## _cr11248

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### Recent developments
- Real GDP grew by 7.2 percent in 2010 compared to a 4.9 percent contraction in 2009.
- Annual export growth (in dollar terms) was about 35 percent in 2010.
- Consumer price inflation (year on year) rose from about 7 percent at end-2010 to 8.3 percent as of May 2011.
- Core inflation (excluding food, fuel and administered prices) has not shown a trend increase in the last few months.
- Banking sector:
  - Credit growth to households has picked up somewhat but remains well below pre-crisis levels.
  - Arrears on bank lending rose significantly during 2009, stabilized during 2010 and by September 2010 had fallen somewhat due to lower levels of non-performing loans to businesses.
- Fiscal outturn in FY2010/11:
  - Deficit of just under 10 percent of GDP compared to the original budget target of 12 percent of GDP.
  - Non-mineral primary deficit declined from about 31 percent of non-mineral GDP in 2009/10 to 27 percent in FY2010/11.
  - Spending cuts focused on central government transfers to other public bodies and on development spending.
- VAT increase from 10 to 12 percent in April 2010 did not yield significant tax revenues.
- External position:
  - Considerable narrowing of the trade deficit in 2010.
  - Real effective exchange rate remained broadly unchanged over the last 12 months.

### Outlook, risks, and medium-term challenges
- Near-term projection:
  - Output growth projected to reach 6.5 percent in 2011 led by the mineral sector.
  - Staff expects inflation to remain above the BoB’s medium-term objective of 3-6 percent throughout 2011.
- Near-term risks:
  - Downside: weaker-than-expected global growth affecting diamond demand.
  - Upside: faster recovery in domestic private investment in energy and non-diamond mineral sectors.
- Medium-term projection and supports:
  - Output growth projected to average about 5.5 percent.
  - Key supports: investments in other minerals and metals (uranium, coal, copper/nickel); completion of Moropule B power plant by 2012/13 (increase domestic electricity capacity by about 600 mega watts); deepening downstream diamond activities; growth in services.
  - External current account balance set to improve gradually, supported by robust diamond and mineral exports, lower energy and equipment imports as projects complete, and a recovery of SACU revenues.

### Monetary policy and exchange rate
- Bank of Botswana (BoB) actions:
  - BoB bank rate lowered by 50 basis points to 9.5 percent in December 2010 and kept at that level since then.
  - BoB increased statutory reserve requirement for banks from 6.5 percent to 10 percent, effective July 1, 2011.
- Staff advice on monetary policy:
  - Support for BoB’s neutral monetary policy stance given no firm evidence of generalized price pressures.
  - If food and fuel shocks lead to generalized price pressures, monetary policy should be tightened to anchor expectations and reduce public sector borrowing costs.
  - Support for authorities’ forward-looking approach to the rate of crawl for the exchange rate.
- Exchange rate assessment (Appendix I):
  - Staff judges the current exchange rate level as broadly in line with macroeconomic fundamentals.
  - Alternative methods indicate some overvaluation estimates: MB 4–6 percent (baseline) and 15–17 percent (alternative), EREER 9 percent, ES 11 percent, PPP about 8 percent.
  - Regime: crawling peg to a basket comprising the SDR and South African rand; forward-looking rate-of-crawl adjustments.

### Fiscal policy, consolidation, and key fiscal figures
- Fiscal stance and targets:
  - FY2011/12 budget targets a deficit of 6 percent of GDP.
  - Staff baseline envisages a balanced budget in FY2012/13 with small surpluses in outer years.
  - Fiscal adjustment to balance the budget would require reining in overall spending (as a share of GDP) to broadly pre-crisis levels.
  - Reverting public investment program to pre-crisis levels would contribute about 4½ percentage points of GDP to the fiscal adjustment.
  - Staff’s Debt Sustainability Analysis shows debt burden remains very low but sensitive to diamond revenue fluctuations.
- Staff fiscal recommendations:
  - Near term: prudent to rebuild fiscal buffers while diamond prices are high; support policy stance of saving revenue over performance in FY2011/12 to replenish the Pula Fund.
  - Medium term: reduce the non-mineral primary balance (NMPB) to a deficit of about 8 percent of non-mineral GDP from the current estimate of about 23 percent, requiring sizable expenditure reductions.
  - Priority expenditure containment areas:
    - Wage bill: reduce wage bill (as a share of GDP) via prudent wage policy and civil service reform; any nominal wage adjustment in FY2011/12 should be budget neutral and financed by other savings.
    - Education budget: rein in tertiary education spending; better synchronize expenditures and receipts of budgetary units to improve central government cash management.
  - Tax policy: improve effective tax rates on VAT and corporate income taxes; revisit merits of specific tax incentives; establish a large taxpayer unit at Botswana Unified Revenue Service.

- Key central government operations (percent of GDP) — selected entries:
  - Revenue: 34.6 (2009/10); 28.8 (2010/11); 30.5 (2011/12); 31.2 (2012/13); 31.7 (2013/14); 32.2 (2014/15); 32.1 (2015/16).
  - Expenditure: 45.5 (2009/10); 38.5 (2010/11); 36.2 (2011/12); 31.2 (2012/13); 29.6 (2013/14); 28.7 (2014/15); 27.9 (2015/16).
  - Current expenditure: 29.6 (2009/10); 25.9 (2010/11); 27.4 (2011/12); 23.0 (2012/13); 21.7 (2013/14); 20.9 (2014/15); 20.1 (2015/16).
  - Capital expenditure: 15.0 (2009/10); 12.7 (2010/11); 8.9 (2011/12); 8.4 (2012/13); 7.9 (2013/14); 7.9 (2014/15); 7.9 (2015/16).
  - Overall balance: -10.9 (2009/10); -9.7 (2010/11); -5.7 (2011/12); 0.0 (2012/13); 2.2 (2013/14); 3.5 (2014/15); 4.2 (2015/16).
  - Non-mineral primary balance: -30.6 (2009/10); -26.6 (2010/11); -23.0 (2011/12); -15.2 (2012/13); -12.4 (2013/14); -10.9 (2014/15); -9.5 (2015/16).

### Public debt dynamics and sustainability
- Public sector debt (percent of GDP) under baseline:
  - 2006: 5.4; 2007: 7.1; 2008: 6.4; 2009: 16.1; 2010: 13.2; 2011: 15.6; 2012: 14.0; 2013: 12.4; 2014: 10.8; 2015: 9.4; 2016: 8.1.
- Debt-stabilizing primary balance in 2016: 0.0 (percent of GDP).
- Primary deficit (percent of GDP): -10.5, -6.3, 2.6, 9.1, 9.1, 6.0, 0.7, -2.2, -3.7, -4.4, -5.7 (2006–2016).
- Sensitivity scenarios:
  - Alternative path with primary balance at -9.5 percent of GDP throughout medium-term: public debt rises to 53 percent of GDP by 2016/17.
  - Increase in real interest rates: 3 percentage points increase in debt-to-GDP relative to baseline.
  - Worsening in the 10-year historical average primary balance by one standard deviation: 16 percentage points increase in debt-to-GDP.
- External debt:
  - Gross external debt rose from US$2.7 billion in 2009 to US$3.5 billion in 2010.
  - Projection of gross external debt (percent of GDP, baseline): 2009: 23.3; 2010: 23.2; 2011: 20.4; 2012: 18.5; 2013: 16.3; 2014: 14.2; 2015: 12.3; 2016: 6.8.
  - Debt-stabilizing non-interest current account: -2.9 (percent of GDP) in 2016.

### Tax policy and revenue mobilization
- VAT increase from 10 to 12 percent in April 2010 did not yield significant tax revenues.
- Effective tax rates of the VAT and corporate taxes are significantly lower than statutory rates.
- Botswana’s VAT rate is one of the lowest among comparator countries; zero ratings on such a low VAT rate erode the revenue base.
- Staff recommendations:
  - Close monitoring of effective tax rates; caution against granting preferential tax regimes.
  - Conduct a study on tax expenditures to quantify revenue loss from incentives.
  - Strengthen tax administration, including creation of a large taxpayer unit (LTU) within Botswana Unified Revenue Service.
- Authorities’ views:
  - Concur that tax incentives erode the tax base and agreed there is scope to broaden the tax base (for example by reducing numbers of goods and services exempt from VAT) while avoiding undue burdens on domestic activity and FDI.

