exemptions and zero-rated items; tax property; improve tax administration (e.g., large-taxpayers unit).
  - 2010/11 budget measures include significant spending restraint, substantial cut in development spending, public service salary freeze, and VAT rate increase from 10 to 12 percent.
  - Budget consistent with improvement in the nonmineral primary deficit to 26.7 percent of nonmineral GDP.
- Risks and public debt:
  - Delivering required spending restraint will be challenging; major slippages risk depleting the Pula Fund and undermining the exchange rate regime.
  - Staff estimate: government could become a net debtor by 2015/16 if development spending returned to 2007/08 level and recurrent spending remained at 2009/10 levels relative to nonmineral GDP.
  - Gross public debt increased to an estimated 14.5 percent of GDP by March 2010 (or 17.7 percent of GDP including publicly guaranteed debt).
  - System for recording debt and debt service obligations is weak; no clear medium-term debt strategy in place.
- Institutional recommendation:
  - Establish a comprehensive framework for asset and liability management with clear institutional arrangements and division of responsibilities between the Ministry of Finance and Development Planning and the Bank of Botswana.

### SACU revenues (box)
- Customs and excise duties pooled and distributed from the Common Revenue Pool (CRP) based on projected revenue collections.
- Before the crisis, actual collections exceeded projections, generating “adjustment payments” to member states.
- Over the last two years, actual revenues have been lower than projected, requiring repayments to the CRP and temporarily reducing Botswana’s net receipts.
- Receipts should recover thereafter, though perhaps not to pre-crisis boom levels.
- SACU member states have agreed to review the revenue-sharing formula.

### Monetary policy, inflation, and exchange rate
- Recent monetary easing:
  - Inflation fell from a peak of 15 percent in late-2008 to an average 6 percent between September 2009 and March 2010.
  - Bank of Botswana reduced policy rates by 550 basis points to 10 percent.
- Recent and near-term inflation:
  - Inflation increased to 7.8 percent in May 2010 because of higher VAT and a 30 percent adjustment in electricity tariffs.
  - Rate may increase a little further in the coming months before falling back within the objective range during 2011—contingent on fiscal consolidation proceeding as anticipated.
- Policy calibration and exchange rate regime:
  - Important to err on the side of caution before further reductions in interest rates.
  - Continue forward-looking approach determining the rate of crawl for the exchange rate so it helps meet the inflation objective.
  - Exchange rate policy implemented through the crawling peg regime; the real value of the pula has been stable over the past 3–4 years.
  - Staff estimates exchange rate broadly in line with its medium-term equilibrium level, conditional on fiscal consolidation.
  - Risks: significant fiscal slippage, or sustained structural weakening in demand for diamonds, would drain the Pula Fund and put pressure on the exchange rate peg.

### Financial sector: stability, regulation, and vulnerabilities
- Banking system:
  - Banking sector impact from the global financial crisis largely indirect; banks not significantly exposed to mining.
  - Banks heavily exposed to households, which account for about 59 percent of bank lending to the private sector (or 23 percent of total bank assets).
  - Household sector under pressure due to diminished employment growth and a freeze in public service salaries; NPLs have risen from low levels.
  - Banks increased provisions and tightened lending standards; profitability declined but remains high by international standards.
  - Bank capital levels remain well above the statutory 8 percent floor and prescribed prudential standard of 15 percent.
- Nonbank financial institutions:
  - Combined assets of pension and insurance companies account for 49.5 percent of GDP (compared with 41 percent of GDP for the banking sector’s assets).
  - NBFIRA established in April 2008 and assumed full responsibility for regulating and supervising non-bank financial institutions in September 2009.
  - Revisions to the Insurance and Pension Fund Acts and accompanying prudential regulations undergoing industry consultation with implementation expected later this year.
  - Gap identified in the regulatory framework for micro lenders that needs to be plugged expeditiously.
- Authorities’ commitments:
  - Adopt Basel II prudential standards; four largest banks (over 90 percent of bank assets) are internationally owned and at an advanced stage of Basel II implementation.
  - Develop regulatory and supervisory framework for micro lending; draft regulations prepared.
  - NBFIRA working with development partners to develop a risk-based supervision framework for non-banks.
  - Bank of Botswana established a Financial Stability Division.

### "Doing More with Less": structural reform agenda
- Structural challenge and public sector:
  - Growth rates declined as impetus from expanding natural resource exports faded.
  - Past large-scale public investment approach has run its course; returns to public spending appear to be diminishing.
  - Despite high spending levels, outcomes (for example, educational attainment) often poorer than in other comparable countries.
  - Large public sector employs over 40 percent of the formal workforce and pays wages almost two-thirds higher than in the private sector.
- Public financial management reforms:
  - Emphasize expenditure prioritization; transition to program-based budgeting; adopt a Medium-Term Expenditure Framework.
  - Phase out or better report extra-budgetary and special funds.
  - Task force established to develop a plan for public financial management reform; steps envisaged include results-based budgeting and move toward accrual accounting.
- Measures to improve business climate and private sector development:
  - Continue investment in electricity generating capacity to address bottleneck.
  - Speed up business registration and licensing; consider speeding up approval of work permits.
  - Sector-specific initiatives should be transparent, independently evaluated, and include discontinuation criteria.
  - Mobilize private sector financing via privatization of selected parastatals (starting with Botswana Telecommunications Corporation), outsourcing some commercial government activities, and using PPPs.
  - PPP framework established in June 2009 and a PPP unit being established within the Ministry of Finance and Development Planning.

### Key statistics and medium-term framework (selected figures preserved exactly)
- Real GDP (calendar year changes): 2007 4.8, 2008 3.1, 2009 -3.7, 2010 8.4, 2011 4.8, 2012 7.2, 2013 7.4, 2014 5.1, 2015 5.3.
- Mineral GDP (calendar year changes): 2007 -2.0, 2008 -3.7, 2009 -20.9, 2010 16.8, 2011 8.4, 2012 6.1, 2013 7.7, 2014 4.3, 2015 4.7.
- Nonmineral GDP (calendar year changes): 2007 9.7, 2008 7.5, 2009 6.2, 2010 4.8, 2011 3.1, 2012 7.8, 2013 7.2, 2014 5.5, 2015 5.5.
- Consumer prices (average): 2007 7.1, 2008 12.6, 2009 8.1, 2010 6.7, 2011 6.3, 2012 5.6, 2013 5.4, 2014 5.3, 2015 5.2.
- Diamond production (millions of carats): 2007 33.6, 2008 32.3, 2009 17.7, 2010 23.2, 2011 25.4, 2012 27.0, 2013 29.0, 2014 30.1, 2015 31.5.
- Nonmineral primary balance (percent of nonmineral GDP): 2007/08 -16.7, 2008/09 -28.5, 2009/10 -32.9, 2010/11 -26.7, 2011/12 -24.2, 2012/13 -23.6, 2013/14 -16.7, 2014/15 -14.3, 2015/16 -12.8, later -11.6.
- Overall balance (percent of GDP): 2007/08 4.8, 2008/09 -5.2, 2009/10 -14.3, 2010/11 -6.4, 2011/12 -4.6, 2012/13 0.3, 2013/14 2.2, 2014/15 3.3, 2015/16 4.7.
- Current account balance (calendar year): 2007 14.5, 2008 3.5, 2009 -2.1, 2010 -0.3, 2011 0.7, 2012 2.5, 2013 3.6, 2014 4.3, 2015 5.1.
- Pula fund (percent of GDP): 2007/08 57.5, 2008/09 58.0, 2009/10 53.9, 2010/11 34.3, 2011/12 46.2, 2012/13 38.7, 2013/14 34.7, 2014/15 33.1, 2015/16 32.9, later 34.2.
- Public debt (percent of GDP): 2007/08 4.6, 2008/09 6.4, 2009/10 14.5, 2010/11 11.7, 2011/12 17.2, 2012/13 17.1, 2013/14 15.3, 2014/15 13.7, 2015/16 11.9, later 10.3.

### Data quality, dissemination, and statistical gaps (DeMPA / surveillance)
- General adequacy: Macroeconomic data adequate for surveillance, but shortcomings in accuracy and reliability for national accounts, government finance, and balance of payments statistics.
- Timeliness and coverage issues:
  - Central bank survey lag: about three months.
  - Detailed government expenditure data by economic classification need increased timeliness for prospective SDDS subscription.
  - Dissemination gaps include monthly production of diamonds and quarterly aggregate financial soundness indicators.
- National accounts and surveys:
  - Current base year: 1993/94 — needs rebasing.
  - Household Income and Expenditure Survey (HIES): 2002/03 (out of date).
  - Labor Force Survey: 2005/06 (out of date).
  - More frequent surveys needed to improve private consumption estimates and poverty/unemployment analysis.
- Balance of payments and ITRS:
  - Annual and quarterly BOP data published; preliminary BOP data disseminated within two months; revised (final) data after nine months.
  - ITRS data unreliable for services and transfers; methods for estimating missing data and f.o.b./c.i.f. import adjustments inadequate.
  - Large errors and omissions in 2009 BOP statistics complicated external sustainability assessment.
- External debt data:
  - Public external debt data are of good quality but timeliness could be improved (latest published data: March 2009).
- Participation and reporting:
  - Botswana participating in GDDS since late 2002.
  - No government financial statistics reported for publication in the Government Finance Statistics Yearbook.

