## _cr12234 ## Source details **Canonical URL:** [_cr12234](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12234.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12234.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12234.pdf.json) --- ### Recent developments - Growth and sectoral performance - Real GDP grew by 5.1 percent in 2011, compared with 7 percent growth in 2010. - Growth deceleration in the second half of 2011 was driven by a significant slowdown in diamond exports. - Non-mining GDP grew strongly in 2011; diamond production remained broadly unchanged in 2011 (diamond production: 23.0 million carats in 2011). - Diamond sales for the first quarter of 2012 showed only a very modest recovery. - Inflation and monetary conditions - Consumer price inflation (year-on-year) declined from 9.2 percent in December 2011 to 7.7 percent in May 2012. - Bank of Botswana (BoB) medium-term objective range: 3–6 percent. - Core inflation measures suggest a downward trend; BoB’s Bank Rate was kept unchanged, maintaining a wedge against the SARB’s Repo Rate. - Financial sector and banking performance - Private sector credit growth approaching precrisis level; households account for 53 percent of bank lending. - Banks’ nonperforming loans (NPLs) fell notably in the second half of 2011; rebound in profitability from increased interest and non-interest income and lower provisions. - Banking system prudential indicators (selected): Regulatory capital to risk-weighted assets: 17.3, 16.8, 18.5, 16.9, 19.6, 20.5, 20.2, 20.5 (series through 2012); Nonperforming loans (NPLs)-to-gross loans (percent): 0.9, 1.5, 1.3, 1.6, 3.2, 6.1, 2.3, 2.4 (series through 2012). - Fiscal and external positions - Estimated fiscal deficit in FY2011/12: about 2 percent of GDP (budget target about 6 percent). - Non-mineral primary deficit declined from about 24 percent of non-mineral GDP in FY2010/11 to 17 percent in FY2011/12. - Exports rebounded in first half of 2011 (annual export growth in dollar terms rebounded to about 66 percent in the first half of 2011 but declined to 20 percent in the second half); exports grew faster than imports in 2011, turning the current account deficit into a surplus. - Foreign exchange reserves stabilized around 14 months of imports; gross official reserves (end of period, US$ millions): 8,386.1 (2011). ### Outlook and risks - Growth and inflation projections - Staff projects real GDP growth will decline to 4 percent in 2012; medium-term GDP growth forecast to average around 4.5 percent through 2017. - Projected inflation expected to converge to the upper end of BoB’s 3–6 percent range in 2013. - Negative output gap projected through 2013; fiscal consolidation, underpinned by wage restraint, should help constrain domestic demand. - Planned relocation of De Beers’ diamond-sorting and sales activity to Botswana by end-2013 expected to boost activity. - External position and exchange rate assessment - With projected fiscal surpluses in FY2012/13 and beyond, current account surplus forecast to stabilize at about 2 percent of GDP. - Staff assessment: current level of the real effective exchange rate (REER) broadly in line with macroeconomic fundamentals from a medium-term perspective (estimates have large confidence bands). - Key risks - Near-term: highly uncertain external environment and fragile global demand; downside risks to mineral export demand and spillovers via South Africa. - Medium-term: sustainability of growth given slowed trend growth; need to find new non-diamond growth engines. - Medium-term fiscal risk: possible decline in SACU revenue (represents about 20 percent of total revenue). - Staff simulation findings - GIMF model simulations: European financial deleveraging would have limited and short-lived impact on Botswana real GDP but could significantly affect diamond prices and fiscal revenues. ### Policy discussions and recommendations - Overall approach - Issues-oriented surveillance framework with four themes: (i) managing near-term macroeconomic policy mix and spillovers; (ii) rebuilding policy buffers through high-quality medium-term fiscal consolidation; (iii) strengthening monetary operations, financial intermediation and stability; (iv) enhancing inclusive growth and institutional and capacity development. - Policy Theme 1 — Managing near-term macroeconomic policy mix and spillovers - Staff recommendation: adopt a tight fiscal policy combined with an accommodative monetary policy stance to preserve external stability. - Fiscal policy centered on further expenditure restraint as laid out in the FY2012/13 Budget. - Accommodative monetary policy to be maintained while generalized price pressures are contained. - If global financial markets become severely disrupted, allow automatic stabilizers to operate on the revenue side (Botswana lacks traditional Keynesian expenditure-side automatic stabilizers). - Authorities’ view: macroeconomic responses should be flexible, measured, and proportional; BoB will remain vigilant. - Policy Theme 2 — Rebuilding policy buffers through high-quality medium-term fiscal consolidation - Fiscal challenge: reduce government size; government expenditure above 30 percent of GDP, including wage bill, is high by international standards. - FY2012/13 budget objectives: - Targets a small fiscal surplus to help rebuild the Pula Fund. - Centers on further expenditure restraint, most notably on the wage bill, while improving spending quality. - Staff estimates implied fiscal impulse is more than minus 3 percentage points of GDP. - Budget will reduce the non-mineral primary balance (NMPB) by more than 6 percentage points of non-mineral GDP. - Budget targets an annual 5 percent reduction in the wage bill over the next three years. - Staff assessment: measures (outsourcing, hiring freeze, natural attrition) likely deliver at most one-fifth of the 5 percent targeted reduction in the wage bill. - Fiscal anchors and frameworks - Staff advocated delinking fiscal policy from volatile diamond and SACU revenue by adopting either the NMPB or the structural fiscal balance (à la Chile) as an anchor, supported by a medium-term fiscal framework (MTFF). - Government committed to put MTFF in place by 2016. ### Tax reform, revenue measures, and the FY2012/13 Budget - Tax reform measures and administration - Abolition of two-tier corporate tax system and replacement with unified corporate tax rate of 22 percent and withholding tax of 7.5 percent. - Effective tax rates of VAT and corporate income taxes remain significantly lower than statutory rates because of tax exemptions. - Staff recommended a comprehensive tax expenditure study; authorities expressed strong interest and established a working group and a Large Taxpayer Unit. - Main budget measures and short-term fiscal actions - Budget measures include: - a 3 percent annual salary increase for public officers (compared to projected average inflation rate of 7.5 percent in 2012), - reduction of the wage bill by five percent each year for the next three years, - an 11 percent reduction in budget appropriations for post-secondary education. - Staff noted wage bill reduction needs credible civil service and wage scale reform and streamlined non-wage payments. - Fiscal consolidation and sustainability targets - Staff PIH analysis suggests NMPB should be reduced to about 5 percent of non-mineral GDP from current about 17 percent. - Staff’s Debt Sustainability Analysis: Botswana’s debt burden remains very low but sensitive to diamond revenue fluctuations. - Staff’s intergenerational smoothing baseline and Chile’s structural balance approach yield broadly similar conclusions. - Central government operations (percent of GDP) — selected FY figures - Total revenue & grants: 29.5 (2011/12), 29.5 (2012/13), 28.6 (2013/14), 28.4 (2014/15), 28.3 (2015/16). - Total expenditure & net lending: 31.7 (2011/12), 29.2 (2012/13), 27.8 (2013/14), 27.4 (2014/15), 26.9 (2015/16). - Overall balance: -2.2 (2011/12), 0.3 (2012/13), 0.8 (2013/14), 1.1 (2014/15), 1.4 (2015/16). - Non-mineral primary balance (In percent of non-mineral GDP): -17.2 (2011/12), -10.9 (2012/13), -10.9 (2013/14), -10.0 (2014/15), -8.8 (2015/16). - Staff recommendations on public employment and wages - Use economy-wide productivity gain as indicator for wage adjustment; rationalize government size and structure; tighten link between pay and performance; strengthen payroll systems; revise wage scale to remove premiums to low/middle pay grades. ### Monetary operations, liquidity management, and financial sector stability - BoB liquidity management reforms - Reforms aimed to reduce sterilization costs by reducing BoBC issuance, increasing reserve requirement, and using reverse repo operations. - Transitional challenges: severed traditional link between BoB policy rate and other short-term rates; large reduction in BoBCs did not produce banking system outflow due to reserve requirement increase and reverse repo usage; fiscal withdrawal also contributed to sterilization. - Staff options to re-establish link between policy rate and short-term rates: use reverse repo to set overnight rate corridor with standing facility; increase issuance of treasury paper to share sterilization costs and provide nonbank investment opportunities. - Non-Bank Financial Institutions (NBFIs) and regulatory gaps - NBFIs (pension funds, insurance, asset managers) have experienced rapid asset expansion and accelerated lending to households; commercial real estate development in Gaborone poses emerging risks. - NBFIRA not yet fully equipped due to staffing delays and incomplete legal/regulatory infrastructure. - Staff recommended developing property market index, establishing macro-prudential framework via BoB’s financial stability unit, strengthening cross-border information sharing, and accompanying financial inclusion with safeguards. ### Inclusive growth, poverty, unemployment, and institutional capacity - Poverty and inequality - Poverty headcount rate declined from 30.6 percent in 2002/03 to 20.7 percent in 2009/10 (preliminary BCWIS 2009/10). - Botswana has one of the highest income inequalities with Gini Index in excess of 0.5; preliminary estimates suggest a decline in Gini between 2002/03 and 2009/10. - Staff notes part of decline in poverty estimates may relate to differences between consumption basket cost increase (~43 percent) and accumulated CPI inflation (~58 percent) during 2002/03-2009/10; estimates provisional. - Unemployment and skills - Structural