### Structural reforms, growth, and diversification
- Overriding policy challenges:
  - Reducing the size of government (government spending just under 40 percent of GDP).
  - Sustaining growth, broadening sources, and improving quality of growth (addressing high unemployment; economic diversification).
- Staff recommendations to improve quality of growth:
  - Focus on sectors with high productivity and employment potential; attract sizeable FDI to non-mining sector while avoiding unwarranted tax incentives.
  - Reduce cost of doing business and improve business environment.
  - Improve labor force skills via education reform; tertiary education reform and Human Resource Development Council to address skills mismatch.
  - Inclusive growth via more efficient and well-targeted pro-poor spending on health and education.
- Authorities’ measures:
  - NDP10 emphasizes reducing relative size of government and diversifying the economy.
  - Business registration time reduced to 5 to 10 days; ongoing diversification within mineral sector (uranium and copper/nickel exploration).
  - Establishment of a Labor Market Observatory; upcoming Botswana Core Welfare Indicator Survey to assess poverty.

### Financial sector supervision and nonbank institutions
- Banking sector described as sound: banks vigilant over asset quality, remain profitable, capital levels significantly in excess of regulatory requirements, and NPLs remain low.
- BoB working to make its financial stability unit fully operational.
- Progress by NBFIRA in shifting from compliance-based to risk-based supervision.
- New Insurance and Pension Funds Act tentatively planned for discussion by parliament in November 2011, proposing gradual rebalancing of insurance companies’ and pension funds’ portfolios.
- Staff recommendations:
  - Strengthen prudential regulation to keep pace with financial innovation (mobile banking); monitor banks’ exposure to mortgage loans.

### Statistics, capacity-building, and data adequacy
- Institutional change: Statistics Act of 2009 commenced November 30, 2010; Central Statistics Office transformed into Statistics Botswana operating independently.
- Key statistical gaps and needs:
  - Need to rebase national accounts (current base year 1993/94).
  - HIES (2002/03) and Labor Force Survey (2005/06) are out of date.
  - CPI weights use outdated HIES; inclusion of owner-occupied housing prices pending.
  - Discontinued producer/wholesale price compilation.
  - Government finance statistics limited to budgetary central government activities; no consolidated general government fiscal statistics.
  - Balance of payments: ITRS data for services and transfers unreliable; large errors and omissions in 2008–2010 BOP statistics.
  - Recommendation to disseminate monthly diamond production and quarterly aggregate financial soundness indicators.
- IMF capacity-building and TA (selected):
  - STA TA on balance of payments and government financial statistics — Ongoing FY 2012.
  - MCM TA on nonbank supervision, central bank risk management, and monetary operations — Ongoing FY 2012.
  - FAD TA follow up on PFM scoping mission — Expected FY 2012.
  - Article IV Consultation — May 2012.
  - Several completed and ongoing FY10–FY12 TA and grants (PER/PFM Reform (TA) — FY11; Medium Term Debt Management Strategy (MTDS) — FY10; skills gap/labor markets — FY12; etc.).

### Key macroeconomic indicators and projections (highlights)
- Real GDP (calendar year): 3.0-4.9 7.2 6.5 5.5 7.1 5.1 4.4 4.7 (series across periods in source).
- Mineral GDP growth: -3.8 -21.0 7.0 8.8 5.6 5.7 4.4 2.1 3.2.
- Nonmineral GDP growth: 7.9 4.5 5.4 5.6 5.7 8.2 5.4 5.5 5.3.
- Consumer prices (average): 12.6 8.1 6.9 7.8 6.2 5.1 5.0 4.9 4.9.
- Nominal GDP (billions of pula): 92.0 82.1 100.9 117.6 132.3 149.5 164.8 180.5 198.6.
- Diamond production (millions of carats): 32.3 17.7 23.8 26.1 27.6 29.0 30.1 30.5 31.3.
- Exports, f.o.b. (US$ millions): 4,835.9 3,377.6 4,593.3 5,069.1 5,356.6 5,608.4 5,854.3 6,016.8 6,282.3.
  - Diamonds (US$ millions): 3,068.7 2,139.5 2,917.6 3,244.9 3,479.1 3,709.2 3,906.3 4,016.3 4,185.4.
- End-of-year gross official reserves (US$ millions): 9,115.6 8,668.8 7,883.1 8,382.0 8,919.5 9,591.7 10,353.2 11,197.9 12,070.8.
- Private sector credit to GDP (percent): 20.9 25.9 23.4 22.5 22.4 22.2 22.6 23.2 23.7.

### IMF Executive Board assessment and recommendations
- Directors commended authorities for prudent macroeconomic management and strong recovery.
- Agreed policy priorities:
  - Reduce size of government; strengthen public sector institutional framework; diversify the economy; improve quality of growth.
  - Implement fiscal consolidation decisively to achieve a balanced budget by FY2012/13 largely through spending prioritization and reductions.
  - Ensure only high-quality public investment projects are undertaken; contain growth of the wage bill and large transfers on tertiary education.
  - Increase effective VAT take by rationalizing exemptions and incentives; broaden tax base.
  - Consider a fiscal rule focusing on non-mineral primary balance as share of non-mineral GDP.
  - Continue to strengthen financial supervision, including operationalizing BoB’s financial stability unit and regulatory framework for non-bank financial institutions.
  - Support measures to address skills mismatches and promote FDI in diversification efforts.

*Source: BOTSWANA 2011 ARTICLE IV REPORT (excerpts provided in the supplied content).*

### 1. Selected Economic and Financial Indicators, 2008–2016  ______________________________________  21

### 1. Selected Economic and Financial Indicators, 2008–2016

### Recent developments
- Real GDP grew by 7.2 percent in 2010 compared to a 4.9 percent contraction in 2009.
- Annual export growth (in dollar terms) was about 35 percent in 2010.
- Consumer price inflation (year on year) rose from about 7 percent at end-2010 to 8.3 percent as of May 2011.
- Core inflation (excluding food, fuel and administered prices) has not shown a trend increase in the last few months.
- Banking sector:
  - Credit growth to households has picked up somewhat but remains well below pre-crisis levels.
  - Arrears on bank lending rose significantly during 2009, stabilized during 2010 and by September 2010 had fallen somewhat due to lower levels of non-performing loans to businesses.
- Fiscal outturn in FY2010/11:
  - Deficit of just under 10 percent of GDP compared to the original budget target of 12 percent of GDP.
  - Non-mineral primary deficit declined from about 31 percent of non-mineral GDP in 2009/10 to 27 percent in FY2010/11.
  - Spending cuts focused on central government transfers to other public bodies and on development spending.
- VAT increase from 10 to 12 percent in April 2010 did not yield significant tax revenues.
- External position:
  - Considerable narrowing of the trade deficit in 2010.
  - Real effective exchange rate remained broadly unchanged over the last 12 months.

### Outlook, risks, and medium-term challenges
- Near-term projection:
  - Output growth projected to reach 6.5 percent in 2011 led by the mineral sector.
  - Staff expects inflation to remain above the BoB’s medium-term objective of 3-6 percent throughout 2011.
- Near-term risks:
  - Downside: weaker-than-expected global growth affecting diamond demand.
  - Upside: faster recovery in domestic private investment in energy and non-diamond mineral sectors.
- Medium-term projection:
  - Output growth projected to average about 5.5 percent.
  - Key supports: investments in other minerals and metals (uranium, coal, copper/nickel), completion of Moropule B power plant by 2012/13 (increase domestic electricity capacity by about 600 mega watts), deepening downstream diamond activities, growth in services.
  - External current account balance set to improve gradually, supported by robust diamond and mineral exports, lower energy and equipment imports as projects complete, and a recovery of SACU revenues.
- Exchange rate assessment:
  - Staff judges the current exchange rate level as broadly in line with macroeconomic fundamentals (Appendix I).