### Medium-term public debt sustainability: baseline, scenarios, and stress tests
- Recent dynamics:
  - Gross public debt rose from US$0.7 billion (6.2 percent of GDP) in 2008/09 to about US$2 billion (15 percent of GDP) in 2009/10.
  - About 72 percent of the debt is owed to bilateral and multilateral foreign creditors; remainder is domestic debt.
  - Fiscal deficit in FY 2009/10: 14.2 percent of GDP; financed by drawdown in reserves, AfDB budget support loan of US$1.5 billion (US$1 billion drawn so far), and other borrowing.
- Baseline projections:
  - Gross public debt-to-GDP: increases to 17.6 percent of GDP in 2010/11, then falls to 10.5 percent of GDP by 2015/16.
  - Government net asset position: declines from 39.1 percent of GDP in 2009/10 to 20.8 percent of GDP in 2012/13, then increases to 25.1 percent of GDP by 2015/16.
  - Revenue and grants: increase from 31.6 percent of GDP in 2009/10 and stabilize around 37 percent of GDP in the medium term.
  - Overall balance: improves gradually to a surplus of 4.7 percent of GDP in 2015/16.
  - Financing assumption: about one-third of deficits from 2010/11 through 2012/13 financed by domestic borrowing; remaining two-thirds financed by drawing down Pula Fund savings.
- Alternative scenarios:
  - Historical averages scenario: public debt-to-GDP would drop to 8.7 percent of GDP by 2013/14 if real GDP growth, real interest rates, and primary balance are maintained at historical 10-year averages.
  - No policy change scenario: if the fiscal balance is held constant at its 2010/11 level (no expenditure reduction), public debt would rise to 56.3 percent of GDP by the end of the forecast period.
- Sensitivity tests:
  - Debt-to-GDP ratio would increase by between 1 to 17 percentage points of GDP depending on the shock.
  - Most benign shock: real interest rate shock — 4 percentage points increase in debt-to-GDP relative to baseline.
  - Worsening in the 10-year historical average primary balance by one standard deviation: 17 percentage points increase in debt-to-GDP.

### External debt, 2009 developments and baseline projections
- 2009 external debt and reserves:
  - Gross external debt in 2009: 1,918 (in millions of U.S. dollars) and 15.4 (in percent of GDP).
  - Public and publicly guaranteed debt: 1,763 (in millions of U.S. dollars); 14.1 (in percent of GDP).
  - Short-term debt: 297 (in millions of U.S. dollars); 2.4 (in percent of GDP).
  - Gross official reserves: 8,704 (in millions of U.S. dollars).
  - Ratio of gross official reserves to short-term debt: 29.3.
  - Ratio of gross official reserves to reserve money: 2.9.
  - Memorandum: GDP at current market prices: 12,468 (in million U.S. dollars). Reserve money: 3,051 (in million U.S. dollars).
- Drivers:
  - Increase largely reflects increased external borrowing by the public sector to finance a large fiscal deficit and government-guaranteed borrowing by Botswana Power Corporation to finance expansion of the Morupule power plant.
  - Public and publicly-guaranteed debt rose six-fold between end-2008 and end-2009, to 14.1 percent of GDP.
- Baseline external debt projections (percent of GDP, 2009–2015): 15.4, 15.9, 14.8, 14.0, 12.9, 10.7, 8.6.
- Resilience and risks:
  - Simulations suggest external debt-to-GDP ratio robust to growth, interest rate, and currency shocks but more susceptible to a current account shock or combined shocks.
  - Under a current account shock the ratio could rise significantly but would still remain below 30 percent of GDP.
  - Key risks include higher than envisaged investment in power projects financed externally and delay of planned fiscal consolidation.

### Exchange rate assessment (Appendix 1)
- Macroeconomic balance approach:
  - Current account norm for Botswana in 2015: "5.5 to 4.8 percent of GDP" (depends on model specification).
  - Staff-projected underlying current account balance in 2015 (baseline): "5.1 percent of GDP".
  - Elasticity of the current account relative to the real effective exchange rate: "-0.5".
  - Implication under baseline: By 2015 the exchange rate expected to be in line with equilibrium, deviating by "less than 0.5 percent".
  - Alternative scenario (fiscal position does not recover and the current account remains negative): Model predicts an overvaluation of "9 to 10 percent" by 2015.
- Equilibrium real exchange rate approach:
  - Result as of March 2010: The exchange rate was overvalued by "about 7 percent".
  - Uncertainty: Confidence intervals around this estimate are large.
- External sustainability approach:
  - Resulting “sustainable current account balance” for 2015: "about 7.3 percent of GDP".
  - Comparison: Staff’s projected underlying current account balance for 2015 is "5.1 percent of GDP".
  - Using same elasticities implies the exchange rate is overvalued by "about 4 percent".

### Key 2009 and near-term economic indicators (selected)
- Real GDP growth (2009): -3.7 percent.
- Non-mineral GDP growth (2009): 6.2 percent.
- Minerals (2009): -20.9 percent.
- Consumer prices (average, 2009): 8.1 percent; end of period 2009: 5.8 percent.
- Nominal GDP (billions of pula, 2009): 83.2.
- Diamond production (millions of carats, 2009): 17.7.
- Exports of goods and services (US$ change, 2009): -23.
  - Diamonds (2009): -30.3 (percent).
- Imports of goods and services (US$ change, 2009): -9.7.
- Broad money (M3) change (2009): -1.8 percent.
- Credit to the private sector (percent change, 2009): 10.3.
- Central government finance (percent of GDP, 2009):
  - Total revenue and grants: 31.6.
  - Total expenditure and net lending: 46.0.
  - Overall balance (deficit –): -14.3.
  - Non-mineral primary balance (percent of non-mineral GDP, 2009): -32.9.
- External sector (percent of GDP, 2009):
  - Current account balance: -2.1.
  - Balance of payments: -12.9.
  - Total external debt: 15.4 (percent of GDP).
- Gross official reserves (end of period, 2009): 8,678 (in millions of U.S. dollars).
  - In months of imports of goods and services (2009): 18.8.
  - In percent of GDP (2009): 74.3.
- Change in reserves (increase –) 2009: 1,503 (in millions of U.S. dollars).

### Institutional and technical recommendations (summary)
- Strengthen public financial management: transition to program-based budgeting and implement a Medium-Term Expenditure Framework.
- Establish a comprehensive asset and liability management framework with clear institutional roles between the Ministry of Finance and Development Planning and the Bank of Botswana.
- Improve tax administration (e.g., large-taxpayers unit) and consider targeted tax-base broadening measures (VAT exemptions, fuel duties, property tax).
- Save any revenue overperformance in the near term to reduce deficits and rebuild buffers.
- Address statistical gaps: rebase national accounts, update HIES and labor force data, improve BOP and ITRS methods, and improve timeliness of government finance and external debt reporting.

*Source: Botswana—Selected Economic and Financial Indicators and accompanying IMF staff report excerpts (_cr10280).*

### 1. Selected Economic and Financial Indicators, 2007–2015 .........................................  15

### _cr10280 - 1. Selected Economic and Financial Indicators, 2007–2015 .........................................  15

### Staff appraisal and summary
- Botswana’s economy is rebounding after a significant setback following the global financial crisis.
- Policy stance:
  - Macroeconomic policies are being redirected from short-term demand management toward medium-term considerations.
  - Substantial fiscal consolidation will be needed as recovery proceeds to put public finances back on a sustainable footing and to safeguard external stability.
  - Anchoring inflation expectations is important because inflation has not yet been brought down sustainably within the authorities’ objective range of 3-6 percent.
- Medium-term projection:
  - Staff projects that real GDP growth will average about 6 percent over the medium term, driven by gradual recovery of diamond production and investment in the power sector.
- Reform priorities:
  - Do more with less: strengthen public financial management through a transition to program-based budgeting and a medium-term expenditure framework.
  - Let the private sector lead: implement cross-cutting structural reforms, safeguard power generation investments, consider privatization of selected parastatals, greater use of public–private partnerships, and rationalization of commercial services.

### I. Context: Emerging from recession
- Recent performance:
  - The economy contracted by 3.7 percent in the crisis year.
  - Nonmining sector grew by 6.2 percent in 2009.
- Near-term outlook and projections:
  - Overall GDP growth is projected to reach 8.4 percent in 2010, led by a rebound in diamond production.
  - Nonmineral GDP growth is expected to slow to 4.8 percent in 2010.
  - Inflation breached the Bank of Botswana’s objective of 3–6 percent due to VAT, electricity tariffs and administered price increases; inflation is expected to fall within the objective band in mid-to-late 2011.
  - Current account balance is set to improve gradually as diamond market recovery boosts export receipts.
- Risks to the outlook:
  - Diamond production recovery tied to consumption in advanced markets; risk of a double-dip recession in advanced economies could cause further collapse, while rising demand from China and India could drive stronger recovery.
  - Developments in South Africa will affect SACU revenue-sharing receipts and prospects for power-sector investment.
  - Domestic risk: resilience of the nonmining private sector to fiscal tightening depends on the government’s ability to enhance spending efficiency.