unemployment drivers: public sector wage/employment policies, demonstration effects, reservation wages, and skill mismatch. - Staff recommendations: faster growth and structural reforms; change public employment/wage policies; align tertiary and vocational curricula with labor demand; use Economic Diversification Drive (EDD) to attract FDI to non-diamond sectors. - Institutional and capacity development - Statistics Botswana transformed into a fully autonomous agency; IMF technical assistance planned for national accounts and balance of payments. - Ongoing reforms: strengthen non-bank regulator, pension and insurance legislation, public financial management reforms with IMF/World Bank assistance, tertiary education reform, e-government program, National Committee on Doing Business. ### Statistics, data quality, and IMF technical assistance - Data adequacy and issues - Macroeconomic data broadly adequate for surveillance but shortcomings in national accounts (base year 1993/94 needs rebasing), government finance, and balance of payments (services data). - CPI weights based on outdated HIES (2002/03); new HIES ongoing; owner-occupied housing inclusion pending. - BoB central bank survey lag usually about three months; STA recommends preliminary data with status flags for SDDS preparation. - Balance of payments: ITRS data unreliable for services and transfers; large errors and omissions in 2008–2010 BOP statistics. - Recommended further dissemination: monthly diamond production and quarterly aggregate financial soundness indicators. - IMF TA and work program (FY12; ongoing) - STA TA on BOP, national accounts, CPI, and standardized reporting; MCM TA on financial stability and nonbank supervision; FAD TA on PFM and tax policy; LEG TA on banking and fiscal laws; Macro-fiscal advisor May 2012–May 2013; Article IV Consultation May 2013. ### Key macroeconomic and fiscal indicators (selected series, 2008–2017 and 2008/09–2016/17) - National income and prices (selected) - Real GDP (annual percent change, series): 3.0-4.7, 7.0, 5.1, 3.8, 4.2, 4.2, 4.3, 4.4, 4.7. - Consumer prices (annual percent change, series): 12.6, 5.8, 7.4, 9.2, 6.4, 6.0, 5.7, 5.5, 5.4, 5.4. - Diamond production (millions of carats): 32.3, 17.7, 22.8, 23.0, 23.5, 23.8, 24.1, 24.6, 25.1, 25.6. - External sector and reserves (selected) - Gross official reserves (end of period, US$ millions): 9,115.6, 8,668.8, 7,883.1, 8,386.1, 9,373.4, 10,241.7, 10,914.9, 11,539.0, 12,114.0, 12,778.1. - Months of imports prospective: 22.0, 17.3, 12.6, 13.0, 14.9, 17.1, 18.8, 20.4, 19.3, 19.1. - Central government finances (selected, millions of pula) - Total revenue and grants: 27,851; 29,023; 31,210; 36,956; 42,126; 45,157; 49,258; 53,734; 58,709 (series across years). - Total expenditure and net lending: 35,150; 39,490; 38,418; 39,753; 41,755; 43,865; 47,400; 51,016; 54,552. - Wages and salaries: 8,701; 9,252; 11,899; 12,140; 12,128; 12,886; 13,646; 14,417; 14,936. - Overall balance (millions of pula, deficit -): -7,299; -10,467; -7,208; -2,797; 371; 1,292; 1,859; 2,718; 4,158. - Monetary aggregates (selected, millions of pula) - Net foreign assets: 72,781; 59,312; 52,550; 63,596; 80,650; 98,397; 116,085; 134,747; 142,201; 150,972. - M2: 39,228; 38,717; 43,534; 45,422; 48,490; 53,226; 57,687; 62,413; 66,542; 72,555. - Private sector credit to GDP (percent): 20.9; 25.7; 23.3; 23.9; 22.9; 23.1; 23.7; 24.4; 25.0; 25.9. ### Appendix I — Exchange rate and external balance assessment (summary) - Exchange rate regime: crawling peg to a basket, objective to stabilize REER; crawl based on differential between Botswana medium-term inflation objective and forecast trading-partner inflation. - CGER-based assessment across four approaches finds REER broadly in line with fundamentals; method ranges include: - Macroeconomic Balance: Lower Bound -24.4; Mean -4.2; Upper Bound 15.8. - Equilibrium REER: Lower Bound -10.6; Mean 0.0; Upper Bound 10.5. - External Sustainability: Mean 8.3 (bounds not fully reported). - PPP approach: Lower Bound -3.7; Mean 9.5; Upper Bound 26.8. - Non-price competitiveness: Botswana stronger on institutions relative to SSA middle-income peers but lags on health, education, and infrastructure; policy implication to prioritize investments in infrastructure and human capital. ### Appendix II — Responding to spillovers from the global economy (summary) - Scope: VAR econometrics and four-region GIMF model (Botswana, Europe, United States, rest of world); scenarios include European financial distress and oil price increases. - Econometric finding: one standard deviation positive shock to advanced-economy output increases diamond prices by about 2 percent on impact. - GIMF simulation results: - Real GDP growth projected to decline by close to 1 percentage point before recovering. - Exports decline in real terms relative to baseline by about 1 percent. - Real exchange rate would appreciate following the shock. - Core inflation marginally lower, leaving room for some policy interest rate reduction. - Recommended fiscal response: allow automatic stabilizers to operate rather than active fiscal stimulus. ### Appendix III — Long-term fiscal sustainability benchmarks (summary) - Methodology: Permanent Income Hypothesis (PIH) annuitization of mineral revenue; alternative scenarios and robustness checks including Chile-style structural balance. - Baseline benchmark results: - Sustainable non-mineral primary deficit: 4.9 percent of non-mineral GDP (baseline). - Corresponding spending level: 26 percent of GDP on average FY2012/13–FY2016/17. - Staff medium-term expenditure projections: 29 percent of GDP for same period. - Alternative scenarios: - Conservative/Optimistic scenarios yield benchmark non-mineral primary deficits averaging about 6.7 percent of GDP (scenarios (b)/(c)). - Scenarios (d)/(e) show wider initial deficits narrowing to 7–9 percent of non-mineral GDP by 2016–17. - Key assumptions include diamond production peak at 30.5 million carats in 2020; real return on mineral wealth 4.2 percent; initial Pula Fund stock 50.6 percent of GDP at end-December 2011; annuity income spread until 2050. ### Appendix IV — Strengthening government institutions (summary) - Botswana ranks higher than SSA middle-income comparators on World Bank Government Effectiveness indices but performance stagnant 2000–2010. - Identified weaknesses: perceived low quality of public bureaucracy, excessive red tape, poor rural public resource allocation. - Policy implication: strengthen institutional effectiveness, reduce red tape, and improve public resource allocation to translate public investment in education and infrastructure into private-sector activity. ### Staff recommendation on consultation frequency - Staff recommends the next Article IV consultation with Botswana take place on the standard 12-month cycle. *Source: IMF staff report excerpts from BOTSWANA 2012 ARTICLE IV REPORT (Selected Economic and Social Indicators, 2008–2017) and accompanying appendices.* ### 1. Selected Economic and Social Indicators, 2008–2017 .................................................................. ### _cr12234 - 1. Selected Economic and Social Indicators, 2008–2017 .................................................................. ### Recent developments - Growth and sectoral performance - Real GDP grew by 5.1 percent in 2011, compared with 7 percent growth in 2010. - Growth deceleration in the second half of 2011 was driven by a significant slowdown in diamond exports. - The non-mineral sector registered brisk growth in 2011 despite a significant fiscal withdrawal. - Diamond sales for the first quarter of 2012 showed only a very modest recovery. - Diamond production remained broadly unchanged in 2011 although world diamond prices recovered. - Non-mining GDP grew strongly in 2011, notably construction. - Inflation and monetary conditions - Consumer price inflation (year-on-year) declined from 9.2 percent in December 2011 to 7.7 percent in May 2012. - The Bank of Botswana’s medium-term objective range is 3–6 percent. - Core inflation (excluding food, fuel, and administered prices) has declined slightly in the last few months; alternative measures, including the trimmed mean, suggest a downward trend in core inflation. - The BoB’s Bank Rate was kept unchanged, maintaining a wedge against the SARB’s Repo Rate. - Financial sector and banking performance - Private sector credit growth is approaching the precrisis level, supported by strong growth in credit to businesses. - Banks’ nonperforming loans (NPLs) fell notably in the second half of 2011 because of a significant improvement in the quality of loans to households. - Increased interest and non-interest income, combined with lower provisions for nonperforming loans, contributed to the rebound in banks’ profitability. - Post 2008/09 crisis credit growth remained generally robust. - Fiscal and external positions - The estimated fiscal deficit in FY2011/12 was about 2 percent of GDP, compared with the budget target of about 6 percent. - The non-mineral primary deficit declined from about 24 percent of non-mineral GDP in FY2010/11 to 17 percent in FY2011/12. - The fiscal adjustment reflected a sharp decline in government spending, savings in the education budget, rationalization of student allowances, improved administration, and better prioritization of development spending. - Higher-than-expected customs revenue from the Southern Africa Customs Union (SACU) Common Revenue Pool also contributed to the lower deficit. - Annual export growth (in dollar terms) rebounded to about 66 percent in the first half of 2011 but declined to 20 percent in the second half of 2011. - Exports grew faster than imports in 2011, turning the current account deficit into a surplus for the first time in three years. - Exports benefited from higher diamond prices in the first half of 2011; plastic products and textile exports surged in 2011; exports of meat and meat products fell compared with 2010 due to restrictions on exports to the European Union. - External buffers and exchange rate - The real effective exchange rate lost ground slightly during the last 12 months (to the report). - Foreign exchange reserves stabilized around 14 months of imports. - Central government debt composition showed external and domestic components with overall public debt stabilized by fiscal consolidation. ### Outlook and risks - Growth and inflation projections - Staff projects real GDP growth will decline to 4 percent in 2012 with non-mineral