### Authorities’ priorities and views
- Two overarching policy issues:
  - Reducing the size of government (government spending just under 40 percent of GDP; government remains the main employer).
  - Sustaining growth, broadening sources, and improving quality of growth (addressing high unemployment; economic diversification).
- Authorities broadly concurred with staff assessments on developments, prospects and challenges.
- FY2011/12 budget forecast for real GDP growth of 6.8 percent is broadly in line with staff’s forecast.
- BoB expects inflation to fall within its medium-term objective range of 3–6 percent only in the second half of 2012.
- Government’s NDP10 emphasizes reducing the relative size of government and diversifying the economy.

### Policy discussions — monetary and fiscal responses
- Monetary policy and inflation:
  - BoB bank rate lowered by 50 basis points to 9.5 percent in December 2010 and kept at that level since then.
  - Core inflation (accounts for about 60 percent of the CPI basket) has not shown rapid increase recently; slack in the non-mining economy limits pass-through.
  - BoB increased statutory reserve requirement for banks from 6.5 percent to 10 percent, effective July 1, 2011.
  - Largest public sector strike since independence in April: initial union demand 16 percent; preliminary agreement for a 3 percent wage increase effective in September that would add only 0.2 percentage points to the wage bill.
- Staff recommendations on monetary policy:
  - Support for BoB’s neutral monetary policy stance given no firm evidence of generalized price pressures.
  - If food and fuel shocks lead to generalized price pressures (via inflation expectations and wage developments), monetary policy should be tightened to anchor expectations and reduce public sector borrowing costs.
  - Support for authorities’ forward-looking approach to the rate of crawl for the exchange rate.
- Fiscal policy and consolidation:
  - FY2011/12 budget implies significant fiscal withdrawal; FY2011/12 budget targets a deficit of 6 percent of GDP.
  - Staff baseline envisages a balanced budget in FY2012/13 with small surpluses in outer years.
  - Fiscal adjustment to balance the budget would require reining in overall spending (as a share of GDP) to broadly pre-crisis levels.
  - Reverting public investment program to pre-crisis levels would contribute about 4½ percentage points of GDP to the fiscal adjustment.
  - Staff’s Debt Sustainability Analysis shows debt burden remains very low but sensitive to diamond revenue fluctuations.
- Tax policy findings:
  - Effective tax rates of the VAT and corporate taxes are significantly lower than statutory rates.
  - Botswana’s VAT rate is one of the lowest among comparator countries; zero ratings on such a low VAT rate erode the revenue base.
- Staff recommendations on fiscal policy:
  - Near term: prudent to rebuild fiscal buffers while diamond prices are high; support policy stance of saving revenue over performance in FY2011/12 to replenish the Pula Fund (Appendix II).
  - Medium term: reduce the non-mineral primary balance (NMPB) to a deficit of about 8 percent of non-mineral GDP from the current estimate of about 23 percent (Appendix II), requiring sizable expenditure reductions.
  - Priority expenditure containment areas:
    - Wage bill: reduce wage bill (as a share of GDP) via prudent wage policy and civil service reform; any nominal wage adjustment in FY2011/12 should be budget neutral and financed by other savings.
    - Education budget: rein in tertiary education spending; better synchronize expenditures and receipts of budgetary units to improve central government cash management and minimize idle balances.
  - World Bank Public Expenditure Review and planned IMF technical assistance on public financial management to assist in reforming education spending.

### Key fiscal figures (selected from authorities’ tables)
- Central government operations (percent of GDP), selected entries shown in source:
  - Revenue: 34.6 (2009/10); 28.8 (2010/11); 30.5 (2011/12); 31.2 (2012/13); 31.7 (2013/14); 32.2 (2014/15); 32.1 (2015/16).
  - Expenditure: 45.5 (2009/10); 38.5 (2010/11); 36.2 (2011/12); 31.2 (2012/13); 29.6 (2013/14); 28.7 (2014/15); 27.9 (2015/16).
  - Current expenditure: 29.6 (2009/10); 25.9 (2010/11); 27.4 (2011/12); 23.0 (2012/13); 21.7 (2013/14); 20.9 (2014/15); 20.1 (2015/16).
  - Capital expenditure: 15.0 (2009/10); 12.7 (2010/11); 8.9 (2011/12); 8.4 (2012/13); 7.9 (2013/14); 7.9 (2014/15); 7.9 (2015/16).
  - Overall balance: -10.9 (2009/10); -9.7 (2010/11); -5.7 (2011/12); 0.0 (2012/13); 2.2 (2013/14); 3.5 (2014/15); 4.2 (2015/16).
  - Non-mineral primary balance: -30.6 (2009/10); -26.6 (2010/11); -23.0 (2011/12); -15.2 (2012/13); -12.4 (2013/14); -10.9 (2014/15); -9.5 (2015/16).

*Source: BOTSWANA 2011 ARTICLE IV REPORT (excerpts provided in the supplied content).*

### 22.      There is scope to broaden the tax

### 22.      There is scope to broaden the tax 

### Broadening the tax base and tax administration
- Staff urged close monitoring of effective tax rates and cautioned against granting preferential tax regimes for businesses.
- Consider conducting a study on tax expenditures to inform policymakers about the magnitude of tax revenues lost through tax incentives.
- Strengthening tax administration is critical; mission urged moving ahead on creation of a large taxpayer unit (LTU) within the Botswana Unified Revenue Service.

### Authorities’ views on fiscal consolidation and spending
- Government committed to balancing the budget in FY2012/13.
- Authorities agreed spending levels were unsustainably high and indicated substantial reductions in expenditures during the next two years would form the basis for achieving a balanced budget by FY2012/13.
- FY2011/12 budget documents noted spending as a share of GDP would be reduced from its current level of just under 40 percent of GDP to just about 30 percent by FY2014/15.
- Public investment program expanded during 2008–10 should revert to more normal pre-crisis levels as big-ticket infrastructure projects are completed, with emphasis on maintenance rather than initiating new projects.
- Authorities seeking to devise simple rules and metrics to contain appropriations already included in the budget without unduly affecting normal functioning of budgetary units.
- Steps toward mandatory public service outsourcing of non-core activities (security services, office maintenance and transport services) intended to reduce administrative burden.
- Authorities agreed on need to reduce size of the wage bill and shared staff’s view that Botswana may not be getting “value for money” regarding current spending on tertiary education.
- Authorities concurred that tax incentives do little to propel new investment and productive activity, but significantly erode the tax base.
- Authorities agreed there is scope for broadening the tax base, for example by reducing numbers of goods and services exempt from VAT, while avoiding undue tax burdens that may discourage domestic activity and FDI.

### Policy Theme 3 — Strengthening the public sector institutional framework
- Background:
  - Current fiscal policy framework focuses on a balanced budget rule and targeted decline in spending as a share of GDP.
  - Overall fiscal balance may not be a reliable indicator of (i) impact of fiscal policy on domestic demand, or (ii) government’s adjustment effort.
  - Fiscal rule that limits government expenditures as percent of GDP can create unintended procyclicality when diamond prices (and GDP) rise, allowing higher spending.
- Financial sector supervision:
  - Banking sector described as sound: banks vigilant over asset quality and reserves, remain profitable, capital levels significantly in excess of regulatory requirements, and non-performing loans remain low.
  - BoB working to make its financial stability unit fully operational.
  - Progress by Nonbank Financial Institutions Regulatory Authority (NBFIRA) in shifting from compliance-based to risk-based supervision.
  - New Insurance and Pension Funds Act tentatively planned for discussion by parliament in November 2011, proposing gradual rebalancing of insurance companies’ and pension funds’ portfolios.
- Staff recommendations:
  - Strengthen fiscal framework by giving greater prominence to the non-mineral primary balance (NMPB) in fiscal policy formulation.
  - Adding the NMPB to fiscal rules would provide a clearer picture of underlying fiscal stance and long-term sustainability.
  - Bank prudential regulation should keep pace with financial innovation (mobile banking); closely monitor banks’ exposure to mortgage loans as some banks plan to expand such secured lending.
- Authorities’ views:
  - Recognize need for a new fiscal rule but cautioned on transition from current rule that includes mineral revenues to a rule that excludes mineral revenues.
  - New fiscal rule should take long-term view of revenues, especially mineral revenues likely to decline in decades following NDP10.
  - Rule should denominate expenditures as share of non-mineral GDP to avoid ramping up expenditure during mineral revenue booms.
  - Implementation of exit policy for new fiscal rule should be carefully managed (recent national public sector union strike highlighted sensitivities).
  - Sustainable budget index rule in NDP10 reserves mineral revenues for capital spending, leaving only non-mineral revenues to finance recurrent spending.
- BoB views:
  - Continue to prioritize banking system surveillance; aware of challenges from cell phone banking and e-wallets.
  - Banks’ exposure to households remains high but increased provisioning should provide safeguards.
  - Mortgage lending is still a relatively small component of overall bank lending, albeit growing; agreed to monitor real estate market data systematically, though a practical method has not been identified.