- Key factual box (Electricity capacity):
  - Botswana imports about 80 percent of its electricity, mainly from South Africa.
  - The Morupule plant (25 years old) is being expanded; production is expected to begin in 2012.
  - Further investments (e.g., Mmamabula) depend on power purchase agreements with South Africa’s state-owned utility; such agreements are uncertain and not included in the staff baseline.

- Social indicators:
  - National HIV prevalence: 17.6 percent (2008 Botswana AIDS Impact Study).
  - Poverty (2002/03 HIES): 30.3 percent.
  - Unemployment (2005/06 Labor Force Survey): 17.5 percent.
  - A new HIES is being conducted this year.

### II. Policies: Rebuilding buffers and promoting private sector-led growth
- Policy reorientation:
  - Focus on: (i) restoring sustainable public finances; (ii) locking in low inflation; (iii) improving public financial management to “do more with less”; and (iv) reinvigorating structural reforms for private sector-led growth.

A. Fiscal policy: restoring sustainability after the crisis
- Countercyclical response and recent fiscal dynamics:
  - Development spending more than doubled in real terms in the past three years.
  - Nonmineral primary deficit rose from 16.7 percent of nonmineral GDP in 2007/08 to 32.9 percent in 2009/10.
- Staff fiscal objective:
  - Reduce the nonmineral primary deficit to about 11–12 percent of nonmineral GDP to preserve mineral wealth for future generations and avoid sharp future adjustment.
- Adjustment composition:
  - Bulk of adjustment will need to come from lower public spending.
  - SACU revenues may recover but likely not to pre-crisis boom levels.
  - Options to boost non-SACU tax revenues: increase specific duties on fuel; broaden the VAT base by reducing exemptions and zero-rated items; tax property; improve tax administration (e.g., large-taxpayers unit).
  - Scope to offset decline in mineral and SACU revenues is limited by the modest size of the nonmining private sector.
- 2010/11 budget:
  - Measures include significant spending restraint, substantial cut in development spending, public service salary freeze, and VAT rate increase from 10 to 12 percent.
  - Budget is consistent with an improvement in the nonmineral primary deficit to 26.7 percent of nonmineral GDP.
  - Staff notes potential revenue overperformance should be saved as lower deficit.
- Authorities’ targets and risks:
  - Authorities plan to balance the budget by 2012/13 and register modest surpluses thereafter.
  - Delivering required spending restraint will be challenging and requires further public financial management improvements.
  - Major slippages risk depleting the Pula Fund and undermining the exchange rate regime.
  - Staff estimate: government could become a net debtor by 2015/16 if development spending returned to 2007/08 level and recurrent spending remained at 2009/10 levels relative to nonmineral GDP.

- Public debt and asset management:
  - Gross public debt increased to an estimated 14.5 percent of GDP by March 2010 (or 17.7 percent of GDP including publicly guaranteed debt).
  - System for recording debt and debt service obligations is weak; no clear medium-term debt strategy in place.
  - Staff recommends a comprehensive framework for asset and liability management with clear institutional arrangements and division of responsibilities between the Ministry of Finance and Development Planning and the Bank of Botswana.

Box (SACU revenues)
- SACU arrangements:
  - Customs and excise duties are pooled and distributed from the Common Revenue Pool (CRP) based on projected revenue collections.
  - Before the crisis, actual collections exceeded projections, generating “adjustment payments” to member states.
  - Over the last two years, actual revenues have been lower than projected, requiring repayments to the CRP and temporarily reducing Botswana’s net receipts.
  - Receipts should recover thereafter, though perhaps not to pre-crisis boom levels.
  - SACU member states have agreed to review the revenue-sharing formula.

### Key statistics and medium-term framework (selected figures preserved as in source)
- Real GDP (calendar year changes): 2007 4.8, 2008 3.1, 2009 -3.7, 2010 8.4, 2011 4.8, 2012 7.2, 2013 7.4, 2014 5.1, 2015 5.3.
- Mineral GDP (calendar year changes): 2007 -2.0, 2008 -3.7, 2009 -20.9, 2010 16.8, 2011 8.4, 2012 6.1, 2013 7.7, 2014 4.3, 2015 4.7.
- Nonmineral GDP (calendar year changes): 2007 9.7, 2008 7.5, 2009 6.2, 2010 4.8, 2011 3.1, 2012 7.8, 2013 7.2, 2014 5.5, 2015 5.5.
- Consumer prices (average): 2007 7.1, 2008 12.6, 2009 8.1, 2010 6.7, 2011 6.3, 2012 5.6, 2013 5.4, 2014 5.3, 2015 5.2.
- Consumer prices (end of period): 2007 8.1, 2008 13.7, 2009 5.8, 2010 6.6, 2011 5.9, 2012 5.5, 2013 5.4, 2014 5.2, 2015 5.2.
- Diamond production (millions of carats): 2007 33.6, 2008 32.3, 2009 17.7, 2010 23.2, 2011 25.4, 2012 27.0, 2013 29.0, 2014 30.1, 2015 31.5.
- Nonmineral primary balance (percent of nonmineral GDP): 2007/08 -16.7, 2008/09 -28.5, 2009/10 -32.9, 2010/11 -26.7, 2011/12 -24.2, 2012/13 -23.6, 2013/14 -16.7, 2014/15 -14.3, 2015/16 -12.8, later -11.6.
- Overall balance (percent of GDP): 2007/08 4.8, 2008/09 -5.2, 2009/10 -14.3, 2010/11 -6.4, 2011/12 -4.6, 2012/13 0.3, 2013/14 2.2, 2014/15 3.3, 2015/16 4.7.
- Current account balance (calendar year): 2007 14.5, 2008 3.5, 2009 -2.1, 2010 -0.3, 2011 0.7, 2012 2.5, 2013 3.6, 2014 4.3, 2015 5.1.
- Central government summary (selected 2010/11 projections, percent of GDP or nonmineral GDP where indicated):
  - Revenue (total) 58.9, 2008/09 53.3, 2009/10 41.4, 2010/11 38.0, 2011/12 46.6, 2012/13 44.9, 2013/14 48.0, 2014/15 47.5, 2015/16 47.2, later 47.6.
  - Mineral 23.1, 2008/09 18.2, 2009/10 12.6, 2010/11 9.2, 2011/12 15.3, 2012/13 17.0, 2013/14 16.9, 2014/15 16.9, 2015/16 16.7, later 17.2.
  - SACU 16.5, 2008/09 13.8, 2009/10 12.5, 2010/11 7.2, 2011/12 8.6, 2012/13 5.7, 2013/14 9.0, 2014/15 8.5, 2015/16 8.4, later 8.3.
  - Other revenue 19.3, 2008/09 21.3, 2009/10 16.4, 2010/11 21.5, 2011/12 22.7, 2012/13 22.1, 2013/14 22.1, 2014/15 22.1, 2015/16 22.1.
  - Expenditure 52.2, 2008/09 62.8, 2009/10 62.0, 2010/11 55.6, 2011/12 55.6, 2012/13 51.4, 2013/14 48.0, 2014/15 45.1, 2015/16 43.4, later 42.0.
  - Current expenditure 39.0, 2008/09 42.7, 2009/10 40.3, 2010/11 38.5, 2011/12 38.5, 2012/13 37.5, 2013/14 35.1, 2014/15 33.0, 2015/16 31.4, later 30.1.
  - Wages and salaries 14.4, 2008/09 15.5, 2009/10 15.0, 2010/11 16.9, 2011/12 16.9, 2012/13 16.2, 2013/14 15.0, 2014/15 13.9, 2015/16 13.2, later 12.6.
  - Capital 13.8, 2008/09 20.5, 2009/10 20.4, 2010/11 17.3, 2011/12 17.3, 2012/13 14.1, 2013/14 13.0, 2014/15 12.2, 2015/16 12.1, later 12.1.
  - Public debt (percent of GDP): 2007/08 4.6, 2008/09 6.4, 2009/10 14.5, 2010/11 11.7, 2011/12 17.2, 2012/13 17.1, 2013/14 15.3, 2014/15 13.7, 2015/16 11.9, later 10.3.
  - External public debt: 2.4, 2008/09 2.3, 2009/10 10.5, 2010/11 10.9, 2011/12 10.9, 2012/13 10.0, 2013/14 9.1, 2014/15 8.1, 2015/16 6.8, later 5.7.
  - Domestic public debt: 2.2, 2008/09 4.0, 2009/10 4.1, 2010/11 0.8, 2011/12 6.3, 2012/13 7.1, 2013/14 6.3, 2014/15 5.6, 2015/16 5.1, later 4.7.
  - Pula fund (percent of GDP): 57.5, 2008/09 58.0, 2009/10 53.9, 2010/11 34.3, 2011/12 46.2, 2012/13 38.7, 2013/14 34.7, 2014/15 33.1, 2015/16 32.9, later 34.2.
- Memorandum items:
  - Real primary spending (percent change): 17.1, 25.2, 3.3, -6.9, -6.9, -4.1, 0.6, 0.8, 1.9, 1.8.
  - Public debt path: staff baseline shows declining public debt to GDP; maintaining current fiscal deficit leads to unsustainable debt path (Informational Annex referenced).