GDP decelerating to about 4 percent. - Medium-term GDP growth is forecast to average around 4.5 percent through 2017. - The planned relocation of De Beers’ diamond-sorting and sales activity from London to Botswana by end-2013 is expected to boost economic activity. - Projected inflation remains slightly above the BoB’s medium-term objective range but is expected to converge to the upper end of the range in 2013. - A negative output gap is projected through 2013; fiscal consolidation, underpinned by wage restraint, should help constrain domestic demand. - External position and exchange rate assessment - With projected fiscal surpluses in FY2012/13 and beyond, the current account surplus is forecast to stabilize at about 2 percent of GDP. - Staff’s assessment, incorporating features appropriate for natural resource–rich economies, shows the current level of the real effective exchange rate (REER) is broadly in line with macroeconomic fundamentals from a medium-term perspective, though estimates have large confidence bands (Appendix I). - Analysis suggests a medium-term balance of payments position that does not and is not likely to give rise to disruptive exchange rate movements under the crawling peg arrangement. - Key risks - Near-term: highly uncertain external environment and fragile global demand pose significant downside risks to mineral export demand; outward spillovers through linkages with South Africa. - Medium-term: sustainability of growth given slowed trend growth over recent decades and the need to find new non-diamond growth engines. - Medium-term fiscal risk: possible decline in SACU revenue (which represents about 20 percent of total revenue) in the long run, either owing to low global growth or changes in the SACU revenue-sharing formula currently under negotiation. - Staff simulation findings - Staff simulations using the IMF’s Global Integrated Monetary and Fiscal (GIMF) model show that financial stress in the euro area through further deleveraging would have limited and short-lived impact on real GDP growth in Botswana, but would have a significant estimated impact on diamond prices, potentially leading to a loss in fiscal revenues (Appendix II). ### Policy discussions and recommendations - Overall approach - The consultation used an issues-oriented surveillance framework focusing on four themes: (i) Managing near-term macroeconomic policy mix and spillovers from the global economy; (ii) rebuilding policy buffers through high-quality medium-term fiscal consolidation to buttress external stability; (iii) strengthening monetary operations, financial intermediation and stability; and (iv) enhancing inclusive growth, reducing structural unemployment, and fostering institutional and capacity development. - Policy Theme 1 — Managing near-term macroeconomic policy mix and spillovers - Staff recommendation: adopt a tight fiscal policy combined with an accommodative monetary policy stance to preserve external stability. - Fiscal policy should be centered on further expenditure restraint, as laid out in the FY2012/13 Budget. - An accommodative monetary policy should be maintained as long as generalized price pressures are contained. - Staff recommendation on spillovers: if global financial markets become severely disrupted or world growth falters beyond the baseline, allow automatic stabilizers to operate on the revenue side. - Note: Botswana does not have traditional Keynesian automatic stabilizers on the expenditure side such as unemployment insurance. - Authorities’ view: macroeconomic policy responses should be flexible, measured, and proportional; continued fiscal restraint is needed without jeopardizing the sustainability of the recovery; BoB will remain vigilant and stand ready to take pre-emptive action on monetary policy if needed. - Policy Theme 2 — Rebuilding policy buffers through high-quality medium-term fiscal consolidation - Fiscal challenge: reduce the size of government as a share of GDP; government expenditure above 30 percent of GDP, including the wage bill, is high by international standards and warrants assessment of unproductive spending and efficiency gains. - Pula Fund: served as a smoothing mechanism to support countercyclical response to the 2008–09 crisis; is a bedrock for the crawling peg mechanism and for transferring mineral wealth across generations. - FY2012/13 budget objectives: - Targets a small fiscal surplus to help rebuild the Pula Fund. - Centers on further expenditure restraint, most notably on the wage bill, while improving spending quality. - Staff estimates the implied fiscal impulse is more than minus 3 percentage points of GDP. - The budget will reduce the non-mineral primary balance (NMPB) by more than 6 percentage points of non-mineral GDP, bringing it closer to its sustainable level. - The budget targets an annual 5 percent reduction in the wage bill over the next three years. - Assessment of measures: staff’s assessment based on wage data provided by the authorities shows that savings generated from measures (outsourcing of low-skilled activities to the private sector, hiring and vacancy freeze, natural attrition) will likely deliver at most one-fifth of the 5 percent targeted reduction in the wage bill. *Source: IMF staff report excerpts from BOTSWANA 2012 ARTICLE IV REPORT (Selected Economic and Social Indicators, 2008–2017).* ### 15. The FY2012/13 Budget is hesitant on ### 15. The FY2012/13 Budget is hesitant on tax reform ### Tax reform and revenue measures - Abolition of the two-tier corporate tax system and replacing it with a unified corporate tax rate of 22 percent and a withholding tax of 7.5 percent. - Effective tax rates of the VAT and corporate income taxes remain significantly lower than the statutory rates because of a number of tax exemptions. - Pressures remain in granting preferential tax regimes for businesses, particularly for the hubs. - Staff recommended a comprehensive study on tax expenditure to quantify revenue loss from tax incentives and to inform rationalization; authorities expressed strong interest in conducting such a study. - Authorities established a working group to identify tax system reforms; Botswana Unified Revenue Service established a Large Taxpayer Unit and is enhancing tax administration through multitasking tax officers and scaling up tax auditors. ### Main budget measures and short-term fiscal actions - Main expenditure measures in the budget include: - a 3 percent annual salary increase for public officers (compared to a projected average inflation rate of 7.5 percent in 2012), - a reduction of the wage bill by five percent each year for the next three years, - a 11 percent reduction in the budget appropriations for post-secondary education to ensure value for money in line with the last World Bank Public Expenditure Review (PER). - Staff noted the targeted reduction in the wage bill should be supported by a credible civil service and wage scale reform and augmented in the short term with a streamlined system of non-wage payments, including tighter eligibility criteria for allowances. ### Fiscal consolidation, sustainability, and quantitative targets - Staff analysis (permanent income hypothesis) suggests the non-mineral primary balance (NMPB) should be reduced to about 5 percent of non-mineral GDP from the current level of about 17 percent (Appendix III) to fully preserve mineral wealth for future generations. - Staff’s updated Debt Sustainability Analysis shows Botswana’s debt burden continues to be very low although sensitive to diamond revenue fluctuations. - Staff’s intergenerational consumption smoothing baseline framework does not incorporate an investment function; staff also used Chile’s structural balance approach with broadly similar conclusions on fiscal sustainability. - Staff advocated delinking fiscal policy stance from volatile diamond and SACU revenue by adopting either the NMPB or the structural fiscal balance (à la Chile) as an anchor, supported by a medium-term fiscal framework (MTFF). Government committed to put in place an MTFF by 2016. ### Central Government Operations, 2011/12–2015/16 (In percent of total GDP, unless otherwise indicated) - Years: 2011/12 2012/13 2013/14 2014/15 2015/16 - Total revenue & grants: 29.5 29.5 28.6 28.4 28.3 - Total expenditure & net lending: 31.7 29.2 27.8 27.4 26.9 - Current: 24.4 22.2 21.0 20.4 19.9 - Capital: 7.5 7.0 6.8 7.0 7.1 - Overall balance: -2.2 0.3 0.8 1.1 1.4 - Overall balance excluding SACU: -9.0 -9.7 -7.9 -7.7 -7.3 - Non-mineral primary balance (In percent of non-mineral GDP): -17.2 -10.9 -10.9 -10.0 -8.8 - Non-mineral primary balance excluding SACU (In percent of non-mineral GDP): -27.3 -26.2 -24.1 -22.9 -21.6 - Note: The kink in the overall balance in FY2013/14 represents the large windfall revenue from SACU in FY2012/13. ### Staff recommendations on public employment, wages, and payroll - Short-term measures should be complemented with medium-term reforms: - (i) Using economy-wide productivity gain as an additional indicator for public sector wage adjustment after a careful assessment of stakeholder inputs; - (ii) Rationalizing the size and structure of government; - (iii) Tightening the link between pay and performance; - (iv) Strengthening payroll systems. - Revision of the wage scale to remove premium to low and middle pay grades relative to the private sector was recommended to support fiscal sustainability and reduce labor market distortions. ### Staff recommendations on the tax base and incentives - Broaden the tax base to prepare for potential decline in SACU revenue and to support medium-term fiscal consolidation. - Judicious rationalization of tax incentives to reduce the gap between effective tax rates and statutory rates on both VAT and corporate income tax. - Avoid granting unwarranted preferential tax regimes for businesses; use tax expenditure study to inform targeted incentives. ### Authorities’ views on fiscal strategy and the Pula Fund - Authorities affirmed medium-term fiscal consolidation goals focused on reducing the size of government and prioritizing high-priority, high-return activities. - On the Pula Fund: inflows and outflows are guided by macroeconomic policy framework; resources not investable in productive domestic investment are transferred to the Pula Fund as a residual; current spending is generally financed by non-mineral revenue. - In event of external shocks, first line of defense is macroeconomic policy adjustments; if insufficient, the Pula Fund is used