### Policy Theme 4 — Improving the quality of growth
- Background:
  - Botswana has relied heavily on diamond exports, making the economy vulnerable to shocks; global financial crisis highlighted need for diversified and competitive private sector.
  - Unemployment rate persistently high; labor market flexibility compares well with other middle-income countries.
  - High unemployment largely reflects capital intensity of mining sector and skills mismatch in non-mining sectors (including emerging IT sector and services such as non-bank financial sector).
- Staff findings and recommendations:
  - Government focus on sectors with high productivity and employment creation potential supports economic diversification.
  - Successful diversification will likely demand sizeable foreign direct investment in the non-mining sector, while avoiding unwarranted tax incentives that impair the tax base.
  - Reducing cost of doing business and improving business environment tend to yield better medium-term outcomes for private sector development.
  - Combination of carefully designed initiatives and faster growth likely to reduce unemployment; improving labor force skills via education reform to produce workers with in-demand skills is important.
  - Inclusive growth critical for poverty eradication; sustained reduction in structural unemployment should help reduce poverty.
  - Fiscal policy can aid inclusive growth via more efficient and well-targeted pro-poor spending on health and education.
- Authorities’ views:
  - Agreed on need to improve quality of growth; see potential in service sectors though limited trade logistics and communication technologies constrain regional trade and development of financial/business hubs.
  - Business licensing procedures simplified; time to register a business now 5 to 10 days.
  - Ongoing diversification within mineral sector includes exploration of uranium and copper/nickel.
  - Skills mismatch identified as key labor market constraint; tertiary education reform program and creation of Human Resource Development Council aim to reduce unemployment.
  - Establishment of a Labor Market Observatory to enhance dissemination of labor market information including vacancies.
  - Government shifting focus from poverty reduction to poverty eradication; plans to refocus social safety net expenditures and make pro-poor spending more efficient.
  - Upcoming Botswana Core Welfare Indicator Survey expected to assess poverty levels to inform policy.

### Staff appraisal and overall recommendations
- Economic outlook and exchange rate:
  - Staff projects a GDP growth of 6.5 percent in 2011, averaging about 5.5 percent over the medium term.
  - Staff judges the level of the exchange rate as broadly in line with fundamentals.
- Overriding economic policy challenges identified:
  - Reducing the size of government.
  - Sustaining growth, diversifying the economy and improving its quality (including reducing unemployment and improving social indicators).
  - Need to rebuild fiscal buffers to strengthen resilience to future shocks.
- Monetary and fiscal stance on global food and fuel price shocks:
  - Staff supports BoB’s neutral monetary policy stance; tighten monetary policy if food and fuel shocks lead to systemic price pressures.
  - Government’s policy of providing a predetermined food basket to the needy (rather than monetary transfers) shields the poor from inflation.
- Fiscal policy actions supported by staff:
  - Move decisively on fiscal plan targeting a balanced budget by FY2012/13 centered on sharp spending reduction.
  - Scope exists to broaden the tax base.
  - Support for better prioritizing overall government outlays, ensuring only high-quality ongoing projects are undertaken with public funds, and efforts to contain growth of appropriations for current transfers, goods and services, and the wage bill.
  - Nominal wage adjustment should be benchmarked to expected inflation and productivity gains.
  - On tax policy, staff welcomes corporate income tax reforms and recommends complementing these with improving effective tax rates on VAT and corporate income taxes, revisiting merits of specific tax incentives, and establishing a large taxpayer unit at Botswana Unified Revenue Service.
- Institutional and sectoral recommendations:
  - Consider adding non-mineral primary balance to fiscal anchor indicators for clearer picture of fiscal stance.
  - Support BoB efforts to make financial stability unit fully operational and welcome progress in strengthening regulation for non-bank financial institutions.
  - Support diversification within mineral sector and exploration of services sector; cautious use of tax incentives.
  - Welcome government initiatives to reduce unemployment (tertiary education reform, Human Resource Development Council).
  - Emphasize poverty eradication focus and role of inclusive growth and targeted pro-poor spending on health and education.

*Source: 2011 ARTICLE IV REPORT BOTSWANA, INTERNATIONAL MONETARY FUND*

### 45.      Staff recommends that the next

### _cr11248 - 45.      Staff recommends that the next

### Recommendation
- Staff recommends that the next Article IV consultation with Botswana will take place on the standard 12-month cycle.

### Recent economic developments (Figure 1: narrative)
- The economy has recovered strongly from the impact of the global financial crisis, supported by strong growth in mineral exports, particularly diamonds.
- Non-mining real GDP growth remained robust, despite limited government support.
- Inflation has been low, but rising due to hikes in food and energy prices and increases in some administrated prices.
- The overall and the nonmineral primary deficits declined somewhat due to cuts in overall public spending that more than compensate for a substantial decline in SACU revenues.
- The central bank cut its leading interest rate in December while credit conditions are gradually normalizing, especially for households.
- The real effective exchange rate has remained broadly constant for the past year.
- Strong export growth has led to a gradual decline in the trade deficit.
- International reserves dropped owing to enduring, albeit declining, current account imbalances.
- Public debt has been on the rise, mainly driven by larger borrowing from IFIs.

### Key macroeconomic indicators and projections (select from Table 1 and Tables 3–4)
- Real GDP (calendar year)1: 3.0-4.9 7.2 6.5 5.5 7.1 5.1 4.4 4.7
- Mineral GDP growth: -3.8 -21.0 7.0 8.8 5.6 5.7 4.4 2.1 3.2
- Nonmineral GDP growth2: 7.9 4.5 5.4 5.6 5.7 8.2 5.4 5.5 5.3
- Consumer prices (average): 12.6 8.1 6.9 7.8 6.2 5.1 5.0 4.9 4.9
- Consumer prices (end of period): 13.7 5.8 7.4 7.2 5.2 5.1 4.9 4.9 4.9
- Nominal GDP (billions of pula)1: 92.0 82.1 100.9 117.6 132.3 149.5 164.8 180.5 198.6
  - Mineral: 37.5 21.5 31.6 38.6 43.2 47.3 51.2 54.3 58.8
  - Nonmineral: 54.5 60.6 69.4 79.0 89.1 102.2 113.6 126.1 139.9
- Diamond production (millions of carats): 32.3 17.7 23.8 26.1 27.6 29.0 30.1 30.5 31.3
- Exports of goods and services, f.o.b. (US$): -2.9 -35.7 33.6 11.1 6.1 5.0 4.7 3.4 4.6
  - Of which diamonds: -8.1 -30.3 36.4 11.2 7.2 6.6 5.3 2.8 4.2
- Imports of goods and services, f.o.b. (US$): 18.2 -3.5 18.1 2.4 0.5 1.6 1.9 2.2 4.3
- Current account balance (US$ millions; Table 3): 931.8 -668.0 -727.8 -628.5 -196.1 147.4 321.4 440.8 486.7
- Trade balance (US$ millions; Table 3): 440.1 -680.9 -176.7 177.1 462.7 673.0 850.5 939.1 986.4
- Exports, f.o.b. (US$ millions; Table 3): 4,835.9 3,377.6 4,593.3 5,069.1 5,356.6 5,608.4 5,854.3 6,016.8 6,282.3
  - Diamonds (US$ millions): 3,068.7 2,139.5 2,917.6 3,244.9 3,479.1 3,709.2 3,906.3 4,016.3 4,185.4
- End-of-year gross official reserves (US$ millions, Table 3): 9,115.6 8,668.8 7,883.1 8,382.0 8,919.5 9,591.7 10,353.2 11,197.9 12,070.8
- Gross official reserves (months of imports of goods and services)1: 21.9 17.6 15.6 17.3 19.3 21.6 23.8 25.3 26.0
- Net foreign assets (Monetary Survey, Table 4; millions of pula): 72,781 59,312 52,550 65,892 78,960 93,311 108,512 124,615 134,021
- Money plus quasi-money (M2; Table 4; end period, millions of pula): 39,228 38,717 43,542 49,577 55,896 65,195 73,852 82,008 90,919
- Private sector credit to GDP (Table 4, percent): 20.9 25.9 23.4 22.5 22.4 22.2 22.6 23.2 23.7