### Institutional and technical recommendations
- Strengthen public financial management: transition to program-based budgeting and implement a medium-term expenditure framework.
- Establish a comprehensive asset and liability management framework with clear institutional roles between Ministry of Finance and Development Planning and the Bank of Botswana.
- Improve tax administration (e.g., large-taxpayers unit) and consider targeted tax-base broadening measures (VAT exemptions, fuel duties, property tax).
- Save any revenue overperformance in the near term to reduce deficits and rebuild buffers.

*Source: Botswana—Selected Economic and Financial Indicators and accompanying staff report (excerpts).*

### 14.      The authorities emphasized their commitment to restoring sustainability in public finances

### _cr10280 - 14.      The authorities emphasized their commitment to restoring sustainability in public finances

### Public finances: Fiscal consolidation strategy
- Large fiscal deficits were an exceptional response to an unprecedented loss of national income and government revenue and helped mitigate the downturn.
- Authorities concurred that spending levels were "unsustainably high" and indicated "substantial reductions in expenditure over the next three years" would form the basis for achieving a balanced budget by 2012/13.
- Spending reorientation:
  - Shift toward maintaining existing infrastructure.
  - Capital spending would decrease from recent exceptionally high levels.
  - Recurrent spending would be held in check, in part by allowing no net new hiring into the public service.

### Tax policy and administration
- Authorities seeking to improve tax collection in a number of areas.
- Measures and reforms:
  - The VAT threshold has been increased, which will simplify administration.
  - A budget proposal to abolish the current two tier corporate tax system would be an additional simplification.
  - A three-year program, with support of the Swedish tax authorities, to modernize and increase efficiency of tax administration.
- Tax base and incentives:
  - Some scope for broadening the tax base, for example by reducing the numbers of goods and services that are zero rated or exempt from VAT.
  - Concern that tax incentives "do little to encourage additional new investment and activity but risk significantly eroding fiscal space."
  - Authorities noted pressure from business for more exemptions and incentives.

### Fiscal rules, debt strategy, and debt management
- Review of fiscal rules to help ensure fiscal discipline.
  - A spending ceiling of 40 percent of GDP introduced in 2006 is acknowledged as "too high to keep spending at sustainable levels."
  - Authorities view the nonmineral primary deficit as a useful measure; however, they would continue to focus on the overall balance.
  - The authorities’ targeted overall balance is broadly consistent with staff’s estimate of the sustainable nonmineral primary balance over the medium term.
- Debt strategy and institutions:
  - Having completed a two-year domestic debt issuance program, authorities plan to announce a medium-term debt strategy within the next few months.
  - Work with the World Bank on the strategy and support from the Commonwealth Secretariat on debt recording.
  - Institutional issues:
    - Debt management unit exists within the Ministry of Finance and Development Planning, but capacity is weak.
    - Authorities see merits in a comprehensive framework for asset and liability management to build on existing reform efforts.

### Monetary and exchange rate policies: Locking in low inflation
- Recent monetary easing as inflation decelerated toward the Bank of Botswana’s 3–6 percent objective range.
  - Inflation fell from a peak of 15 percent in late-2008 to an average 6 percent between September 2009 and March 2010.
  - Bank of Botswana reduced policy rates by 550 basis points to 10 percent, broadly in line with policy easing in South Africa.
- Recent and near-term inflation dynamics:
  - Inflation increased to 7.8 percent in May 2010 because of higher VAT and a 30 percent adjustment in electricity tariffs.
  - The rate may increase a little further in the coming months in response to additional administered price increases, before falling back within the objective range during 2011—contingent on fiscal consolidation proceeding as anticipated.
- Inflation expectations and policy calibration:
  - Business survey measure of inflation expectations declined but remains high at around 10 percent.
  - Limited demand for long-dated government bonds at prices close to benchmark South African bond rates partly explained by lingering inflation concerns.
  - Policy guidance:
    - Important to err on the side of caution before further reductions in interest rates.
    - Continue forward-looking approach determining the rate of crawl for the exchange rate so it helps meet the inflation objective rather than accommodating past inflation.
    - Publishing basket weights and rate of crawl could contribute to anchoring market expectations.
- Exchange rate regime and assessment:
  - Exchange rate policy implemented through the crawling peg regime.
  - The annual rate of crawl is determined based on the differential between Botswana’s inflation objective and forecast inflation in trading partner countries, aiming to stabilize the real effective exchange rate.
  - The real value of the pula has been stable over the past 3–4 years, in line with the crawling peg regime.
  - Staff estimates exchange rate is broadly in line with its medium-term equilibrium level (see Appendix 2), conditional on fiscal consolidation and budget balance returning to a moderate surplus over the medium term.
  - Risks: significant fiscal slippage, or a sustained structural weakening in demand for diamonds, would drain resources in the Pula Fund and put pressure on the exchange rate peg.

### Authorities’ views on inflation and exchange rate
- Authorities anticipate inflation will fall back within the objective range on a sustained basis by mid-2011.
  - Benign external price pressures and subdued domestic demand expected to keep underlying inflationary pressures in check.
  - Survey of business expectations based on a small sample but likely above the 3–6 percent objective range.
  - Public service salary freeze could signal and help curb private sector wage settlements.
  - Continued regular communication of the strategy for bringing inflation within the 3–6 percent band would help anchor expectations.
- Inflation framework and exchange rate flexibility:
  - Authorities are refining their inflation forecasting framework but are not yet ready to move to formal inflation targeting as the sole anchor for monetary policy; this would require greater exchange rate flexibility.
- On real exchange rate:
  - Authorities consider current level broadly appropriate but acknowledge a sustained structural shift in the external position could change this.
  - Durable international competitiveness depends on productivity improvements.

### Financial sector: Stability and regulation
- Banking system soundness and household exposure:
  - Banking sector impact from the global financial crisis largely indirect; banks not significantly exposed to mining.
  - Banks heavily exposed to households, which account for about 59 percent of bank lending to the private sector (or 23 percent of total bank assets).
  - Household sector under pressure due to diminished employment growth and a freeze in public service salaries; nonperforming loans have risen from low levels.
  - Banks increased provisions and tightened lending standards; profitability declined but remains high by international standards.
  - Bank capital levels remain well above the statutory 8 percent floor and prescribed prudential standard of 15 percent.
- Nonbank financial institutions and regulation:
  - Combined assets of pension and insurance companies account for 49.5 percent of GDP (compared with 41 percent of GDP for the banking sector’s assets).
  - NBFIRA established in April 2008 and assumed full responsibility for regulating and supervising non-bank financial institutions in September 2009.
  - Revisions to the Insurance and Pension Fund Acts and accompanying prudential regulations are undergoing industry consultation with implementation expected later this year.
  - Gap identified in the regulatory framework for micro lenders that needs to be plugged expeditiously.

### Authorities’ views on financial regulation and supervision
- Authorities agree concentration of bank lending on the retail sector is a concern and will continue close monitoring.
- Banks responded to elevated risks by raising provisions and tightening lending standards.
- Commitment to adopt Basel II prudential standards; four largest banks (over 90 percent of bank assets) are internationally owned and at an advanced stage of Basel II implementation.
- Need to develop regulatory and supervisory framework for the micro lending sector; draft regulations have been prepared.
- NBFIRA working with development partners to develop a risk-based supervision framework for non-banks, in line with international best practice.
- Plans to develop a financial stability framework for monitoring risks and resolving financial crises; Bank of Botswana established a Financial Stability Division.

### Reforming public finances and supporting private sector-led growth: "Doing More with Less"
- Structural challenge:
  - Botswana’s growth rates have declined as impetus from expanding natural resource exports faded.
  - Past approach to promoting diversification through large scale public investment and other spending programs has run its course; returns to public spending appear to be diminishing.
  - Despite high spending levels, outcomes (for example, educational attainment) are often poorer than in other comparable countries.
  - Large public sector employs over 40 percent of the formal workforce and pays wages almost two-thirds higher than in the private sector, exerting upward pressure on costs given a constrained skills base.
- Public financial management reforms:
  - Need greater emphasis on expenditure prioritization and improvements in public financial management, including transition to program-based budgeting and adoption of a Medium-Term Expenditure Framework.
  - Extra-budgetary and special funds, in some cases no longer serving original purposes, impede efficiency and undermine transparency and accountability; these could be phased out or have activities more transparently reported in fiscal accounts and budget documentation.
  - A task force established to develop a plan for public financial management reform.
  - Steps envisaged: introduction of results-based budgeting, implementation of a medium-term framework for budget formulation, and a move toward accrual accounting.
- Measures to improve business climate and encourage private sector development:
  - Current investment in electricity generating capacity to address a key bottleneck.
  - Efforts to speed up business registration and licensing; consider speeding up approval of work permits.
  - Sector-specific initiatives (hubs for agriculture, innovation, diamonds, education, health, transport) should be transparent, subject to periodic independent evaluations, and include clear discontinuation criteria.
  - Mobilizing private sector financing and entrepreneurship through privatization of selected parastatals (starting with Botswana Telecommunications Corporation) and outsourcing some commercial government activities.
  - Framework for public–private partnerships (PPPs) established in June 2009 and a PPP unit being established within the Ministry of Finance and Development Planning.
  - Importance of appropriate legal and regulatory frameworks to mitigate fiscal risks and maximize value for money.