to bridge residual gaps. - Authorities recognized need for a fiscal anchor that handles volatile revenue and noted their Sustainable Budget Index in NDP10 reserves mineral revenue for capital spending, leaving non-mineral revenue to finance recurrent spending. - Authorities are reviewing legal and regulatory framework for MTFF and program-based budgeting, developing a debt management strategy, and enhancing ministries’ capacity in cash flow monitoring and forecasting to support MTFF implementation by 2016. ### Monetary operations and financial sector stability - BoB reforms in liquidity management aimed to reduce sterilization costs by reducing issuance of Bank of Botswana Certificates (BoBCs), increasing reserve requirement for banks, and more frequent use of reverse repo operations. - Transitional challenges: reforms severed traditional link between BoB policy rate and other short-term interest rates, weakening monetary transmission; large reduction in BoBCs stock did not produce an outflow from the banking system because increased reserve requirements and reverse repo operations absorbed excess liquidity; fiscal withdrawal also contributed to sterilization. - Staff discussed options to re-establish link between policy rate and short-term rates, including use of reverse repo to credibly set overnight rate corridor supported by a standing facility; increased issuance of treasury paper recommended to share sterilization costs and provide investment opportunities for nonbanks. ### Financial intermediation, inclusion, and vulnerabilities - Banking system remains sound, with major banks well capitalized and profitable and little direct exposure to euro area stress; however, high exposure of banks to households is a potential vulnerability: households now account for 53 percent of bank lending. - Households’ real incomes declined after three years of public sector wage freeze; households increasingly running down savings and are excessively leveraged. - Finscope 2009: about 60 percent of adults do not have a bank account; more recent estimate of financial exclusion at about 33 percent (number of adults without access to financial services). - Non-bank financial institutions (NBFIs)—pension funds, insurance institutions, asset managers—have experienced rapid asset expansion; acceleration of lending by NBFIs to households and property market development, especially commercial real estate in Gaborone, poses emerging risks. - NBFIRA is not yet fully equipped to discharge its mandate due to delays in staffing and incomplete legal and regulatory infrastructure. - Staff recommended: - developing a reliable property market index to monitor price developments; - using BoB’s financial stability unit to establish a macro-prudential framework; - strengthening information sharing with foreign supervisors on cross-border flows; - accompanying financial inclusion and product innovation with safeguards to contain risks, including money laundering. *Source: IMF staff report, "The FY2012/13 Budget is hesitant on tax reform."* ### 33. Staff underscored the need to ### _cr12234 - 33. Staff underscored the need to ### Non-Bank Financial Institutions (NBFIs) and Financial Stability - Staff underscored the need to strengthen the regulatory and supervisory framework for NBFIs, emphasizing the potential risks NBFIs pose to domestic financial stability, including through regulatory arbitrage. - Cross-linkages between the bank and non-bank parts of the financial system are significant; any large shock to the non-banking system could reverberate through the banking system and pose systemic stress across the financial system and the broader macroeconomy. - Authorities’ actions and views: - BoB acknowledged transitional challenges from liquidity management reform and is exploring options to re-establish the link between its policy rate and short-term interest rates. - Two working groups have been established to examine coordination between monetary and debt management policies and more frequent issuance of government securities. - The government has enabled NBFIRA to collect supervisory levies from NBFIs to address funding problems. - Progress toward signing a memorandum of understanding (MOU) between the BoB and NBFIRA is well advanced to facilitate effective information sharing between the two supervisory agencies. ### Financial Access, Real Estate Monitoring, and Exposure to Household Debt - Authorities recognize stability challenges in broadening financial access and deepening intermediation; steps considered to monitor risks from innovative banking products. - Household lending: - Households’ portion of total bank lending declined from about 61 percent to 53 percent. - Households are beginning to borrow outside the banking system, including through microfinance institutions. - Property market monitoring: - BoB has stepped up efforts to collect more information on the property market and to develop a reliable property market index. - Staff appraisal: - The high level of exposure of the banking system to household debt is a significant source of vulnerability and warrants close monitoring. ### Poverty, Inequality, and Inclusive Growth - Key statistics and background: - Poverty headcount rate declined from 30.6 percent in 2002/03 to 20.7 percent in 2009/10 (preliminary BCWIS 2009/10). - Botswana has one of the highest income inequalities in the world with a Gini Index in excess of 0.5. - Staff’s preliminary estimates suggest a decline in the Gini coefficient between 2002/03 and 2009/10. - Growth incidence: households between percentiles 15 and 75 experienced more rapid growth than those in the lowest 15 percentile or in the highest 25 percentile. - Staff analysis suggests part of the significant decline in preliminary poverty estimates may be because the increase in the cost of the consumption basket (around 43 percent) during 2002/03-2009/10 is smaller than accumulated CPI inflation (around 58 percent). - These estimates are provisional and will be updated once final official data are available. - Staff recommendations to enhance inclusive growth: - Target inequalities at their sources, including fostering effective investment in health and education. - Enhance population access to financial services to support greater financial inclusion. - Complement current redistributive fiscal policy with policies tackling inequality through effective public investment. ### Unemployment, Skills, and Economic Diversification - Structural unemployment drivers: - Public sector wage and employment policies, demonstration effects on the private sector and reservation wages, and skill mismatch contribute to persistently high structural unemployment. - Staff recommendations to tackle unemployment: - Require faster economic growth and well-designed structural reforms. - Structural measures should focus on changing public employment and wage policies and aligning university, tertiary education, and vocational curricula to meet demand for skilled labor. - The Economic Diversification Drive (EDD) should attract sizeable foreign direct investment in the non-diamond sector and improve the business environment to enhance job creation. - Lessons from Chile’s experience as a middle-income, mineral-based economy could be useful for job creation policy design. ### Public Expenditure, Fiscal Policy, and Taxation - Staff recommendations: - Reform Botswana’s public expenditure framework; implement sequences of reforms outlined in the 2009 PEFA report, addressing numerous low-ranking areas. - Adopt bolder measures to achieve targeted reduction in the wage bill, including streamlining non-wage payments, rationalizing government size and structure, tightening the link between pay and performance, strengthening payroll systems, and revising the wage scale. - Broaden the tax base as part of fiscal consolidation; conduct a full-fledged study on tax expenditure to provide a foundation for streamlining tax incentives. - Adopt a fiscal anchor that delinks the fiscal stance from volatile mineral revenue and SACU receipts, adopting either the non-mineral primary balance or the structural fiscal balance (à la Chile). ### Macroeconomic Policy Mix and Coordination - Staff appraisal: - The current policy mix of fiscal restraint and an accommodative monetary policy stance is appropriate given the fragile global economic environment; trend growth will likely moderate over the medium term as diamond-driven success fades. - In a more adverse global scenario, authorities should allow automatic stabilizers to operate on the revenue side. - Staff supports BoB’s liquidity management reform; greater coordination between monetary operations and debt management through enhanced issuance of treasury securities should support burden-sharing of sterilization costs. - Staff reiterates the need to pay close attention to macro-financial linkages. ### Statistics, Data Quality, and Institutional Capacity - Data quality assessment: - Data quality is broadly adequate for surveillance but with room for improvement. - Weaknesses identified in compilation of national accounts (including the expenditure side of GDP) and balance of payments statistics (including services data). - Staff recommendations: - Improve quality of macroeconomic statistics; IMF technical assistance missions on national accounts and balance of payments are forthcoming. - Develop new high-frequency time series on inflation expectations, housing prices, and industrial production indicators to enable BoB timely action against second-round inflation impacts or asset price bubbles. - Accelerate efforts to subscribe to the IMF’s Special Data Dissemination Standard (SDDS); note that Mauritius has recently subscribed. - Authorities’ actions: - Statistics Botswana has been transformed into a fully autonomous agency to enhance capacity to collect and compile high quality statistics. ### Institutional and Capacity Development - Authorities’ initiatives: - Emphasis on enhancing capacity of the non-bank regulator highlighted in the FY2012/13 Budget speech. - Efforts ongoing to strengthen legislation for pension fund and insurance institutions. - Public financial management reform agenda pursued with IMF and World Bank assistance. - Tertiary education reform program and the Human Resource Development Council expected to be operational in 2012; graduates’ internship program to provide skills and on-the-job training. - E-government program initiated to improve the quality of publicly provided services. - National Committee on Doing Business established to improve the business climate. - Staff view: - Urgent need to strengthen capacity of the non-bank financial institutions’ regulator as NBFIs have become systemically important while regulator capacity lags behind. ### Staff Appraisal: Long-term Challenges and Exchange Rate Assessment - Long-term development and structural challenges must be addressed to move Botswana to a higher level of development; policies should complement redistributive fiscal measures with investments in education, health, and financial inclusion. - Reform of public sector employment policies is critical to enhancing job creation economy-wide. - Staff judges the level of the real effective exchange rate as broadly in line with fundamentals from a medium-term perspective. *Source: _cr12234 - 33. Staff underscored the need to (2012 Article IV Report, Botswana).