### Fiscal developments (select from Tables 2a–2d)
- Total revenue and grants (millions of pula, Table 2a): 28,629 30,455 30,023 30,289 36,920 42,594 48,507 54,213 59,209
- Total expenditure and net lending (millions of pula, Table 2a): 24,822 35,150 39,490 40,509 43,934 42,594 45,325 48,455 51,689
- Overall balance (deficit –) (millions of pula, Table 2a): 3,808 -4,695 -9,467 -10,220 -7,014 0 3,182 5,758 7,520
- Nonmineral primary balance (memorandum, millions of pula, Table 2a): -7,929 -15,949 -19,218 -19,085 -18,769 -13,737 -12,698 -12,453 -12,054
- Total central government debt (percent of GDP, Table 1): 6.4 16.1 13.2 15.6 14.0 12.4 10.8 9.4 8.1
- External public debt (percent of GDP, Table 1): 2.1 14.3 15.1 15.8 15.0 13.0 11.0 9.2 9.0

### Banking and financial sector (select from Table 5)
- Regulatory capital (millions of pula): 1,568.6 1,743.2 2,020.6 2,991.6 3,670.7 3,989.6 4,582.0 4,801.9
- Risk weighted assets (millions of pula): 9,065.6 10,404.2 10,947.2 17,694.4 18,734.7 20,044.4 22,311.8 22,784.9
- Regulatory capital to risk-weighted assets (percent): 17.3 16.8 18.5 16.9 19.6 19.9 20.5 21.1
- Nonperforming loans (NPLs)-to-gross loans (percent): 0.9 1.5 1.3 1.6 3.2 3.3 6.1 2.5
- Return on average assets (percent): 5.5 6.1 2.6 2.9 2.8 0.7 0.9 0.6

### Development and social indicators (select from Table 6)
- Diamond indicators and social scores referenced; Millennium Development Goal indicators include:
  - GNI per capita, Atlas method (current US$): 2,560 3,040 3,310 6,120
  - Life expectancy at birth, total (years): 63 57 49 51
  - Population, total (millions): 1.4 1.6 1.7 1.9

*Sources: Botswana authorities; and Fund staff’s estimates.*

### Appendix I. Exchange Rate Assessment

### Appendix I. Exchange Rate Assessment

### Summary assessment
- Different measures provide evidence of some degree of overvaluation, although the misalignment is not in excess of 10 percent.
- Taking into account the confidence bands surrounding the various estimates, it is fair to conclude that by and large the real effective exchange rate (REER) is broadly in line with macroeconomic fundamentals from a medium-term perspective.

### Exchange rate regime
- The exchange rate regime is a crawling peg, in which the pula is pegged to a basket of currencies comprising the SDR and South African rand.
- The regime is implemented through continuous adjustment of the trade-weighted nominal effective exchange rate of the pula at a rate of crawl based on the differential between Botswana’s inflation objective and the forecast inflation of trading partner countries.
- The rate of crawl is determined using a forward-looking approach and is revised on a regular basis; authorities periodically determine the rate of crawl for the subsequent period, such as the next 6 or 12 months.
- Botswana maintains an exchange system free of restrictions on the making of payments and transfer for current international transactions.

### Alternative exchange rate assessment approaches and findings
- Macroeconomic balance approach (MB):
  - Assesses exchange rate by estimating the gap between the underlying current account balance and its norm, taking into account Botswana’s macroeconomic fundamentals.
  - Degree of under- or overvaluation determined by size of gap and elasticity of current account relative to the REER.
  - MB indicates an overvalued exchange rate in the order of 4–6 percent under the baseline scenario and 15–17 percent under the alternative scenario that assumes a delayed fiscal consolidation.
  - This assessment assumes fiscal consolidation proceeds as planned and that the overall budget balance returns to a moderate surplus over the medium term.
  - The underlying current account balance is calculated to be consistent with the sustainable fiscal position under the NMPB approach.
- Equilibrium real exchange rate approach (EREER):
  - Estimates the level of the equilibrium real exchange rate based on macroeconomic fundamentals and compares it to the observed real exchange rate.
  - The EREER estimates that the exchange rate is currently overvalued by 9 percent.
- External sustainability approach (ES):
  - Calibrated to calculate the norm current account balance consistent with a buildup of net foreign assets that takes into account the need to accumulate savings ahead of declining diamond receipts.
  - The gap between the underlying and norm current account balances reflects the degree of under- or overvaluation of the REER.
  - The ES approach indicates that the exchange rate is overvalued by 11 percent.
- Purchasing power parity approach (PPP) (Rodrick (2008) stylized model):
  - Steps: (i) define relative prices using PPP exchange rate; (ii) estimate panel regression of ratio of PPP exchange rate to market exchange rate as function of GDP per capita at “PPP dollars”; (iii) evaluate residual to determine degree of misalignment.
  - The PPP approach shows an exchange rate that is overvalued by about 8 percent in 2010.

### Non-price competitiveness indicators
- Botswana is close to its peer countries in terms of overall competitiveness.
- Scores slightly above average compared to other middle-income countries (MICs) in:
  - Strength of institutions
  - Financial market development
  - Labor market flexibility
- Scores below the middle-income average in:
  - Health
  - Education
- Infrastructure and macroeconomic environment scores are broadly in line with countries with similar income level and characteristics.

### Implications and priorities
- Overall, the REER is broadly in line with fundamentals from a medium-term perspective despite indications of slight overvaluation across methods (estimates ranging from about 4–11 percent, with one method at 9 percent and PPP at about 8 percent).
- Improving the return on investment in tertiary education is important to placing the country in a competitive position as the economy moves beyond the diamond sector.