*Source: _cr10280 - 14.      The authorities emphasized their commitment to restoring sustainability in public finances*

### 32.      The authorities agreed that their development model would need to change. Stimulating private

### _cr10280 - 32.      The authorities agreed that their development model would need to change. Stimulating private

### Development model and structural reforms
- The once large infrastructure gap has been closed; stimulating private sector growth by creating additional infrastructure "has become less relevant over time."
- The latest National Development Plan (NDP10), covering the period 2009–16, emphasizes:
  - "the creation of a leaner more effective public sector, thereby reducing crowding out of the private sector,"
  - supporting private sector activity "through regulatory and other structural reforms."
- "A major effort will be made during NDP10 to reduce regulatory burdens that hinder investment."
- Specific legislative revision noted: "revisions to the Immigration and Citizenship and Employment of Non-Citizens Act will provide an opportunity to improve Botswana’s skills base."

### National income and prices — selected indicators (calendar year unless indicated)
- Real GDP (annual percent change): 2007: 4.8; 2008: 3.1; 2009: -3.7; 2010: 8.4; 2011: 4.8; 2012: 7.2; 2013: 7.4; 2014: 5.1; 2015: 5.3
- Mineral GDP (annual percent change): 2007: -2.0; 2008: -3.7; 2009: -20.9; 2010: 16.8; 2011: 8.4; 2012: 6.1; 2013: 7.7; 2014: 4.3; 2015: 4.7
- Nonmineral GDP (annual percent change): 2007: 9.7; 2008: 7.5; 2009: 6.2; 2010: 4.8; 2011: 3.1; 2012: 7.8; 2013: 7.2; 2014: 5.5; 2015: 5.5
- Consumer prices (average): 2007: 7.1; 2008: 12.6; 2009: 8.1; 2010: 6.7; 2011: 6.3; 2012: 5.6; 2013: 5.4; 2014: 5.3; 2015: 5.2
- Consumer prices (end of period): 2007: 8.1; 2008: 13.7; 2009: 5.8; 2010: 6.6; 2011: 5.9; 2012: 5.5; 2013: 5.4; 2014: 5.2; 2015: 5.2
- Nominal GDP (billions of pula): 2007: 76.0; 2008: 91.7; 2009: 83.2; 2010: 92.7; 2011: 101.7; 2012: 114.7; 2013: 129.4; 2014: 142.2; 2015: 156.4
- Diamond production (millions of carats): 2007: 33.6; 2008: 32.3; 2009: 17.7; 2010: 23.2; 2011: 25.4; 2012: 27.0; 2013: 29.0; 2014: 30.1; 2015: 31.5

### External sector and reserves — selected indicators
- Exports of goods and services, f.o.b (US$ percent change): 2007: 11.1; 2008: -3.2; 2009: -23.0; 2010: 14.9; 2011: 7.2; 2012: 4.4; 2013: 5.5; 2014: 3.9; 2015: 4.4
  - Of which Diamonds (annual percent change): 2007: -1.5; 2008: -8.1; 2009: -30.3; 2010: 20.6; 2011: 10.5; 2012: 7.9; 2013: 9.4; 2014: 5.3; 2015: 6.3
- Imports of goods and services, f.o.b (US$ percent change): 2007: 29.1; 2008: 24.9; 2009: -9.7; 2010: 10.0; 2011: 1.4; 2012: 3.3; 2013: 3.2; 2014: 2.2; 2015: 2.4
- Terms of trade (annual percent change): 2007: 3.9; 2008: 2.6; 2009: 4.0; 2010: -0.6; 2011: -0.9; 2012: -1.6; 2013: -0.9; 2014: -0.9; 2015: -1.1
- Change in reserves (increase –, US$ millions): 2007: -1,718; 2008: -1,490; 2009: 1,503; 2010: -678; 2011: -688; 2012: -947; 2013: -1,131; 2014: -1,173; 2015: -1,327
- Gross official reserves (end of period, US$ millions): 2007: 9,743; 2008: 9,125; 2009: 8,678; 2010: 9,382; 2011: 10,070; 2012: 11,018; 2013: 12,149; 2014: 13,322; 2015: 14,649
- Gross official reserves (in months of imports of goods and services): 2007: 20.9; 2008: 21.7; 2009: 18.8; 2010: 20.0; 2011: 20.8; 2012: 22.1; 2013: 23.8; 2014: 25.5; 2015: 30.3
- Pula Fund (US$ millions): 2007: 6,614; 2008: 6,866; 2009: 6,523
  - Pula Fund (in months of imports of goods and services): 2007: 14.2; 2008: 16.3; 2009: 14.1
- Liquidity portfolio/other reserves (US$ millions): 2007: 3,130; 2008: 2,259; 2009: 2,155
  - Liquidity portfolio (in months of imports of goods and services): 2007: 6.7; 2008: 5.4; 2009: 4.7

### Monetary and banking — selected indicators
- Net foreign assets (end of period, contribution to M3 growth): 2007: 24.1; 2008: 20.1; 2009: -18.5; 2010: 6.6; 2011: 14.6; 2012: 15.9; 2013: 16.6; 2014: 15.4; 2015: 15.7
- Net domestic assets (contribution to M3 growth): 2007: 17.0; 2008: 19.0; 2009: -37.8; 2010: -10.8; 2011: 26.7; 2012: 18.4; 2013: 18.1; 2014: 18.9; 2015: 24.0
- Broad money (M3, percent change): 2007: 31.2; 2008: 21.1; 2009: -1.8; 2010: 16.1; 2011: 9.5; 2012: 14.6; 2013: 15.9; 2014: 13.6; 2015: 11.3
- Velocity (nonmineral GDP relative to M3): 2007–2015: 1.4, 1.4, 1.6, 1.5, 1.5, 1.5, 1.5, 1.5, 1.5
- Credit to the private sector (percent change): 2007: 25.7; 2008: 26.6; 2009: 10.3; 2010: 11.4; 2011: 9.1; 2012: 7.7; 2013: 6.5; 2014: 8.3; 2015: 8.2

### Fiscal accounts — central government (selected fiscal-year figures; fiscal year begins April 1)
- Total revenue and grants (millions of pula, FY 2007/08–prelim/projection): 2007/08: 28,629; 2008/09: 30,455; 2009/10: 27,047; 2010/11: 27,077; 2011/12: 33,156; 2012/13: 35,410; 2013/14: 43,331; 2014/15: 48,599; 2015/16: 53,794; 2016/17: 59,864 (table spans 2007/08–2015/16)
- Total expenditure and net lending (millions of pula): 2007/08: 24,822; 2008/09: 35,150; 2009/10: 39,326; 2010/11: 39,194; 2011/12: 39,195; 2012/13: 40,205; 2013/14: 42,936; 2014/15: 45,714; 2015/16: 48,955; 2016/17: 52,318
- Tax revenue (millions of pula): 2007/08: 17,267; 2008/09: 20,455; 2009/10: 17,249; 2010/11: 18,472; 2011/12: 21,746; 2012/13: 22,899; 2013/14: 29,087; 2014/15: 32,456; 2015/16: 35,942; 2016/17: 39,747
- Mineral royalties and dividends (nontax revenue, millions of pula): 2007/08: 8,564; 2008/09: 6,731; 2009/10: 6,729; 2010/11: 4,586; 2011/12: 7,391; 2012/13: 9,023; 2013/14: 10,251; 2014/15: 11,621; 2015/16: 12,817; 2016/17: 14,563
- Wages and salaries (current expenditure, millions of pula): 2007/08: 6,850; 2008/09: 8,701; 2009/10: 9,547; 2010/11: 11,935; 2011/12: 11,935; 2012/13: 12,688; 2013/14: 13,396; 2014/15: 14,125; 2015/16: 14,873
- Capital expenditure (millions of pula): 2007/08: 6,548; 2008/09: 11,458; 2009/10: 12,959; 2010/11: 12,182; 2011/12: 12,182; 2012/13: 11,036; 2013/14: 11,652; 2014/15: 12,403; 2015/16: 13,683
- Primary balance (deficit - , millions of pula): 2007/08: 4,056; 2008/09: -4,413; 2009/10: -11,909; 2010/11: -11,618; 2011/12: -5,539; 2012/13: -4,032; 2013/14: 1,450; 2014/15: 4,067; 2015/16: 6,009; 2016/17: 8,669
- Overall balance (millions of pula): 2007/08: 3,808; 2008/09: -4,695; 2009/10: -12,279; 2010/11: -12,118; 2011/12: -6,039; 2012/13: -4,795; 2013/14: 395; 2014/15: 2,884; 2015/16: 4,839; 2016/17: 7,546
- Financing (millions of pula): 2007/08: -3,808; 2008/09: 4,696; 2009/10: 11,987; 2010/11: 12,117; 2011/12: 6,039; 2012/13: 4,795; 2013/14: -395; 2014/15: -2,884; 2015/16: -4,839; 2016/17: -7,546
- Memorandum: Nonmineral primary balance (millions of pula): 2007/08: -7,929; 2008/09: -15,949; 2009/10: -20,906; 2010/11: -18,848; 2011/12: -17,098; 2012/13: -18,438; 2013/14: -14,908; 2014/15: -14,459; 2015/16: -14,420; 2016/17: -14,475