* ### 59. Staff recommends that the next ### _cr12234 - 59. Staff recommends that the next ### Recommendation - Staff recommends that the next Article IV consultation with Botswana take place on the standard 12-month cycle. ### National income and prices (selected series, 2008–2017) - Real GDP (annual percent change): 3.0-4.7 7.0 5.1 3.8 4.2 4.2 4.3 4.4 4.7 - Mineral GDP (annual percent change): -3.8-20.7 6.7 -1.3 2.7 1.8 1.8 2.1 2.0 2.0 - Nonmineral GDP (annual percent change): 7.9 4.6 5.2 7.3 3.9 4.9 4.9 5.0 5.0 5.4 - Consumer prices (annual percent change): 12.6 5.8 7.4 9.2 6.4 6.0 5.7 5.5 5.4 5.4 - Diamond production (millions of carats): 32.3 17.7 22.8 23.0 23.5 23.8 24.1 24.6 25.1 25.6 ### External sector and reserves - Exports of goods and services, f.o.b. (US$, annual percent change): -2.9 -34.0 30.3 39.1 -2.9 1.5 2.0 2.4 2.1 2.2 - Of which: diamonds (annual percent change): -8.1 -30.3 49.9 38.3 3.4 0.0 1.0 1.5 1.5 1.6 - Imports of goods and services, f.o.b. (annual percent change): 18.2 -4.3 21.1 25.1 -1.9 4.0 2.3 3.1 3.5 7.0 - Terms of trade (annual percent change): 2.6 5.9 -6.3 -0.2 -2.0 1.4 1.9 1.5 2.5 2.6 - Gross official reserves (end of period, US$ millions): 9,115.6 8,668.8 7,883.1 8,386.1 9,373.4 10,241.7 10,914.9 11,539.0 12,114.0 12,778.1 - Months of imports of goods and services (prospective): 22.0 17.3 12.6 13.0 14.9 17.1 18.8 20.4 19.3 19.1 - Percent of GDP (reserves): 67.2 74.8 52.9 45.3 53.2 59.3 64.1 68.1 65.4 60.5 ### Balance of payments and current account (2008–2017) - Current account balance (US$ millions): 931.9 -606.0 -296.8 283.9 544.5 503.4 439.5 454.2 426.7 542.2 - Trade balance (US$ millions): 440.1 -565.8 -237.1 183.1 7.9 -215.8 -263.6 -331.3 -443.4 -685.5 - Exports, f.o.b. (US$ millions): 4,835.9 3,451.4 4,635.5 6,475.2 6,245.2 6,303.7 6,399.7 6,518.4 6,638.0 6,772.0 - Diamonds (US$ millions): 3,068.7 2,139.5 3,207.8 4,435.2 4,584.4 4,605.0 4,651.4 4,720.9 4,793.6 4,872.4 - Imports, f.o.b. (US$ millions): -4,395.8 -4,017.3 -4,872.6 -6,292.1 -6,237.3 -6,519.4 -6,663.3 -6,849.7 -7,081.4 -7,457.5 - Services balance (US$ millions): 80.3 -633.0 -869.7 -881.4 -760.8 -734.7 -727.7 -737.2 -762.3 -942.6 - SACU receipts (US$ millions, current transfers): 1,146.9 1,159.1 977.7 1,155.8 1,638.7 1,693.5 1,730.9 1,824.9 1,927.2 2,044.2 - Capital and financial account total (US$ millions): 833.3 872.0 165.5 976.5 442.8 363.9 234.8 169.9 148.3 121.9 - Reserve assets (increase –, US$ millions): -1,089.3 639.3 960.4 -503.1 -987.3 -867.3 -674.2 -624.0 -575.0 -664.1 ### Central government finances (fiscal year April 1; selected items, 2008/09–2016/17) - Total revenue and grants (millions of pula): 27,851 29,023 31,210 36,956 42,126 45,157 49,258 53,734 58,709 - Total revenue (millions of pula): 27,229 28,254 30,881 36,646 41,778 44,765 48,821 53,247 58,195 - Tax revenue (millions of pula): 20,455 20,045 20,505 24,843 31,759 32,924 36,256 39,895 43,993 - Mineral income taxes (millions of pula): 3,451 2,360 2,949 2,717 3,524 3,289 3,462 3,649 3,848 - Nonmineral income taxes (millions of pula): 4,608 5,561 6,413 7,138 7,764 8,748 9,761 10,876 12,144 - Grants (millions of pula): 623 769 329 310 348 392 437 488 515 - Total expenditure and net lending (millions of pula): 35,150 39,490 38,418 39,753 41,755 43,865 47,400 51,016 54,552 - Current expenditure (millions of pula): 23,889 25,732 27,090 30,525 31,751 33,135 35,309 37,621 39,788 - Wages and salaries (millions of pula): 8,701 9,252 11,899 12,140 12,128 12,886 13,646 14,417 14,936 - Capital expenditure (millions of pula): 11,458 13,006 11,372 9,343 10,058 10,787 12,152 13,460 14,835 - Overall balance (millions of pula, deficit -): -7,299 -10,467 -7,208 -2,797 371 1,292 1,859 2,718 4,158 - Primary balance (millions of pula, deficit -): -7,069 -10,129 -6,732 -2,297 1,931 2,077 2,616 3,521 5,039 - Non-mineral primary balance (memorandum, millions of pula): -17,251 -19,218 -17,146 -14,418 -10,107 -11,448 -11,620 -11,486 -10,785 ### Central government operations (percent of GDP, selected) - Total revenue and grants: 31.1 33.3 29.4 29.5 29.5 28.6 28.5 28.4 28.2 - Total expenditure and net lending: 39.2 45.3 36.2 31.8 29.2 27.8 27.4 26.9 26.2 - Overall balance (deficit -): -8.1 -12.0 -6.8 -2.2 0.3 0.8 1.1 1.4 2.0 - Nonmineral primary balance: -30.7 -30.4 -23.6 -17.2 -10.9 -11.0 -10.0 -8.8 -7.4 - Nominal GDP (current local currency, memorandum): 90,871 106,125 143,158 173,190 208 ### Monetary aggregates and banking (2008–2017, selected) - Net foreign assets (millions of pula): 72,781 59,312 52,550 63,596 80,650 98,397 116,085 134,747 142,201 150,972 - Net domestic assets (millions of pula): -33,553 -20,596 -9,016 -18,174 -32,160 -45,170 -58,397 -72,335 -75,659 -78,417 - Money plus quasi-money (M2, millions of pula): 39,228 38,717 43,534 45,422 48,490 53,226 57,687 62,413 66,542 72,555 - Money (millions of pula): 7,768 7,108 9,938 9,334 11,069 12,151 13,169 14,248 15,190 16,563 - Quasi-money (millions of pula): 31,459 31,609 33,596 36,088 37,420 41,076 44,518 48,165 51,351 55,992 - Velocity (GDP relative to M2): 2.3 2.1 2.3 2.7 2.9 2.9 2.9 3.0 3.0 3.1 - Private sector credit to GDP (percent): 20.9 25.7 23.3 23.9 22.9 23.1 23.7 24.4 25.0 25.9 - Velocity (non-mineral GDP relative to M2): 1.4 1.6 1.6 1.8 1.9 1.9 2.0 2.0 2.1 2.2 ### Banking system prudential indicators (selected, 2005–2012) - Regulatory capital (millions of pula, March): 1,568.6 1,743.2 2,020.6 2,991.6 3,670.7 4,582.0 5,418.9 5,778.0 - Tier 1 capital (millions of pula, March): 961.4 1,071.3 1,185.4 1,832.2 2,191.6 2,692.0 3,394.4 3,559.9 - Risk weighted assets (millions of pula): 9,065.6 10,404.2 10,947.2 17,694.4 18,734.7 22,311.8 26,844.0 28,187.9 - Regulatory capital to risk-weighted assets (percent): 17.3 16.8 18.5 16.9 19.6 20.5 20.2 20.5 - Regulatory Tier I capital to risk-weighted assets (percent): 10.6 10.3 10.8 10.4 11.7 12.1 12.7 12.6 - Capital-to-assets (percent): 8.8 6.0 5.9 6.6 8.3 9.3 10.7 10.6 - Loans-to-assets (percent): 51.2 36.9 33.9 39.7 44.8 43.9 52.8 51.9 - Nonperforming loans (NPLs)-to-gross loans (percent): 0.9 1.5 1.3 1.6 3.2 6.1 2.3 2.4 - Return on average assets (percent): 5.5 6.1 2.6 2.9 2.8 0.9 0.4 0.3 - Liquid assets to total assets (percent): 26.1 47.0 47.2 50.5 39.6 34.4 18.9 21.2 - Deposits-to-assets (percent): 74.5 79.0 83.2 85.2 86.0 82.4 85.4 85.4 - Loans-to-deposits (percent): 68.7 46.7 40.8 46.6 52.1 53.3 61.9 60.8 - Net open foreign exchange position as percent of regulatory capital (percent): 8.3 -18.1 -8.1 28.7 22.5 15.4 17.3 10.6 ### Social and development indicators (selected) - Per capita GDP (2010): US$8,117 - Life expectancy at birth (2007): 51 - Poverty headcount ratio at national poverty line (percent of population, 2008): 30.3 - Millennium Development Goals highlights (selected): - Poverty headcount ratio at national poverty line (percent): ...47.0 47.0 30.3 30.3... - Immunization, measles (percent of children ages 12–23 months): 87 89 91 94 94 94 94 - Mortality rate, infant (per 1,000 live births): 46 56 64 39 39 37 36 - Life expectancy at birth, total (years): 64 59 51 52 53 53 53 *Source: Botswana authorities and IMF staff estimates and projections (2012 ARTICLE IV REPORT BOTSWANA).* ### Appendix I. Botswana: Exchange Rate and External Balance Assessment ### Appendix I. Botswana: Exchange Rate and External Balance Assessment ### Exchange rate regime and methodology - Botswana follows a crawling peg exchange rate regime with the objective of stabilizing the real exchange rate. The pula is pegged to a basket of currencies and implemented through continuous adjustment of the trade-weighted nominal effective exchange rate at a rate of crawl based on the differential between Botswana’s medium-term inflation objective and the forecast inflation of trading partner countries. - Assessment uses CGER methodologies adapted to country-specific circumstances and four different approaches: the macroeconomic balance approach, the external sustainability approach, the equilibrium real exchange rate approach, and the purchasing power parity (PPP) approach. ### Key findings on REER misalignment - Staff conclusion: the real effective exchange rate (REER) is broadly in line with macroeconomic fundamentals from a medium-term perspective, taking into account the confidence bands surrounding estimates. - Range of estimates across methods: - One measure indicates no exchange rate misalignment. - Two measures suggest evidence of some degree of overvaluation, ranging from eight to ten percent. - One measure points to a minor undervaluation. - Table of estimated REER misalignments (as reported): - Macroeconomic Balance: Lower Bound -24.4; Mean -4.2; Upper Bound 15.8 - Equilibrium Real Effective Exchange Rate: Lower Bound -10.6; Mean 0.0; Upper Bound 10.5 - External Sustainability: Lower Bound ...; Mean 8.3; Upper Bound ... - Purchasing Power Parity: Lower Bound -3.7; Mean 9.5; Upper Bound 26.8 ### Method-specific results (selected) - Macroeconomic balance approach: - Two-stage methodology using panel regressions for 184 economies (1973–2011). - Assumed current-account elasticity relative to REER: -0.5, based on country-specific estimated import and export elasticities for Botswana. - Yields a current account norm for Botswana of 0.2 percent of GDP in 2017, close to the underlying current account balance, and indicates a small undervaluation of close to 4 percent. Estimated misalignment is not statistically significant. - External sustainability approach: - Tailored to a resource-rich economy by defining current account norm via a forward-looking normative path for net foreign assets (NFA) consistent with inter-temporal allocation of nonrenewable resource revenue. - Target path of NFA: 70% of GDP by 2017 (based on IMF 2012 fiscal sustainability analysis). - Using the same elasticities as the macroeconomic balance approach suggests the real exchange rate is overvalued by close to eight percent. - Equilibrium REER approach: - Panel regressions of REER on macroeconomic fundamentals; compares fitted values to observed REER. - Suggests the REER is broadly in line with macroeconomic fundamentals. - Purchasing Power Parity (PPP) approach: - Panel regressions of the ratio of PPP exchange rate to market exchange rate on GDP per capita (PPP dollars); residuals evaluate misalignment. - Indicates the exchange rate is overvalued by about 10 percent in the medium term, but large confidence intervals advise caution. ### Non-price competitiveness - Botswana performs better than other middle-income countries in SSA on strength of institutions, but lags comparators on health, education, and infrastructure. - Policy implication: prioritize investments in infrastructure and human capital to address constraints to competitiveness. *Italic: Source: IMF staff assessment in Appendix I, "Botswana: Exchange Rate and External Balance Assessment."