*Source: _cr11248 - Appendix I. Exchange Rate Assessment_*

### 5. Statistics/Capacity-building

### _cr11248 - 5. Statistics/Capacity-building

### Capacity-building and Technical Assistance Activities (selected items)
- Strengthening Monitoring and Evaluation capacity for Vision 2016 Council (IDF Grant) — FY12; ongoing
- Strengthening Institute & Accountants (IDF Grant) — FY12; ongoing
- Carbon Capture and Storage TA — FY11; ongoing
- Post ICA Follow-up— Microenterprises — FY10; completed
- Public Expenditure Review — (timing unspecified in source)
- FBSA Technical Advisory Services (Phases 1 & 2) — FY10; completed
- Sustainable Development (SDN) Policy Notes — Phase 1 completed FY10, Phase 2 completed FY11
- PER/PFM Reform (TA) — FY11; completed
- Development Policy Review (DPR): Competitiveness, Diversification and Growth — FY12
- Skills Gap/Labor Markets — FY12; ongoing
- Assistance to Statistics Botswana in developing a new Poverty Datum Line; including capacity building — FY11; ongoing
- Capacity Building in Nonbank Financial Institutions (TA); further capacity building being undertaken (pension funds, insurance; capital markets) — FY10; completed; FY12; ongoing
- Issues Note on Accrual Accounting — FY11; ongoing
- Country Program Strategy (CPS) Progress Report — FY12
- Medium Term Debt Management Strategy (MTDS) — FY10; completed

### IMF Work Program in the Next 12 Months (selected)
- STA TA on balance of payments and government financial statistics — Ongoing FY 2012
- MCM TA on nonbank supervision, central bank risk management, and monetary operations, including assistance in moving on inflation forecasting and modeling — Ongoing FY 2012
- FAD TA Follow up on PFM scoping mission — Expected FY 2012
- Article IV Consultation — May 2012

### Assessment of Data Adequacy for Surveillance — Key Findings
- Institutional change:
  - On November 30, 2010, the government of Botswana gazetted the commencement of the Statistics Act of 2009.
  - The Central Statistics Office (CSO) was transformed into Statistics Botswana (SB), now operating independently of the Ministry of Finance and Development Planning with its own board of Directors.
- General data adequacy:
  - 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 concerns: central bank survey and detailed government expenditure data by economic classification need increased timeliness to better support analysis and prepare for SDDS subscription.
  - Recommended improvements include dissemination of monthly diamond production and quarterly aggregate financial soundness indicators.
- Ongoing authority actions to improve data:
  - Reviewing source data and methodologies for data with estimation problems/gaps.
  - Seeking stronger collaboration among source data producers to reconcile discrepancies.
  - Producing leading economic indicators.
  - Addressing staff shortages within budget constraints.
  - A national population census is scheduled to begin the current fiscal year.

### Statistical Domain Findings
- National Accounts:
  - Need to rebase national accounts; current base year is 1993/94.
  - Household Income and Expenditure Survey (HIES) (2002/03) and Labor Force Survey (2005/06) are out of date.
  - More frequent surveys would improve private consumption estimation and understanding of poverty and unemployment.
- Price Statistics:
  - Monthly CPI available timely on SB’s website; provides urban/rural and tradable/nontradable breakdowns.
  - CPI weights use estimates from an outdated HIES (ongoing HIES to update).
  - Inclusion of owner-occupied housing prices in CPI is pending.
  - Producer/wholesale price compilation has been discontinued.
- Government Finance Statistics:
  - Compilation generally follows GFSM 1986 but covers only budgetary central government activities.
  - No fiscal statistics for extra-budgetary institutions, consolidated central government, or consolidated general government.
  - No decision yet on adopting a migration path to GFSM 2001; authorities working with STA.
  - Recurrent and development expenditure are published in aggregate form; development spending mixes current and capital spending.
- Monetary and Financial Statistics:
  - Practices consistent with the Monetary and Financial Statistics Manual.
  - Central bank survey available with a lag of usually about three months (SDDS recommends two weeks).
  - STA recommends making preliminary data available with clear identification of status; authorities prefer cautious dissemination to avoid reputation damage from revisions.
  - BoB seeks to expand coverage to nonbank financial intermediaries (NBFI); STA recommends focusing on data collection in a handful of large institutions within each NBFI category.
- Balance of Payments and IIP:
  - Annual and quarterly BOP data published in Botswana Financial Statistics and BoB’s Annual Report.
  - Preliminary data generally disseminated within two months; revised (final) data available after nine months.
  - Concepts follow BPM5.
  - Source data generally adequate, but ITRS data for services and transfer items has become unreliable.
  - Estimation methods for missing data (unrecorded trade), f.o.b./c.i.f. import adjustments, and flows-from-stock are inadequate.
  - Discrepancies exist in national accounts concerning valuation of diamond exports and SACU-related imports/exports/payments.
  - Large errors and omissions in 2008–2010 BOP statistics complicate external sustainability assessment.
  - BoB conducts an annual investment and IIP survey; a quarterly IIP survey is produced for internal use with ITRS data.
- External Debt:
  - Public external debt data are of good quality but timeliness could be improved (latest published data is for March 2009).

### Data Standards, Quality, and Reporting
- Botswana has participated in the GDDS since late 2002.
- Data ROSC and updates published April 2002, March 2004, and April 2007.
- Monetary data are reported for publication in International Financial Statistics using Standardized Report Forms.
- Botswana reports annual balance of payments and IIP data to STA.
- No government financial statistics currently reported for publication in the Government Finance Statistics Yearbook.

### Common Indicators Required for Surveillance (excerpt as of June 15, 2011)
- Exchange rates: Latest observation 6/15/2011; Date received 6/15/2011; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D.
- International reserve assets and reserve liabilities of the monetary authorities: Latest observation Mar 2011; Date received May 2011; Frequency M; Frequency of Reporting M; Frequency of Publication M.
- Reserve/base money: Latest observation Mar 2011; Date received May 2011; Frequency M; Frequency of Reporting M; Frequency of Publication M; Data Quality—Methodological Soundness: O, O, LO, O; Data Quality—Accuracy and Reliability: LNO, O, LO, LO, LO.
- Broad money: Latest observation Mar 2011; Date received June 2011; Frequency M; Frequency of Reporting M; Frequency of Publication M.
- Central bank balance sheet: Latest observation Mar 2011; Date received Mar 2011; Frequency M; Frequency of Reporting M; Frequency of Publication M.
- Consolidated balance sheet of the banking system: Latest observation Mar 2011; Date received June 2011; Frequency M; Frequency of Reporting M.
- Interest rates: Latest observation 6/15/2011; Date received 6/15/2011; Frequency D; Frequency of Reporting D; Frequency of Publication D.
- Consumer price index: Latest observation May 2011; Date received June 2011; Frequency M; Frequency of Reporting M; Frequency of Publication M; Data Quality—Methodological Soundness: O, LO, O, O; Data Quality—Accuracy and Reliability: LO, LO, LO, LO, O.
- Revenue, expenditure, balance, and composition of financing — general government: Date received NA; Data Quality—Methodological Soundness: LO, LNO, LNO, LO; Data Quality—Accuracy and Reliability: LO, O, LO, LO, LNO.
- Revenue, expenditure, balance, and composition of financing — central government: Latest observation March 2011; Date received July 2011; Frequency A/Q/M; Frequency of Reporting Q; Frequency of Publication Q.
- Stocks of central government and central government-guaranteed debt: Latest observation March 2011; Date received July 2011; Frequency A; Frequency of Reporting A; Frequency of Publication A.
- External current account balance: Latest observation 2010 Q4; Date received July 2011; Frequency A/Q; 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: Latest observation March 2011; Date received May 2011; Frequency M; Frequency of Reporting M; Frequency of Publication M.
- GDP/GNP: Latest observation 2010 Q4; Date received April 2011; Frequency 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: Latest observation March 2011; Date received July 2011; Frequency A/Q; Frequency of Reporting A; Frequency of Publication A.

### Medium-Term Public Debt Sustainability — Key Points and Scenarios
- Debt status and composition:
  - Compared with 2009/10, Botswana’s gross public debt remained mainly unchanged in absolute pula values in 2010/11.
  - As a share of GDP, the debt declined from 17 to 13.8 percent.
  - About 77 percent of the debt is owed to bilateral and multilateral foreign creditors, while the rest is domestic debt.
- Historical context:
  - Botswana has had a historically low level of public debt due to prudent macroeconomic policies and substantial accumulation of international reserves, including the Pula Fund.
  - Fiscal imbalances from countercyclical policies during the global financial crisis were largely financed by a drawdown of government deposits in the Bank of Botswana rather than through large increases in debt.
- Baseline staff macroeconomic framework:
  - Assumes a sharp adjustment in the primary balance shifting from a deficit of 9.5 percent of GDP in 2010/11 to a surplus of about 6 percent of GDP in 2016/17.
  - This adjustment mainly reflects a sharp contraction in primary expenditure that reinforces increases in tax revenue.
  - By 2016/17, the stock of gross public debt is projected at 8.3 percent of GDP.
- Alternative scenarios in Table 2 (summary descriptions):
  - Scenario 1: If real GDP growth, real interest rates, and the primary balance are maintained at their historical 10-year averages, the deterioration in primary balances is the main driver and leads to a steady increase in the public debt-to-GDP ratio.
  - Scenario 2: If the primary fiscal balance is held constant at its 2010/11 peak level (− [text truncated in source]), the debt dynamics differ accordingly (details in source table).