### Balance of payments — selected projections (US$ millions and percent of GDP)
- Current account balance (US$ millions): 2007: 1,797; 2008: 473; 2009: -243; 2010: -359; 2011: 435; 2012: 154; 2013: 267; 2014: 383; 2015: 9
- Trade balance (US$ millions): 2007: 1,610; 2008: 332; 2009: -659; 2010: -484; 2011: -245; 2012: -196; 2013: -731; 2014: 613; 2015: 4
- Exports, f.o.b. (US$ millions): 2007: 5,053; 2008: 4,789; 2009: 3,462; 2010: 4,112; 2011: 4,437; 2012: 4,640; 2013: 4,915; 2014: 5,106; 2015: 5,325
  - Diamonds (US$ millions): 2007: 3,338; 2008: 3,069; 2009: 2,139; 2010: 2,580; 2011: 2,850; 2012: 3,076; 2013: 3,365; 2014: 3,543; 2015: 3,767
- Imports, f.o.b. (US$ millions): 2007: -3,444; 2008: -4,458; 2009: -4,121; 2010: -4,595; 2011: -4,682; 2012: -4,836; 2013: -4,988; 2014: -5,090; 2015: -5,191
- End-of-year reserves (US$ millions): 2007: 9,790; 2008: 9,118; 2009: 8,704; 2010: 9,382; 2011: 10,070; 2012: 11,018; 2013: 12,149; 2014: 13,322; 2015: 14,649
- Reserves (months of imports of goods and services): 2007: 18.5; 2008: 22.9; 2009: 16.9; 2010: 18.9; 2011: 19.8; 2012: 21.0; 2013: 22.8; 2014: 24.4; 2015: 26.2

### Banking system prudential indicators (selected)
- Regulatory capital (millions of pula): 2005: 1,568.6; 2006: 1,743.2; 2007: 2,020.6; 2008: 2,991.6; 2009: 3,670.7; 2010: 3,989.6
- Tier 1 capital (millions of pula): 2005: 961.4; 2006: 1,071.3; 2007: 1,185.4; 2008: 1,832.2; 2009: 2,191.6; 2010: 2,253.5
- Risk weighted assets (millions of pula): 2005: 9,065.6; 2006: 10,404.2; 2007: 10,947.2; 2008: 17,694.4; 2009: 18,734.7; 2010: 20,044.4
- Regulatory capital to risk-weighted assets (percent): 2005: 17.3; 2006: 16.8; 2007: 18.5; 2008: 16.9; 2009: 19.6; 2010: 19.9
- Regulatory Tier I capital to risk-weighted assets (percent): 2005: 10.6; 2006: 10.3; 2007: 10.8; 2008: 10.4; 2009: 11.7; 2010: 11.2
- Nonperforming loans (NPLs)-to-gross loans (percent): 2005: 0.9; 2006: 1.5; 2007: 1.3; 2008: 1.6; 2009: 3.2; 2010: 3.3
- Return on average assets (percent): 2005: 5.5; 2006: 6.1; 2007: 2.6; 2008: 2.9; 2009: 2.8; 2010: 0.7
- Return on average equity (percent): 2005: 62.5; 2006: 66.9; 2007: 43.2; 2008: 45.4; 2009: 56.5; 2010: 13.8
- Liquid assets to total assets (percent): 2005: 26.1; 2006: 47.0; 2007: 47.2; 2008: 50.5; 2009: 39.6; 2010: 37.1
- Loans-to-assets (percent): 2005: 51.2; 2006: 36.9; 2007: 33.9; 2008: 39.7; 2009: 44.8; 2010: 45.1

### Social indicators — Millennium Development Goals (selected)
- Malnutrition prevalence, weight for age (percent of children under 5): 1990: 17.2; 1995: 12.5; 2000: 10.7; 2007: 4.3; 2008: 4.1
- Poverty headcount ratio at national poverty line (percent of population): 1995: 47.0; 2000: 47.0; 2004: 30.3; 2007: 30.3
- Literacy rate, youth total (percent ages 15–24): 1990: 89; 2000: 94; 2005: 94; 2007: 94
- Primary completion rate, total (percent): 1990: 89; 1995: 91; 2000: 90; 2005: 95
- Immunization, measles (percent of children ages 12–23 months): 1990: 87; 1995: 89; 2000: 90; 2005: 90; 2007: 91; 2008: 93
- Births attended by skilled health staff (percent of total): 1990: 77; 1995: 87; 2000: 94; 2005: 99; 2007: 98
- Prevalence of HIV, total (percent ages 15–49): (as reported) 17.6 (period not explicitly indicated in table)
- Mobile cellular subscriptions (per 100 people): 1990: 0; 1995: 0; 2000: 1; 2005: 36; 2007: 91; 2008: 105
- Internet users (per 100 people): 1990: 0; 1995: 0.1; 2000: 2.9; 2005: 5.3; 2007: 4.0; 2008: 4.0
- GNI per capita, Atlas method (current US$): 1990: 2,560; 1995: 3,040; 2000: 3,310; 2007: 6,120

### Key policy emphasis and recommendations drawn from the text
- Shift development model away from infrastructure-led stimulus toward policies that reduce crowding out and enhance private sector participation.
- Make the public sector "leaner" and "more effective" to reduce crowding out of the private sector.
- Implement regulatory and structural reforms to support private sector activity, including a "major effort" during NDP10 to reduce regulatory burdens that hinder investment.
- Revise the Immigration and Citizenship and Employment of Non-Citizens Act to "provide an opportunity to improve Botswana’s skills base."

*Source: Botswana authorities and IMF staff estimates and projections (excerpts from _cr10280)._

### Appendix 1. Exchange Rate Assessment

### Appendix 1. Exchange Rate Assessment

### Macroeconomic balance approach
- Method: Uses coefficients relating current account balances to macroeconomic fundamentals, estimated from a sample of low- and middle-income countries; adapted for Botswana’s circumstances.
- Current account norm for Botswana in 2015: "5.5 to 4.8 percent of GDP" (depends on model specification).
- Staff-projected underlying current account balance in 2015 (baseline): "5.1 percent of GDP".
- Elasticity of the current account relative to the real effective exchange rate: "-0.5" (based on estimated import and export elasticities for Botswana).
- Implication under baseline scenario: By 2015 the exchange rate is expected to be in line with equilibrium, deviating by "less than 0.5 percent".
- Alternative scenario (fiscal position does not recover and the current account remains negative): Model predicts an overvaluation of "9 to 10 percent" by 2015.

### Equilibrium real exchange rate approach
- Method: Estimates the level of the equilibrium real exchange rate based on macroeconomic fundamentals (relative productivity, real interest rate differentials, terms of trade, and government consumption).
- Result as of March 2010: The exchange rate was overvalued by "about 7 percent".
- Uncertainty: Confidence intervals around this estimate are large.

### External sustainability approach
- Method: Calculates the norm current account balance consistent with a buildup of net foreign assets that accounts for the need to accumulate savings ahead of declining diamond receipts (following previous work on Botswana).
- Resulting “sustainable current account balance” for 2015: "about 7.3 percent of GDP".
- Comparison: Staff’s projected underlying current account balance for 2015 is "5.1 percent of GDP".
- Using the same elasticities as in the macroeconomic balance approach implies the exchange rate is overvalued by "about 4 percent".