* ### Appendix II. Botswana: Responding to Spillovers from the Global Economy ### Scope and approach - Assesses potential spillovers from deterioration in the global economic outlook on Botswana, focusing on shocks to output growth in advanced economies, deterioration in financial conditions in Europe, and increases in international oil prices. - Uses econometric results (Vector Autoregressive models) and model simulations with a four-region version of the IMF GIMF model (Botswana, Europe, the United States, and the rest of the world). - Considers trade and financial channels and possible transmission via South Africa. ### Econometric findings on diamonds - VAR results: a one standard deviation (positive) shock to output growth in advanced economies increases diamond prices by about 2 percent on impact; effects are not very persistent. - Variance decomposition: shocks to US growth rates are particularly important in explaining variation in diamond prices. ### GIMF scenario and assumptions - Simulated European financial distress: - Temporary, but persistent increase in corporate credit spreads (surpassing 2 percentage points). - Combined with a one percentage point increase in the sovereign risk premium for Europe. - Combined the European financial shock with an increase in international oil prices over two years, affecting oil-importing regions. ### Model simulation results and implications - Impact on Botswana: - Real GDP growth projected to decline by close to 1 percentage point before recovering the following year. - Exports decline in real terms relative to baseline by about 1 percent due to lower global demand. - Real exchange rate would appreciate following the shock. - Transmission primarily through trade channels; limited direct exposure to Europe through trade explains the limited and short-lived impact. - Monetary and fiscal policy role: - Core inflation projected to decline marginally relative to baseline, leaving room for some reduction in policy interest rates (incorporated in simulations). - Due to need to buttress medium-term consolidation and small fiscal multipliers in a highly open economy, appropriate fiscal response: let automatic stabilizers work rather than pursuing more active fiscal stimulus measures. - Letting automatic stabilizers work may delay fiscal consolidation envisaged under the FY2012/13 budget but should not undermine medium-term fiscal sustainability. - Conclusion: spillovers mainly transmitted through trade channels; impact on diamond demand and prices is particularly important; global shocks unlikely to produce persistent effects on Botswana’s economy. *Italic: Source: IMF staff analysis in Appendix II, "Botswana: Responding to Spillovers from the Global Economy."* ### Appendix III. Botswana: Long-Term Fiscal Sustainability Benchmarks ### Framework and methodology - Uses the Permanent Income Hypothesis (PIH) framework to derive numerical benchmarks guiding medium-term fiscal policy for a resource-exhaustible economy. - Compute annuitized mineral revenue: convert projected stream of mineral revenue into a hypothetical annuity with the same net present value; permanent sustainable spending equals annuity plus non-mineral revenue. - Staff medium-term fiscal projections assume attainment of a small surplus in FY2012/13 consistent with the Budget, and a steady, gradual diamond market recovery. ### Main benchmark results and comparisons - Baseline (scenario (a)): - Sustainable non-mineral primary deficit: 4.9 percent of non-mineral GDP. - Corresponding spending level: 26 percent of GDP on average from FY2012/13 to FY2016/17. - Staff’s medium-term expenditure projections: 29 percent of GDP for the same period (higher than sustainable spending). - Alternative scenarios: - When assuming a more optimistic rate of return on mineral wealth (scenario (b)) or higher non-mineral revenue (scenario (c)), benchmark non-mineral primary deficits average about 6.7 percent of GDP between FY2011/12 and FY2015/16. - If the annuity is held constant in real per capita terms (scenario (d)) or constant in real terms (scenario (e)), sustainable non-mineral primary deficits are wider initially, narrowing gradually to a range of 7 to 9 percent of non-mineral GDP by 2016–17. - Robustness check: - PIH benchmarks are closely correlated with structural budget deficit estimates using Chile’s structural fiscal balance approach. - Structural balance defined as expected structural mining revenue minus expected structural expenditures; staff estimates show a close correlation with the PIH-derived non-mineral primary balance. ### Reported medium-term figures (selected table entries) - Staff projections: - 2012/13: -8.6 - 2016/17: -7.0 - 2012/13: 1.1 - 2016/17: 1.2 - Sustainability benchmarks (percent of nonmining GDP / percent of GDP) presented as: - (a) Baseline assumptions: -4.9; -4.9; 5.1; 3.5 - (b) Conservative assumptions: -6.7; -6.7; 3.9; 2.1 - (c) Optimistic assumptions: -6.8; -6.8; 3.8; 0.7 - (d) Constant per capita purchasing power: -10.6; -8.9; 1.2; 0.5 - (e) Constant real purchase power: -8.2; -6.6; 2.9; 2.2 - (Table source: IMF staff calculations.) - Structural balance estimates (percent of non-mining GDP): - Estimated Structural Revenues (selected): 36.9; 33.0; 35.4; 38.2; 39.4; 40.1; 40.5 (2009/10 to 2015/16) - Estimated Structural Expenditures (selected): 63.5; 51.6; 50.3; 45.7; 47.3; 45.8; 45.0 - Estimated Structural Balance (selected): -26.6; -18.6; -14.9; -7.5; -7.9; -5.7; -4.5 - Rolling correlation with NMPB (selected): 0.712; 0.744; 0.718; 0.705; 0.748; 0.767; 0.772 ### Key assumptions used to calculate benchmarks (Box 1) - Production of diamonds reaches a pick of 30.5 million carats in 2020 and begins sharp decline from 2024. - Nominal US dollar price of diamond is adjusted annually by the rate of change in the CPI of the advanced economies, so that stays constant in real terms. The dollar price is converted to pula using period average nominal exchange rate. - The initial stock of wealth accumulated into the pula fund is 50.6 percent of GDP at end-December 2011. This is added to the value of mineral wealth still in the ground in calculating the total value of mineral wealth. - The real return on mineral wealth is 4.2 percent, based on the average real return of the Norwegian Pension Fund over the last ten years. - The income from annuitized diamond revenue is spread until 2050. - The annuity is assumed to stay constant in terms of real non-mining GDP. - Non-mineral real GDP growth averages about 5 percent from 2012/13 to 2016/17 before declining gradually and to a steady state rate of 3 percent. *Italic: Source: IMF staff analysis in Appendix III, "Botswana: Long-Term Fiscal Sustainability Benchmarks."* ### Appendix IV. Botswana: Strengthening Government Institutions ### Rationale - Strong government institutions are critical for supporting high economic growth by raising the return to private sector investment and enabling realization of private sector outlays. - Principal public-sector investments: education and infrastructure; regulations and the effectiveness of public institutions complement these investments. ### Performance and challenges - World Bank Government Effectiveness indices indicate: - Botswana ranks significantly higher than other middle-income countries in SSA (Cape Verde, Namibia, Seychelles) in quality of government institutions. - Botswana’s absolute level of performance has remained broadly stagnant for about a decade (2000–2010). - By contrast, Mauritius shows sustained institution-building over the same period. - Detailed survey data point to Botswana’s relative weaknesses: - Perceived low quality of public sector bureaucracy. - Excessive red tape. - Poor allocation of public resources for rural development. - In terms of quality of public institutions, Botswana ranks somewhat below comparators with similar gross national income (GNI) per capita. ### Policy implication - Strengthen institutional effectiveness, reduce red tape, and improve public resource allocation—particularly for rural development—to support higher growth and better translate public investments in education and infrastructure into private sector activity. *Italic: Source: IMF staff discussion in Appendix IV, "Botswana: Strengthening Government Institutions."