*Source: 2011 Article IV Report — Informational Annex (Botswana), IMF staff report material as provided in the source content.*

### 9.5 percent of GDP) throughout the

### _cr11248 - 9.5 percent of GDP) throughout the

### Public debt dynamics and baseline projections
- Under the baseline, public sector debt evolves as follows (public sector debt, in percent of GDP):
  - 2006: 5.4
  - 2007: 7.1
  - 2008: 6.4
  - 2009: 16.1
  - 2010: 13.2
  - 2011: 15.6
  - 2012: 14.0
  - 2013: 12.4
  - 2014: 10.8
  - 2015: 9.4
  - 2016: 8.1
- Debt-stabilizing primary balance in 2016: 0.0 (percent of GDP).
- Change in public sector debt (yearly): -1.6, 1.8, -0.8, 9.7, -2.8, 2.4, -1.6, -1.5, -1.6, -1.4, -1.3 (2006–2016).
- Identified debt-creating flows (4+7+12): -11.2, -6.7, 2.1, 10.0, 6.2, 4.6, -0.5, -3.2, -4.2, -4.8, -6.0 (2006–2016).
- Primary deficit (percent of GDP): -10.5, -6.3, 2.6, 9.1, 9.1, 6.0, 0.7, -2.2, -3.7, -4.4, -5.7 (2006–2016).
- Revenue and grants (percent of GDP): 38.3, 35.4, 33.5, 34.7, 28.8, 29.1, 30.1, 30.7, 31.3, 31.3, 31.5 (2006–2016).
- Primary (noninterest) expenditure (percent of GDP): 27.8, 29.1, 36.1, 43.8, 37.9, 35.1, 30.8, 28.5, 27.6, 26.9, 25.8 (2006–2016).
- Automatic debt dynamics contributions (percent):
  - Overall: -0.7, -0.4, -0.4, 0.9, -2.9, -1.4, -1.2, -1.0, -0.5, -0.4, -0.3 (2006–2016).
  - Contribution from interest rate/growth differential: -1.0, -0.4, -1.0, 1.2, -2.6, -1.4, -1.2, -1.0, -0.5, -0.4, -0.3.
  - Of which real interest rate contribution: -0.8, -0.2, -0.8, 0.8, -1.6, -0.7, -0.4, -0.1, 0.0, 0.0, 0.1.
  - Of which real GDP growth contribution: -0.3, -0.2, -0.2, 0.4, -0.9, -0.7, -0.8, -0.9, -0.6, -0.4, -0.4.
  - Contribution from exchange rate depreciation: 0.3, 0.0, 0.5, -0.3, -0.3, ...
- Residual, including asset changes (2-3): 9.6, 8.5, -2.9, -0.3, -9.1, -2.2, -1.1, 1.7, 2.6, 3.3, 4.7 (2006–2016).
- Public sector debt-to-revenue ratio (percent): 14.0, 20.1, 19.0, 46.3, 45.9, 53.5, 46.3, 40.5, 34.7, 30.0, 25.7 (2006–2016).
- Gross financing need (percent of GDP): -5.0, -8.4, -5.1, 3.3, 8.2, 8.4, 5.9, 1.3, -0.9, -2.2, -3.0 (2006–2016).
- Gross financing need (in billions of U.S. dollars, listed across periods): -590.1, -1091.0, -668.0, 405.9, 1262.2, 1415.7, 1062.7, 258.8, -196.1, -495.6, -708.3.

### Public-debt scenarios and sensitivity to shocks
- Scenario with key variables at their historical averages (public debt, percent of GDP): 15.6, 13.2, 13.8, 15.3, 17.6, 21.3, -1.0 (selected years shown).
- Scenario with no policy change (constant primary balance) in 2011-2016 (public debt, percent of GDP): 15.6, 19.2, 25.5, 33.2, 41.7, 51.8, -0.1 (selected years shown).
- Alternative path assuming primary balance remains at -9.5 percent of GDP throughout the medium-term: public debt rises sharply to 53 percent of GDP by 2016/17—more than twice the debt-to-GDP ratio reached under the first scenario—underscoring downside risk of delay or failure to reduce expenditure to sustainable levels.
- Bounds-test shock outcomes (public debt-to-GDP):
  - Increase in real interest rates: results in a 3 percentage points increase in the debt-to-GDP ratio relative to the baseline.
  - Worsening in the 10-year historical average primary balance by one standard deviation: results in a 16 percentage points increase in the debt-to-GDP ratio.
- Figure 1 notes:
  - Individual shocks are permanent one-half standard deviation shocks.
  - Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and primary balance in combined scenarios.
  - One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2010 in one scenario (real depreciation defined as nominal depreciation minus domestic inflation based on GDP deflator).

### External debt and medium-term external debt sustainability
- Botswana’s gross external debt:
  - Increased from US$2.7 billion in 2009 to US$3.5 billion in 2010.
  - Remained unchanged as a share of GDP in those two years.
  - Nominal increase mainly reflected external borrowing by Botswana Power Corporation for Moropule B and World Bank loan disbursements for social and institution-building programs.
- Projection of gross external debt (percent of GDP, baseline):
  - 2006: 12.5
  - 2007: 10.1
  - 2008: 8.4
  - 2009: 23.3
  - 2010: 23.2
  - 2011: 20.4
  - 2012: 18.5
  - 2013: 16.3
  - 2014: 14.2
  - 2015: 12.3
  - 2016: 6.8
- Debt-stabilizing non-interest current account: -2.9 (percent of GDP) in 2016.
- Change in external debt (2006–2016): -1.2, -2.3, -1.7, 14.8, 0.0, -2.8, -1.9, -2.2, -2.1, -1.9, -5.5.
- Identified external debt-creating flows (4+8+9): -23.0, -20.2, -11.4, 3.8, -3.2, -1.5, -4.3, -6.1, -6.4, -6.4, -6.2 (2006–2016).
- Current account deficit excluding interest payments (percent of GDP): -18.2, -15.9, -7.7, 4.9, 4.6, 2.4, -1.2, -2.8, -3.6, -3.8, -3.6 (2006–2016).
- Exports (percent of GDP): 47.0, 47.5, 42.0, 31.8, 32.9, 33.5, 33.3, 32.0, 31.4, 30.7, 30.3.
- Imports (percent of GDP): 30.7, 35.4, 38.2, 43.4, 39.7, 37.2, 34.9, 32.5, 31.0, 30.1, 29.6.
- Net non-debt creating capital inflows (negative, percent of GDP): -4.6, -4.1, -3.6, -3.5, -2.8, -3.7, -3.5, -3.3, -3.2, -3.1, -3.0.
- Automatic debt dynamics (external debt, percent): -0.1, -0.1, -0.1, 2.4, -4.9, -0.3, 0.4, 0.0, 0.4, 0.5, 0.4.
- Residual, including change in gross foreign assets (2-3): 21.8, 17.8, 9.6, 11.0, 3.1, -1.3, 2.4, 3.9, 4.3, 4.5, 0.7.
- External debt-to-exports ratio (percent): 26.6, 21.4, 20.1, 73.1, 70.5, 60.9, 55.6, 51.0, 45.2, 39.9, 22.4.
- Gross external financing need (in billions of US$): -1180.4, -1019.8, -895.8, 713.1, 771.4, 610.8, 81.6, -264.6, -392.9, -462.8, -496.7.
- Gross external financing need (percent of GDP): -10.4, -8.2, -6.6, 6.2, 5.2, 3.8, 0.5, -1.4, -1.9, -2.2, -2.2.
- Staff scenarios with key variables at historical levels suggest Botswana could become a net creditor vis-à-vis the rest of the world over the medium-term, improving on baseline projections.
- External debt vulnerability:
  - Robust to shocks in interest rates and economic activity.
  - Greatest vulnerability is to a shock to the current account balance.
  - A real depreciation shock leads to a temporary increase in the external debt-to-GDP ratio that gradually fades over the medium-term.
- Figure 2 notes:
  - 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 2011 in one scenario.