*Source: Appendix 1. Exchange Rate Assessment, _cr10280 - Appendix 1. Exchange Rate Assessment_*

### 17. Debt Management Performance

### 17. Debt Management Performance Assessment (DeMPA)

### I. Assessment of Data Adequacy for Surveillance
- General: Macroeconomic data are adequate for surveillance, but shortcomings exist in accuracy and reliability of source data and statistical techniques for national accounts, government finance, and balance of payments statistics.
- Timeliness and coverage issues:
  - Central bank survey lag: about three months (recommendation: make preliminary data available with clear identification of data status).
  - Detailed government expenditure data by economic classification need increased timeliness to prepare for eventual SDDS subscription.
  - Dissemination gaps: monthly production of diamonds and quarterly aggregate financial soundness indicators.
- Ongoing authority actions:
  - Reviewing source data and methodologies for data with estimation problems/gaps.
  - Strengthening collaboration among source data producers to reconcile discrepancies.
  - Production of leading economic indicators underway.
  - Addressing staff shortages within budget constraints.
- National Accounts:
  - Current base year: 1993/94 — needs rebasing.
  - Household Income and Expenditure Survey (HIES) date: 2002/03 (out of date).
  - Labor Force Survey date: 2005/06 (out of date).
  - More frequent surveys needed to improve private consumption estimates and poverty/unemployment analysis.
- Price Statistics:
  - Official monthly CPI: timely and available on CSO’s website; provides urban/rural and tradable/nontradable breakdowns.
  - CPI weights use estimates from HIES (outdated).
  - Ongoing: new HIES; eventual inclusion of owner-occupied housing prices planned.
  - Producer/wholesale price compilation discontinued.
- Government Finance Statistics:
  - Compilation follows GFSM 1986 concepts and definitions but covers only budgetary central government activities.
  - No fiscal statistics compiled for extra budgetary institutions, consolidated central government, or consolidated general government.
  - No decision on migration path to GFSM 2001 methodology.
  - Recurrent and development expenditure data published in aggregate form; development spending is a mixture of current and capital spending.
- Monetary and Financial Statistics:
  - Compilation practices consistent with the Monetary and Financial Statistics Manual.
  - BoB seeking to expand coverage to include nonbank financial intermediaries (NBFI): pension funds, insurance companies, unit trusts, finance companies, financial auxiliaries.
  - STA recommendation: focus data collection on a handful of large institutions within each NBFI category.
- Balance of Payments and IIP:
  - Annual and quarterly BOP data published in Botswana Financial Statistics (BF) and BoB Annual Report.
  - Preliminary BOP data disseminated within two months; revised (final) data after nine months.
  - Concepts follow BPM5.
  - ITRS data unreliable for services and transfers; methods for estimating missing data (unrecorded trade), f.o.b./c.i.f. import adjustments, and flows from stock data are inadequate.
  - Discrepancies exist in national accounts on valuation of diamond exports and SACU-related imports/exports/payments.
  - Large errors and omissions in 2009 BOP statistics complicated external sustainability assessment.
  - BoB conducts annual IIP survey; quarterly IIP survey produced for internal use with ITRS data.
- External Debt:
  - Public external debt data: good quality but timeliness could be improved (latest published data: March 2009).

### II. Data Standards and Reporting
- Botswana participation: GDDS since late 2002.
- Data ROSC publications: April 2002, March 2004, April 2007 (updates).
- Reporting to STA:
  - Monetary data reported for publication in International Financial Statistics using Standardized Report Forms.
  - No government financial statistics reported for publication in the Government Finance Statistics Yearbook.

### III. Key Data Timeliness and Quality Indicators (selected items, as of July 9, 2010)
- Exchange rates: Latest observation 7/09/2010; Date received 7/09/2010; Frequency: D (daily).
- International reserve assets and reserve liabilities of the monetary authorities: Latest observation Feb 2010; Date received April 2010; Frequency: M (monthly).
- Reserve/base money: Latest observation Feb 2010; Date received April 2010; Frequency: M.
- Broad money: Latest observation Feb 2010; Date received April 2010; Frequency: M.
- Consumer price index: Latest observation May 2010; Date received June 2010; Frequency: M.
- Revenue, expenditure, balance, and composition of financing — central government: Latest observation March 2010; Date received May 2010; Frequency: A/Q/M (annual/quarterly/monthly).
- Stocks of central government and central government-guaranteed debt: Latest observation March 2009; Date received April 2010; Frequency: A (annual).
- External current account balance: Latest observation 2009 Q3; Date received May 2010; Frequency: A/Q.
- GDP/GNP: Latest observation 2010 Q1; Date received June 2010; Frequency: A/Q.
- Gross external debt: Latest observation March 2009; Date received May 2010; Frequency: A/Q.

(Notes on quality indicators: methodological soundness and accuracy/reliability assessments reflect the April 6, 2007 data ROSC mission findings using the O/LO/LNO/NO/NA scale.)

### IV. Medium-Term Public Debt Sustainability Analysis — Key Findings and Projections
- Recent debt dynamics:
  - Gross public debt rose from US$0.7 billion (6.2 percent of GDP) in 2008/09 to about US$2 billion (15 percent of GDP) in 2009/10.
  - About 72 percent of the debt is owed to bilateral and multilateral foreign creditors; remainder is domestic debt.
  - Fiscal deficit in FY 2009/10: 14.2 percent of GDP; financed by drawdown in reserves, AfDB budget support loan of US$1.5 billion (US$1 billion drawn so far), and other borrowing.
- Baseline scenario projections:
  - Gross public debt-to-GDP: increases to 17.6 percent of GDP in 2010/11, then falls to 10.5 percent of GDP by 2015/16.
  - Government net asset position: declines from 39.1 percent of GDP in 2009/10 to 20.8 percent of GDP in 2012/13, then increases to 25.1 percent of GDP by 2015/16.
  - Revenue and grants: increase from 31.6 percent of GDP in 2009/10 and stabilize around 37 percent of GDP in the medium term (staff baseline assumption).
  - Overall balance: improves gradually to a surplus of 4.7 percent of GDP in 2015/16.
  - Financing assumption: about one-third of deficits from 2010/11 through 2012/13 financed by domestic borrowing; remaining two-thirds financed by drawing down Pula Fund savings.
- Historical averages scenario:
  - If real GDP growth, real interest rates, and primary balance are maintained at historical 10-year averages, public debt-to-GDP ratio would drop to 8.7 percent of GDP by 2013/14.
- No policy change scenario:
  - If the fiscal balance is held constant at its 2010/11 level (no expenditure reduction), public debt would rise to 56.3 percent of GDP by the end of the forecast period, illustrating substantial downside risk.
- Sensitivity (bounds) tests:
  - Debt-to-GDP ratio would increase by between 1 to 17 percentage points of GDP depending on the shock.
  - Most benign shock: real interest rate shock — 4 percentage points increase in debt-to-GDP relative to baseline.
  - Worsening in the 10-year historical average primary balance by one standard deviation: 17 percentage points increase in debt-to-GDP.
- Selected table highlights (public sector, percent of calendar-year GDP):
  - Baseline public sector debt-to-GDP: 2009 = 15.0; 2010 = 17.6; 2011 = 17.6; 2012 = 15.8; 2013 = 14.0; 2014 = 12.2; 2015 = 10.5.
  - Primary deficit (percent of GDP): 2009 = 12.1; 2010 = 7.7; 2011 = 4.3; 2012 = -0.1; 2013 = -2.6; 2014 = -3.9; 2015 = -5.1.
  - Revenue and grants (percent of GDP): 2009 = 33.5; 2010 = 34.1; 2011 = 34.3; 2012 = 36.1; 2013 = 36.5; 2014 = 36.9; 2015 = 37.3.
  - Primary (noninterest) expenditure (percent of GDP): 2009 = 45.6; 2010 = 41.8; 2011 = 38.6; 2012 = 36.0; 2013 = 33.9; 2014 = 33.0; 2015 = 32.2.
  - Public sector debt-to-revenue ratio: 2009 = 44.6; 2010 = 51.5; 2011 = 51.5; 2012 = 43.9; 2013 = 38.3; 2014 = 33.1; 2015 = 28.2.
  - Gross financing need (percent of GDP): 2009 = 13.1; 2010 = 9.6; 2011 = 6.3; 2012 = 1.9; 2013 = -0.8; 2014 = -1.8; 2015 = -3.1.
  - Gross financing need (in billions of U.S. dollars): 2009 = 1.5; 2010 = 1.2; 2011 = 0.8; 2012 = 0.3; 2013 = -0.1; 2014 = -0.3; 2015 = -0.5.
- Key macro-fiscal assumptions underlying baseline:
  - Real GDP growth (percent): 2009 = -3.7; 2010 = 8.4; 2011 = 4.8; 2012 = 7.2; 2013 = 7.4; 2014 = 5.1; 2015 = 5.3.
  - Average nominal interest rate on public debt (percent): 2009 = 6.1; 2010 = 3.8; 2011 = 4.3; 2012 = 5.5; 2013 = 6.3; 2014 = 6.5; 2015 = 6.5.
  - Average real interest rate (percent): 2009 = 11.9; 2010 = 0.9; 2011 = -0.4; 2012 = 0.3; 2013 = 1.3; 2014 = 1.9; 2015 = 2.0.
  - Inflation rate (GDP deflator, percent): 2009 = -5.8; 2010 = 2.8; 2011 = 4.7; 2012 = 5.2; 2013 = 5.1; 2014 = 4.5; 2015 = 4.5.
  - Growth of real primary spending (percent): 2009 = 24.7; 2010 = -0.6; 2011 = -3.2; 2012 = 0.0; 2013 = 1.2; 2014 = 2.4; 2015 = 2.5.