* ### 3. Building efficient and accountable ### 3. Building efficient and accountable ### Strengthening public financial management (PFM) - Building efficient and accountable PFM systems could be a useful way to address challenges and strengthening government institutions. - Botswana’s Public Expenditure and Financial Accountability (PEFA) report of February 2009 provides a practical sequence of reforms to budgetary practices, procurement, and financial accountability systems. - Low-cost reforms that could trigger an overall improvement in Botswana’s PEFA ratings include, in particular: - a comprehensive monitoring of debt levels of sub-national governments; - the development of a multi-year perspective in fiscal planning and execution; - more frequent reconciliation of tax assessments and collections; - strong compliance of competitive bidding procurement processes; - enhanced quality and timeliness of the production and dissemination of central government annual financial statements and internal audit reports. ### Strengthening the local financial sector to support savings and growth - The government’s support in strengthening the local financial sector is another avenue to support domestic savings and high economic growth. - Botswana’s overall macroeconomic stability and the resilience attained in financial systems during the 2008/09 global financial crisis provide a favorable setting for further developing the depth, efficiency and competitiveness of the financial sector. - Messages from the 2007 Financial Sector Assessment Program (FSAP) and the Botswana Financial Sector Development Strategy of 2011: - Large size of the unbanked population; need to search for measures to fill the financial access gap. - Potential instruments: development of microfinance and e-money, while taking appropriate steps to limit regulatory risks. - Deepening the government bond market could support domestic savings to finance investment. ### Institutional effectiveness: scope and findings - Assessing the quality of institutional effectiveness is complex; the analysis addresses a limited number of issues for Botswana. - While mineral wealth has propelled Botswana to high middle-income status, the analysis highlights spots of institutional weaknesses that: - do not exist in some other high middle-income countries; and - are often found in economies with much lower levels of per capita income. ### Comparative indicators referenced - Figures referenced in the text: - Figure 1. Botswana and Sub-Saharan African Comparators: Government Effectiveness Index (Source: World Bank Worldwide Governance Indicators). - Figure 2. Government Effectiveness and GNI Per Capita (Source: World Bank Worldwide Governance Indicators and World Bank World Development Indicators). *Source: _cr12234 - 3. Building efficient and accountable* ### 12. Wealth Accounting and Valuation of ### 12. Wealth Accounting and Valuation of ### IMF work program (FY12; ongoing) - STA TA on balance of payments, national accounts, consumer price index, and standardized reporting — Ongoing FY 2012 - MCM TA on financial stability, nonbank supervision, central bank risk management, payment system modernization, and reviewing banking legislation — Ongoing FY 2012 - FAD TA PFM, overall tax policy review, cash management and trade facilitation — Expected FY 2012 - FAD Macro-fiscal advisor — May 2012–May 2013 - LEG TA on banking and fiscal laws — FY 2012 - Article IV Consultation — May 2013 ### Statistical issues — assessment and actions - Institutional reform: - Statistics Act of 2009 commenced November 30, 2010; Central Statistics Office transformed into Statistics Botswana (SB) operating independently with its own board. - General data adequacy: - Macroeconomic data are adequate for surveillance but have shortcomings in accuracy and reliability for national accounts, government finance, and balance of payments statistics. - Timeliness needs improvement for central bank survey and detailed government expenditure by economic classification to prepare for potential SDDS subscription. - Recommended further dissemination: monthly diamond production and quarterly aggregate financial soundness indicators. - Ongoing authority actions: - Review of source data and methodologies where estimation problems exist. - Stronger collaboration among source data producers to secure consistency. - Production of leading economic indicators underway. - Addressing staff shortages within budget constraints. - National population census scheduled to begin the current fiscal year. - National accounts: - Base year is 1993/94 and needs rebasing. - Household Income and Expenditure Survey (HIES) (2002/03) and Labor Force Survey (2005/06) out of date. - Preliminary estimates based on Botswana Core Welfare Indicators Survey (BCWIS) 2009/10 were released in late 2011. - More frequent surveys needed to support private consumption estimation and poverty/unemployment analysis. - Price statistics: - Official monthly CPI available timely on SB website; provides urban/rural and tradable/nontradable breakdowns. - CPI weights based on outdated HIES; new HIES ongoing. - Owner-occupied housing inclusion in CPI pending. - Producer/wholesale price compilation discontinued. - Government finance statistics: - Concepts/definitions follow GFSM 1986 but cover only budgetary central government activities. - No fiscal statistics compiled for extra budgetary institutions, consolidated central government, or consolidated general government. - Authorities working with STA on potential migration to GFSM 2001; no decision made. - Recurrent and development expenditure published in aggregate form; development spending mixes current and capital. - Monetary and financial statistics: - Compilation practices consistent with the Monetary and Financial Statistics Manual. - Central bank survey lag usually about three months (short of SDDS two-week recommendation); STA recommends preliminary data with status flags. - BoB seeking to expand coverage to NBFIs (pension funds, insurance companies, unit trusts, finance companies, financial auxiliaries); STA recommends focusing on large institutions in 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 generally disseminated within two months; revised (final) after nine months. - Concepts follow BPM5. - ITRS data have become unreliable for services and transfers; methods for estimating missing data (e.g., unrecorded trade), f.o.b./c.i.f. import adjustments, and flows from stock data are inadequate. - Discrepancies in national accounts: valuation of diamond exports; imports/exports/payments related to SACU settlements. - Large errors and omissions in 2008–2010 BOP statistics complicate external sustainability assessment. - BoB conducts annual IIP survey; quarterly IIP survey produced for internal use with ITRS data. - External debt data: - Public external debt data are of good quality but timeliness could be improved (latest published data for March 2009). - Data standards and reporting: - Botswana participated in GDDS since late 2002; Data ROSC and updates published April 2002, March 2004, April 2007. - Monetary data reported to IFS using Standardized Report Forms; annual BOP and IIP data reported to STA. - No government financial statistics reported for publication in Government Finance Statistics Yearbook. *Table snapshot (Common Indicators Required for Surveillance, as of June 19, 2012) highlights (preserve status text from source):* - Exchange rates — Latest observation 6/19/2012; Date received 6/19/2012; Frequency D; Frequency of reporting D; Frequency of publication D. - International reserve assets and reserve liabilities of the monetary authorities — Latest observation Mar 2012; Date received May 2012; Frequency M M M. - Reserve/base money — Mar 2012; May 2012; M M M; Data Quality—Methodological Soundness: O, O, LO, O; Data Quality—Accuracy and Reliability: LNO, O, LO, LO, LO. - Consumer price index — May 2012; June 2012; M M 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 — NA NA; Data Quality—Methodological Soundness: LO, LNO, LNO, LO; Data Quality—Accuracy and Reliability: LO, O, LO, LO, LNO. - External current account balance — 2011 Q4; April 2012; A/Q A A; Data Quality—Methodological Soundness: O, O, O, LO; Data Quality—Accuracy and Reliability: LO, LO, LNO, O, LO. - GDP/GNP — 2011 Q4; April 2012; A/Q A/Q A/Q; Data Quality—Methodological Soundness: LO, LO, LNO, LO; Data Quality—Accuracy and Reliability: LO, LO, LNO, LO, LO. - Gross external debt — March 2012; May 2012; A/Q A A. ### Medium-term public debt sustainability — findings and scenarios - Historical context and recent movement: - Gross public debt increased in pula values in 2011/12 compared with 2010/11, while it fell by one percentage point relative to GDP. - Share of external debt in total debt increased sharply to 67 percent in 2009/10. - Botswana’s historically low public debt reflects prudent macroeconomic policies and significant reserve accumulation that supported countercyclical policies during the Great Recession. - Baseline scenario (staff macroeconomic framework): - Assumes continuing fiscal consolidation with the primary balance turning from a deficit of 6.6 percent of GDP in 2010/11 into a surplus of 1.3 percent of GDP on average for 2012/13–17/18. - Main burden of consolidation falls on primary expenditure. - By 2017/18, stock of gross public debt projected at 8 percent of GDP. - Alternative scenarios: - Scenario 1 — key macro-variables maintained at historical 10-year averages: debt-to-GDP ratio increases and stabilizes at a level much higher than baseline; main driver is deteriorated primary balances due to countercyclical response to the 2008–09 financial crisis. - Scenario 2 — no change in policy (primary fiscal balance held constant at 2012/13 level of 1.4 percent of GDP through medium term): public debt decreases to 7.2 percent of GDP by 2017/18; outcome similar to baseline since 2012/13 primary balance is close to the 2012/13–17/18 average. - Downside risk emphasis: delay or failure to implement fiscal consolidation raises debt substantially. - Sensitivity (bounds) tests: - Public debt relatively vulnerable to primary fiscal balance and growth shocks. - These shocks generate increases in debt-to-GDP ratio by 18 and 9 percentage points respectively (as reported). - Table 1 (Public Sector Debt Sustainability Framework, 2007–2017) selected values: - Baseline: Public sector debt (percent of GDP): 2007: 7.5; 2008: 6.2; 2009: 16.7; 2010: 18.4; 2011: 17.4; 2012: 15.3; 2013: 13.8; 2014: 12.2; 2015: 10.6; 2016: 9.3; 2017: 8.0. - o/w foreign-currency denominated (percent of GDP): 2007: 1.7; 2008: 1.2; 2009: 3.2; 2010: 2.9; 2011: 2.6; 2012: 2.3; 2013: 2.0; 2014: 1.8; 2015: 1.5; 2016: 1.2; 2017: 0.6. - Change in public sector debt (percent of GDP): 2007: 1.9; 2008: -1.3; 2009: 10.5; 2010: 1.7; 2011: -1.0; 2012: -2.0; 2013: -1.5; 2014: -1.7; 2015: -1.5; 2016: -1.4; 2017: -1.3. - Primary deficit (percent of GDP): 2007: -4.1; 2008: 7.6; 2009: 12.2; 2010: 6.6; 2011: 1.9; 2012: -1.4; 2013: -1.4; 2014: -1.6; 2015: -1.9; 2016: -1.1; 2017: -0.3. - Revenue and grants (percent of GDP): 2007: 36.5; 2008: 30.3; 2009: 35.2; 2010: 30.8; 2011: 30.7; 2012: 30.3; 2013: 29.3; 2014: 29.1; 2015: 29.0; 2016: 29.0; 2017: 28.8. - Primary (noninterest) expenditure (percent of GDP): 2007: 32.3; 2008: 37.9; 2009: 47.4; 2010: 37.4; 2011: 32.5; 2012: 28.8; 2013: 27.9; 2014: 27.6; 2015: 27.1; 2016: 27.8; 2017: 28.5. - Residual, including asset changes (percent of GDP): 2007: 6.5; 2008: -8.3; 2009: -2.7; 2010: -2.2; 2011: -0.8; 2012: 0.6; 2013: 0.8; 2014: 0.6; 2015: 1.0; 2016: 0.0; 2017: -0.7. - Public sector debt-to-revenue ratio (percent): 2007: 20.5; 2008: 20.4; 2009: 47.5; 2010: 59.7; 2011: 56.7; 2012: 50.7; 2013: 47.3; 2014: 41.8; 2015: 36.6; 2016: 32.0; 2017: 27.8. - Gross financing need (percent of GDP): 2007: -2.7; 2008: 8.0; 2009: 12.7; 2010: 7.2; 2011: 2.3; 2012: -0.2; 2013: -0.8; 2014: -1.0; 2015: -1.4; 2016: -0.4; 2017: 0.4. - Scenario with key variables at their historical averages — public debt (percent of GDP) shown for later years: 2012: 15.3; 2013: 15.6; 2014: 15.6; 2015: 15.9; 2016: 15.3; 2017: 14.0; 2017 debt-stabilizing primary balance: -1.0. - Scenario with no policy change (constant primary balance) — public debt (percent of GDP): 2012: 15.3; 2013: 13.8; 2014: 12.3; 2015: 11.3; 2016: 9.6; 2017: 7.2; Debt-stabilizing primary balance: -0.2. - Key macro-fiscal assumptions (selected): - Real GDP growth (percent): 2007: 4.8; 2008: 3.0; 2009: -4.7; 2010: 7.0; 2011: 5.1; 2012: 3.8; 2013: 4.2; 2014: 4.2; 2015: 4.3; 2016: 4.4; 2017: 4.7. - Average nominal interest rate on public debt (percent) 8/: 2007: 6.8; 2008: 5.0; 2009: 6.5; 2010: 3.8; 2011: 3.0; 2012: 7.6; 2013: 3.9; 2014: 3.7; 2015: 4.1; 2016: 7.1; 2017: 7.1. - Inflation rate (GDP deflator, percent): 2007: 10.4; 2008: 17.6; 2009: -5.8; 2010: 14.6; 2011: 13.3; 2012: 11.3; 2013: 6.4; 2014: 5.3; 2015: 4.9; 2016: 4.9; 2017: 5.3. - Growth of real primary spending (percent): 2007: 14.2; 2008: 20.7; 2009: 19.1; 2010: -15.5; 2011: -8.7; 2012: -7.9; 2013: 0.8; 2014: 2.9; 2015: 2.6; 2016: 7.1; 2017: 7.2. ### Medium-term external debt sustainability — findings and scenarios - Historical and recent movement: - Gross external debt increased from US$2.6 billion in 2009 to US$3.1 billion in 2011 but fell by 5 percentage points relative to GDP. - Nominal increase largely due to Botswana Power Corporation borrowing for Moropule B and World Bank loan disbursements for social and institution-building programs (including databases at Statistics Botswana, capacity-building at NBFIRA, and a medium-term debt strategy at the Ministry of Finance and Development Planning). - Projections and drivers: - Stock of gross external debt projected to decline from a peak of about 23 percent of GDP in 2009 to about 6 percent of GDP in 2017 (Table 2 Baseline). - Ongoing fiscal consolidation, export growth, improvement in international terms of trade, and stable FDI inflows support reduction in external debt ratio. - Alternative scenario with key variables at historical levels suggests Botswana could become a net creditor over the medium term. - Sensitivity: - External debt-to-GDP ratio sensitive mainly to current account shock. - Real depreciation shock increases debt-to-GDP ratio initially but has marginal medium-term impact. - External debt not sensitive to interest rate and economic activity shocks. - Table 2 (External Debt Sustainability Framework, 2008–2017) selected values: - Baseline: External debt (percent of GDP): 2008: 8.1; 2009: 22.9; 2010: 19.6; 2011: 17.9; 2012: 17.7; 2013: 16.6; 2014: 15.1; 2015: 13.5; 2016: 11.5; 2017: 6.0. - Change in external debt (percent of GDP): 2008: -2.0; 2009: 14.7; 2010: -3.2; 2011: -1.8; 2012: -0.2; 2013: -1.1; 2014: -1.6; 2015: -1.6; 2016: -2.0; 2017: -5.5. - Identified external debt-creating flows (percent of GDP): 2008: -11.4; 2009: 0.9; 2010: -6.9; 2011: -8.0; 2012: -6.8; 2013: -6.4; 2014: -5.8; 2015: -5.6; 2016: -5.2; 2017: -5.5. - Current account deficit, excluding interest payments (percent of GDP): 2008: -7.7; 2009: 4.3; 2010: 1.7; 2011: -2.7; 2012: -4.2; 2013: -3.8; 2014: -3.3; 2015: -3.2; 2016: -2.9; 2017: -3.2. - Net foreign direct investment, equity (percent of GDP): 2008: 3.9; 2009: 5.6; 2010: 3.8; 2011: 3.3; 2012: 3.1; 2013: 3.0; 2014: 3.0; 2015: 2.9; 2016: 2.8; 2017: 2.7. - External debt-to-exports ratio (percent): 2008: 19.3; 2009: 70.4; 2010: 59.7; 2011: 46.3; 2012: 47.9; 2013: 46.6; 2014: 43.6; 2015: 40.2; 2016: 35.3; 2017: 19.2. - Gross external financing need (in percent of GDP): 2008: -6.6; 2009: 5.6; 2010: 2.3; 2011: -1.4; 2012: -2.9; 2013: -2.5; 2014: -1.7; 2015: -1.6; 2016: -1.5; 2017: -1.9. - Key macro assumptions (selected): - Real GDP growth (percent): 2008: 3.0; 2009: -4.7; 2010: 7.0; 2011: 5.1; 2012: 3.8; 2013: 4.2; 2014: 4.2; 2015: 4.3; 2016: 4.4; 2017: 4.7. - Nominal external interest rate (percent): 2008: 8.5; 2009: 10.2; 2010: 1.7; 2011: 6.6; 2012: 6.4; 2013: 7.0; 2014: 7.1; 2015: 7.5; 2016: 7.7; 2017: 8.6. - Growth of exports (US$ terms, percent): 2008: -2.9; 2009: -34.0; 2010: 30.3; 2011: 39.1; 2012: -2.9; 2013: 1.5; 2014: 2.0; 2015: 2.4; 2016: 2.0; 2017: 2.2. ### IMF Executive Board assessment (Public Information Notice No. 12/91, July 31, 2012) - Recent performance and near-term outlook: - Real GDP growth: 2011: 5.1 percent (2010: 7 percent); growth weakened in second half of 2011 due to diamond export slowdown. - Consumer price inflation (year on year): declined from 9.2 percent in December 2011 to 7.7 percent in May 2012; BoB medium-term objective range is 3–6 percent. - Core inflation and trimmed-mean measures suggest a downward trend in core inflation. - Private sector credit growth approaching pre-crisis levels; nonperforming loans fell notably in second half of 2011. - FY2011/12 overall fiscal deficit about 2 percent of GDP (budget target about 6 percent); non-mineral primary deficit declined from about 24 percent of non-mineral GDP in FY2010/11 to 17 percent in FY2011/12. - Current account: external position strengthened in 2011 with annual export growth (US$) about 40 percent; current account turned to a surplus for the first time in three years. - Near-term projection: growth likely to moderate in 2012; over medium term, real GDP growth expected to stabilize at around 4.5 percent; inflation expected to converge to upper band of BoB range in 2013; current account surplus forecast to stabilize at about 2 percent of GDP with fiscal surpluses in FY2012/13 and beyond. - Executive Directors’ policy appraisal and recommendations: - Policy mix of fiscal restraint and accommodative monetary stance is appropriate given fragile global environment. - In adverse external scenarios, allow automatic stabilizers to operate on revenue side. - Bolder measures required to reduce wage bill: streamline non-wage payments, rationalize size/structure of government, tighten link between pay and performance, strengthen payroll systems, revise wage scale. - Broaden tax base as part of fiscal consolidation; conduct a full-fledged study on tax expenditure to streamline tax incentives. - Adopt a fiscal anchor delinked from volatile mineral revenue and SACU receipts — either non-mineral primary balance or structural fiscal balance (à la Chile). - Support BoB’s liquidity management reform; enhance coordination between monetary operations and debt management via increased treasury securities issuance to share sterilization costs. - Monitor macro-financial linkages closely; high banking system exposure to household debt is a vulnerability. - Urgent need to strengthen capacity of non-bank financial institutions’ regulator as NBFIs have become systemically important; cross-linkages between bank and non-bank sectors pose additional risks. - Address long-term development and structural challenges: complement redistributive fiscal policy with investment in education and health, enhance financial inclusion, and reform public sector employment policies to support job creation and improve pay-setting incentives. - Staff judges the level of the real effective exchange rate as broadly in line with fundamentals from a medium-term perspective. ### Selected economic and financial indicators (2009–2012, from PIN table) - Real GDP (annual percent change, calendar year): 2009: -4.7; 2010: 7.0; 2011: 5.1; 2012 Prel./Proj.: 3.8. - Mineral growth (percent): 2009: -20.7; 2010: 6.7; 2011: -1.3; 2012: 2.7. - Non-mineral growth (percent): 2009: 4.6; 2010: 5.2; 2011: 7.3; 2012: 3.9. - Consumer prices (average, percent): 2009: 8.1; 2010: 6.9; 2011: 8.5; 2012: 7.5. - Consumer prices (end of period, percent): 2009: 5.8; 2010: 7.4; 2011: 9.2; 2012: 6.4. - Nominal GDP (billions of pula, calendar year): 2009: 82.5; 2010: 101.3; 2011: 120.5; 2012: 139.2. - Diamond production (millions of carats): 2009: 17.7; 2010: 22.8; 2011: 23.0; 2012: 23.5. - Exports of goods and services, f.o.b. (US$, percent change): 2009: -34.0; 2010: 30.3; 2011: 39.1; 2012: -2.9. - Of which diamonds (percent change): 2009: -30.3; 2010: 49.9; 2011: 38.3; 2012: 3.4. - Imports of goods and services, f.o.b. (US$, percent change): 2009: -4.3; 2010: 21.1; 2011: 25.1; 2012: -1.9. - Money and banking (percent change): - Net foreign assets: 2009: -34.3; 2010: -17.5; 2011: 25.4; 2012: 37.5. - Net domestic assets: 2009: 33.0; 2010: 29.9; 2011: -21.0; 2012: -30.8. - Broad money (M2): 2009: -1.3; 2010: 12.4; 2011: 4.3; 2012: 6.8. - Credit to private sector (percentage change): 2009: 5.1; 2010: 6.1; 2011: 11.8; 2012: 6.8. - Central government finances (percent of GDP, fiscal year begins April 1): - Total revenue and grants: 2009: 33.3; 2010: 29.4; 2011: 29.5; 2012: 29.5. - Total expenditure and net lending: 2009: 45.3; 2010: 36.2; 2011: 31.7; 2012: 29.2. - Overall balance (deficit –): 2009: -12.0; 2010: -6.8; 2011: -2.2; 2012: 0.3. - Nonmineral primary balance (percent of nonmineral GDP): 2009: -30.4; 2010: -23.6; 2011: -17.2; 2012: -10.9. - Total central government debt (percent of GDP): 2009: 15.8; 2010: 17.6; 2011: 16.7; 2012: 14.9. - External sector: - Current account balance (percent of GDP): 2009: -5.2; 2010: -2.0; 2011: 1.6; 2012: 3.0. - Balance of payments (percent of GDP): 2009: -5.5; 2010: -6.4; 2011: 2.8; 2012: 5.5. - External public debt (percent of GDP): 2009: 13.0; 2010: 10.9; 2011: 11.8; 2012: 11.0. - Reserves and reserve indicators: - Change in reserves (increase –, US$ millions): 2009: 447; 2010: 786; 2011: -503; 2012: -987. - Gross official reserves (end of period, US$ millions): 2009: 8,669; 2010: 7,883; 2011: 8,386; 2012: 9,373. - Reserves in months of imports of goods and services: 2009: 17.3; 2010: 12.6; 2011: 13.0; 2012: 14.9. - Reserves in percent of GDP: 2009: 74.8; 2010: 52.9; 2011: 45.3; 2012: 53.2. *Prepared by the Staff Representatives for the 2012 Consultation with Botswana; Approved By Anne-Marie Gulde-Wolf and Dhaneshwar Ghura.* *Source: IMF — Staff Report for the 2012 Article IV Consultation and accompanying informational annex.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12234.pdf_