### Key macroeconomic and fiscal assumptions underlying baseline
- Real GDP growth (percent): 5.1, 4.8, 3.0, -4.9, 7.2, 6.5, 5.5, 7.1, 5.1, 4.4, 4.7 (2006–2016).
- Average nominal interest rate on public debt (percent): 6.6, 6.7, 4.8, 6.1, 3.4, 3.9, 4.2, 5.3, 5.5, 5.6, 6.7 (2006–2016).
- Average real interest rate (nominal rate minus change in GDP deflator, percent): -12.6, -3.7, -12.7, 12.2, -11.3, -5.6, -2.5, -0.3, 0.6, 0.6, 1.4 (2006–2016).
- Inflation rate (GDP deflator, percent): 19.1, 10.4, 17.6, -6.1, 14.7, 9.5, 6.7, 5.6, 5.0, 5.0, 5.2 (2006–2016).
- Growth of real primary spending (deflated by GDP deflator, percent): -7.8, 11.4, 17.9, 25.5, -8.8, -2.4, -7.2, -2.0, 1.8, 1.9, 0.0 (2006–2016).
- Primary deficit repeated: -10.5, -6.3, 2.6, 9.1, 9.1, 6.0, 0.7, -2.2, -3.7, -4.4, -5.7 (2006–2016).
- Footnotes specify technical derivations for automatic dynamics, contributions, definitions of gross financing need, and assumptions for scenario with key variables at historical averages.

### IMF Executive Board assessment, findings, and recommended policies
- Executive Board summary points:
  - Commended authorities for prudent macroeconomic management and strong economic recovery.
  - Key policy challenges: reduce the size of government, strengthen public sector institutional framework, diversify the economy, and improve quality of growth.
- Monetary policy:
  - Directors broadly supported the authorities’ neutral monetary policy stance given lack of concrete evidence of generalized domestic price pressures.
  - If high global food and commodity prices begin to translate into economy-wide price pressures, authorities should tighten policy.
- Fiscal consolidation:
  - Directors agreed on the need for fiscal consolidation.
  - Encouraged decisive implementation of fiscal plan to achieve a balanced budget by FY2012/13, largely through prioritizing and reducing government spending.
  - Importance of ensuring only high quality public investment projects are undertaken, and containing growth of the wage bill and large transfers on tertiary education.
  - Welcomed measures to reform the corporate income tax system.
  - Called for efforts to increase the effective tax rate on the VAT through rationalizing tax exemptions and incentives and to broaden the tax base.
  - Saw merit in a new fiscal rule focusing on non-mineral primary balance as a share of non-mineral GDP.
- Financial sector and supervision:
  - Welcomed efforts to make operational the financial stability unit at the Bank of Botswana and to strengthen regulatory and supervisory framework for non-bank financial institutions.
- Growth and diversification:
  - Directors commended focus on poverty reduction and diversification.
  - Supported measures to address skills mismatches to tackle high unemployment.
  - Noted that successful diversification will likely demand sizeable FDI in the non-mineral sector and sustained efforts to improve the business environment without impairing the tax base.

### Selected economic and financial indicators (2008–2011, highlights)
- Real GDP (annual % change): 2008: 3.0; 2009: -4.9; 2010: 7.2; 2011 (Proj.): 6.5.
- Mineral growth (annual % change): 2008: -3.8; 2009: -21.0; 2010: 7.0; 2011 (Proj.): 8.8.
- Nonmineral growth (annual % change): 2008: 7.9; 2009: 4.5; 2010: 5.4; 2011 (Proj.): 5.6.
- Consumer prices (average): 2008: 12.6; 2009: 8.1; 2010: 6.9; 2011 (Proj.): 7.8.
- Consumer prices (end of period): 2008: 13.7; 2009: 5.8; 2010: 7.4; 2011 (Proj.): 7.2.
- Nominal GDP (billions of pula): 2008: 92.0; 2009: 82.1; 2010: 100.9; 2011 (Proj.): 117.6.
- Diamond production (millions of carats): 2008: 32.3; 2009: 17.7; 2010: 23.8; 2011 (Proj.): 26.1.
- Exports of goods and services, f.o.b. (US$, percent change): 2008: -2.9; 2009: -35.7; 2010: 33.6; 2011 (Proj.): 11.1.
- Imports of goods and services, f.o.b. (US$, percent change): 2008: 18.2; 2009: -3.5; 2010: 18.1; 2011 (Proj.): 2.4.
- Net foreign assets (percent change): 37.8, -34.3, -17.5, 30.6 (2008–2011).
- Broad money (M2, percent change): 21.7, -1.3, 12.5, 13.9 (2008–2011).
- Credit to the private sector (percent change): 12.6, 5.1, 6.1, 6.5 (2008–2011).
- Central government finances (percent of GDP):
  - Total revenue and grants: 34.0, 34.6, 28.8, 30.4 (2008–2011).
  - Total expenditure and net lending: 39.3, 45.5, 38.5, 36.2 (2008–2011).
  - Overall balance (deficit –): -5.2, -10.9, -9.7, -5.8 (2008–2011).
  - Nonmineral primary balance: -28.5, -30.6, -26.6, -23.0 (2008–2011).
  - Total central government debt: 6.4, 16.1, 13.2, 15.6 (2008–2011).
- External sector:
  - Current account balance (percent of GDP): 6.9, -5.8, -4.9, -3.9 (2008–2011).
  - Balance of payments (percent of GDP): 8.0, -5.5, -5.5, 3.1 (2008–2011).
  - External public debt (percent of GDP): 2.1, 14.3, 15.1, 15.8 (2008–2011).
- Gross official reserves (end of period, US$ millions): 9,116; 8,669; 7,883; 8,382 (2008–2011).
- Reserves in months of imports of goods and services: 21.9, 17.6, 15.6, 17.3 (2008–2011).
- Reserves (percent of GDP): 67.2, 75.2, 53.0, 53.7 (2008–2011).

### Authorities’ statements and policy intentions
- Authorities’ priorities and measures:
  - Aim to achieve a balanced budget by 2012/13 via prioritizing and streamlining spending and improving revenue collection.
  - Measures include outsourcing, merging some parastatals, realigning development budget to focus on high return projects, raising effective tax rate to statutory level, and improving tax administration after analysis of poor tax performance.
  - Public Finance Management Reform Program to improve accountability, transparency, and management of public spending.
  - Continue to use the sustainable budget index rule which sets aside mineral revenues for capital spending while non-mineral revenues finance recurrent spending; authorities note care in any transition to a new fiscal rule that excludes mining revenues.
- Debt management:
  - Authorities preparing a debt management strategy to realize efficient financing mix without violating legislated limits.
  - Internal debt ratio estimated at 6.4 percent of GDP; external debt ratio estimated at 19.1 percent of GDP (authorities’ estimates).
- Monetary and financial policy:
  - Bank Rate maintained at 10 percent for most of 2010 and reduced by 50 basis points in December 2010.
  - Primary reserve requirement for commercial banks raised from 6.5 percent to 10 percent of total Pula deposits to mop up excess liquidity.
  - Monetary policy objective: price stability with medium-term objective range of 3-6 percent for inflation.
  - Focus on strengthening supervision and oversight of the financial system, particularly nonbank financial sector.
- Growth and diversification strategy:
  - Tenth National Development Plan (NDP 10) prioritizes diversification, inclusive growth, addressing skills mismatch, and improving infrastructure quality and maintenance.
  - Authorities request IMF and World Bank support for concrete ideas on fostering broad-based growth and diversification.

*Source: Botswana—2011 Article IV Consultation materials and accompanying debt sustainability analysis as provided in the supplied content.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11248.pdf_