### V. Medium-Term External Debt Sustainability (excerpt)
- Gross external debt increased from $0.4 billion (3.2 percent of GDP) in 2008 to $1.9 billion (15.4 percent of GDP) at the end of (text truncated in source).

*Source: IMF staff report excerpt — "17. Debt Management Performance Assessment (DeMPA)"; content as provided in the supplied PDF chapter.*

### 2009. The increase largely reflects

### _cr10280 - 2009. The increase largely reflects

### External debt developments and drivers
- The increase largely reflects increased external borrowing by the public sector to finance a large fiscal deficit as well as (government-guaranteed) borrowing by the Botswana Power Corporation to finance the expansion of the Morupule power plant.
- As a result, public and publicly-guaranteed debt rose six-fold between end-2008 and end-2009, to 14.1 percent of GDP.
- Gross external debt in 2009 was 1,918 (in millions of U.S. dollars) and 15.4 (in percent of GDP).
  - Of which public and publicly guaranteed debt: 1,763 (in millions of U.S. dollars); 14.1 (in percent of GDP).
  - Short-term debt: 297 (in millions of U.S. dollars); 2.4 (in percent of GDP).
- Gross official reserves: 8,704 (in millions of U.S. dollars).
  - Ratio to short-term debt: 29.3.
  - Ratio to reserve money: 2.9.
- Memorandum items:
  - GDP at current market prices: 12,468 (in million U.S. dollars).
  - Reserve money: 3,051 (in million U.S. dollars).

### Baseline projections and macroeconomic assumptions
- Under the baseline scenario, external debt should stabilize in 2010 at 15.9 percent of GDP.
- The fiscal and current account balances are projected to return to a surplus by 2011, at which time external debt should begin to decline steadily.
- The baseline recovery is predicated on:
  - A rebound in diamond exports.
  - Declining imports as the power plant projects near completion.
- Risks to the baseline include:
  - Higher than envisaged investment in power projects, a substantial element of which would be financed through external borrowing.
  - A delay of the planned fiscal consolidation.
- Baseline projections (selected indicators, percent of GDP or percent changes as shown):
  - Baseline: External debt (2009–2015): 15.4, 15.9, 14.8, 14.0, 12.9, 10.7, 8.6 (years 2009–2015 respectively).
  - Change in external debt (2005–2015 excerpt): 0.4, -1.2, -1.1, -0.5, 12.2, 0.6, -1.1, -0.8, -1.1, -2.1, -2.1.
  - Identified external debt-creating flows (2005–2015 excerpt): -13.4, -16.3, -16.1, -10.6, -1.4, -5.0, -5.3, -7.0, -7.9, -8.1, -8.6.
  - Current account deficit, excluding interest payments (2005–2015 excerpt): -17.0, -19.1, -16.2, -4.3, 1.1, -1.3, -2.3, -4.0, -5.0, -6.0, -6.6.
  - External debt-to-exports ratio (in percent) (2005–2015 excerpt): 11.9, 10.4, 7.9, 7.6, 40.8, 39.8, 36.8, 35.9, 33.8, 28.8, 23.6.
  - Gross external financing need (in billions of US dollars) (2005–2015 excerpt): -0.8, -1.0, -0.9, -0.2, 0.6, 0.4, 0.3, 0.1, 0.0, 0.0, -0.1.
  - Gross external financing need (in percent of GDP) (2005–2015 excerpt): -8.4, -9.0, -6.8, -1.3, 4.8, 3.3, 2.5, 1.0, 0.0, -0.1, -0.7.
- Key macroeconomic assumptions underlying the baseline (selected):
  - Real GDP growth (percent) (2005–2015 excerpt): 1.6, 5.1, 4.8, 3.1, -3.7, 8.4, 4.8, 7.2, 7.4, 5.1, 5.3.
  - GDP deflator in US dollars (change in percent) (2005–2015 excerpt): -15.0, 8.9, 10.8, -6.6, 8.9, -6.7, 1.6, 0.6, 0.6, 1.1, 1.0.
  - Nominal external interest rate (percent) (2005–2015 excerpt): 27.2, 34.5, 39.5, 21.9, 30.7, 10.5, 11.0, 11.9, 12.7, 16.7, 19.1.
  - Growth of exports (US dollar terms, percent) (2005–2015 excerpt): 0.4, 4.7, 17.8, -14.6, -8.8, 7.7, 7.2, 4.4, 5.5, 3.9, 4.4.
  - Growth of imports (US dollar terms, percent) (2005–2015 excerpt): -18.0, 1.5, 36.8, 10.2, 6.9, 3.0, 1.4, 3.3, 3.2, 2.2, 2.4.
  - Current account balance, excluding interest payments (percent of GDP) (2005–2015 excerpt): 17.0, 19.1, 16.2, 4.3, -1.1, 1.3, 2.3, 4.0, 5.0, 6.0, 6.6.
  - Net non-debt creating capital inflows (percent of GDP) (2005–2015 excerpt): -0.9, -1.7, 0.9, 7.2, 3.3, 4.0, 3.9, 3.7, 3.6, 3.4, 3.3.
- Scenario with key variables at their historical averages (selected): 15.9, 12.4, 10.5, 8.9, 6.0, 2.9, 0.3 (years not explicitly restated in the table excerpt).

### Stress tests, shocks, and resilience
- Simulations suggest Botswana’s external debt-to-GDP ratio is robust to growth, interest rate, and currency shocks.
- The external debt ratio appears more susceptible to:
  - A current account shock.
  - A combination of growth, interest rate, and current account shocks.
- Under a current account shock the ratio could rise significantly but would still remain below 30 percent of GDP.
- The report notes: "However, neither scenario is very likely under current circumstances absent a further collapse in the diamond market."
- Bound tests and scenario notes (figure captions):
  - Individual shocks are permanent one-half standard deviation shocks.
  - Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.
  - One-time real depreciation of 30 percent occurs in 2010 (real depreciation shock).

### Policy recommendations and assessment
- Macroeconomic policies are being appropriately redirected away from short-term demand management toward medium-term considerations.
- Substantial fiscal consolidation will be needed as recovery proceeds to:
  - Put public finances back on a sustainable footing.
  - Safeguard external stability.
- Much of the fiscal adjustment will need to come from lower public spending because mineral revenues are on a declining trend and the scope for raising nonmineral taxes is limited by the size of the private sector.
- The budget for 2010/11 is judged to make a good start on fiscal adjustment; plans to balance the budget by 2012/13 and register modest surpluses thereafter are described as ambitious but warranted.
- Recent increases in public debt and a more challenging fiscal environment require a clearer framework for management of the government’s assets and liabilities.
- Anchoring inflation expectations is important; inflation increased to 7.8 percent in May 2010 and the Bank of Botswana’s inflation objective is 3–6 percent.
- It will be important to err on the side of caution before proceeding with further reductions in interest rates and to proceed with fiscal consolidation as envisaged.
- Structural reform priorities to sustain high growth:
  - Create a leaner and more effective public sector and promote private sector-led growth ("Doing more with less").
  - Strengthen public financial management, including transition to program-based budgeting and implementation of a medium-term expenditure framework.
  - Encourage private sector-led growth through cross-cutting structural reforms that benefit the whole economy.
  - Continue current investments in power generation to address a key bottleneck to growth.
  - With appropriate safeguards, pursue plans to privatize selected parastatals, greater use of public–private partnerships, and rationalization of commercial services currently provided by the government to mobilize greater private sector participation.

### Key 2009 and near-term economic indicators (selected)
- Real GDP growth (2009): -3.7 percent.
  - Non-mineral GDP growth (2009): 6.2 percent.
  - Minerals (2009): -20.9 percent.
- Consumer prices (average, 2009): 8.1 percent; end of period 2009: 5.8 percent.
- Nominal GDP (billions of pula, 2009): 83.2.
- Diamond production (millions of carats, 2009): 17.7.
- Exports of goods and services (US$ change, 2009): -23.
  - Diamonds (2009): -30.3 (percent).
- Imports of goods and services (US$ change, 2009): -9.7.
- Broad money (M3) change (2009): -1.8 percent.
- Credit to the private sector (percent change, 2009): 10.3.
- Central government finance (percent of GDP, 2009):
  - Total revenue and grants: 31.6.
  - Total expenditure and net lending: 46.0.
  - Overall balance (deficit –): -14.3.
  - Non-mineral primary balance (percent of non-mineral GDP, 2009): -32.9.
- External sector (percent of GDP, 2009):
  - Current account balance: -2.1.
  - Balance of payments: -12.9.
  - Total external debt: 15.4 (percent of GDP).
- Gross official reserves (end of period, 2009): 8,678 (in millions of U.S. dollars).
  - In months of imports of goods and services (2009): 18.8.
  - In percent of GDP (2009): 74.3.
- Change in reserves (increase –) 2009: 1,503 (in millions of U.S. dollars).

*Prepared by Irene Yackovlev. Sources: Bank of Botswana and Fund staff estimates.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10280.pdf_