## 1. Botswana: Long-Term Economic Developments

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### Recent developments, outlook, and risks — Key findings
- GDP per capita more than quintupled during the last three decades.
- Poverty rate: about 19 percent.
- Gini coefficient: over 0.60.
- Botswana scores well in SSA on the human development index (HDI); improvement in the HDI has been very small over the last decade and Botswana lags peers outside the region.
- Trend growth has slowed, driven by the decline in TFP growth, amid persistently high structural unemployment and skill mismatches.
- 2013 real GDP growth: 5.9 percent, driven by recovery in the mining sector; nonmineral sector slowed partly due to power and water supply disruptions.
- Inflation decelerated significantly in 2013 and stayed well within the BoB’s medium-term objective range.
- Credit to households continued to grow at about 24 percent.
- Banks’ nonperforming loans (NPLs) doubled to 5.3 percent in December 2013.
- Total assets of nonbank financial institutions (NBFIs) account for about 50 percent of GDP.
- NBFIs wholesale deposits constitute about 40 percent of banks’ liabilities.
- External position: REER broadly in line with fundamentals; macroeconomic balance and external sustainability approaches give point estimates not significantly different from zero.
- Botswana’s reserves are well above the adequate range suggested by the Fund’s new metric for reserve adequacy.
- Current account balance turned into a surplus in 2013 supported by a rebound in diamond exports; imports continued to grow partly due to increased electricity imports.

### Outlook and risk scenarios
- Baseline projections:
  - Real GDP growth expected to moderate to 4.4 percent in 2014.
  - Growth expected to stabilize around 4 percent in the medium-term.
  - Headline inflation likely to remain within the BoB’s medium-term objective range in 2014.
  - Current account surplus projected to stabilize at around 2 percent of GDP.
- Downside risks:
  - Uncertain external environment (potential slowdown in emerging markets) could reduce mineral export demand.
  - Botswana could lose all preferential trade access to the EU market in October 2014 if agreement is not reached with the EU (Botswana’s export to the EU is only about 5 percent of the total export base).
  - Under some adverse global spillover scenarios, output growth could be lower by 1–1½ percentage points compared with the baseline forecast.
  - Domestic risk: delays in full commencement of the Morupule B power plant; ongoing power and water supply problems could negatively affect investor sentiment and the recovery.
  - Continued rapid growth of household borrowing poses a potential risk to consumer welfare and could generate vulnerabilities in the financial sector; many household loans are contracted at floating rates.
- Policy advice under adverse scenarios:
  - If adverse global spillovers lead to a decline in diamond prices and significant revenue loss, allow automatic stabilizers to work on the revenue side to avoid a procyclical fiscal stance; Botswana’s ample reserves and very low debt level support this approach.

### Policy discussions — overarching themes
- Consultation focused on three main themes:
  1. Cost-efficient and growth-friendly fiscal consolidation.
  2. Preserving financial stability while promoting financial inclusion.
  3. Raising economy-wide productivity growth to lift potential growth over the medium term.

### Policy Theme 1 — Cost-efficient and growth-friendly fiscal consolidation
- Staff assessment:
  - Authorities’ gradual fiscal consolidation strategy is appropriate given the uncertain external environment and existing policy space.
  - Strategy would bring the nonmineral primary balance (NMPB) closer to its long-term sustainable level of about 5 percent of nonmineral GDP.
  - Emphasis on improving performance of state owned enterprises (SOE) is well placed.
  - Inclusion of a medium-term projection for government accounts in the FY2014/15 budget is welcomed.
- Recommended measures to achieve medium-term fiscal targets:
  - Short-term: streamline the system of nonwage payments and include tighter eligibility criteria for allowances.
  - Medium-term: rationalize size and structure of government, tighten the link between pay and performance, and strengthen payroll systems.
  - Broaden the tax base and improve quality of government spending.
  - Caution against further VAT exemptions that could undermine tax base broadening and simplification.
  - Conduct a comprehensive study on tax expenditures using BURS’s improved information technology system to quantify forgone tax revenues from tax incentives and inform policy.
  - Make social welfare programs more targeted to address high income inequality while minimizing adverse effects on incentives to work, save, and invest.
  - Continue privatization and merger of some SOEs; implement guidance by the Public Enterprise Evaluation and Privatization Agency and reform SOE governance to set clear performance targets and increase accountability.

### Policy Theme 2 — Strengthening the monetary regime, transmission channel, and enhancing financial stability
- Exchange rate and monetary policy:
  - Botswana’s crawling peg arrangement has served as a good anchor for monetary and financial stability and merits continued support.
  - Staff encourages continuous improvement of operational aspects of the exchange rate framework, including regularly updating the optimality of the currency basket and deepening money and foreign currency markets.
  - Capacity building in monetary policy operations is encouraged to prepare for potential future moves to a more flexible exchange rate regime.
- Banking system and consumer protection:
  - A floor on deposit rates (91-day minimum 4 percent per annum) and moratorium on increasing banks’ fees aim to boost savings and protect depositors.
  - A binding floor on deposit rates combined with a moratorium on fee increases could create distortions and may not address underlying banking inefficiencies; BoB should monitor and address unintended negative consequences.
  - Positive real deposit rates would support financial inclusion and could be achieved through BoB’s liquidity management framework.
  - BoB established a consumer protection unit in its banking supervision department.
- Macroprudential and regulatory recommendations:
  - Consider macro-prudential measures to contain household borrowing growth, including tighter debt-to-income ratios and assigning higher risk weights on unsecured lending to households.
  - Address data gaps capturing household borrowing outside the banking system to make macro-prudential tools more effective.
  - Strengthen regulation of NBFIs and support capacity building in the Non-Bank Financial Institutions Regulatory Agency (NBFIRA).

### Policy Theme 3 — Raising economy-wide productivity growth
- Strategic orientation:
  - The MTR of NDP10 and planning for NDP11 emphasize structural transformation: reducing the size of government relative to GDP to let the private sector lead growth, boosting economy-wide productivity, enhancing financial inclusion, and reducing high unemployment.
  - Vision 2016 aims at “prosperity for all” with goals of poverty eradication, a more equitable distribution of income, and rapid economic growth and diversification.
- Key constraints to productivity growth:
  - Skill mismatches in the labor market despite significant government investment in education.
  - Lack of export diversification, leaving the economy vulnerable to international diamond demand fluctuations.
  - Need to remove structural bottlenecks (notably in the energy sector) and find new growth drivers to sustain long-term growth.

### Financial inclusion and stability
- Overview:
  - International experience suggests special programs to increase access to credit through public sector institutions have been costly with little sustained impact; actions that lower intermediation costs and preserve financial stability tend to have more sustained impact.
  - Financial deepening and inclusion remain low by international standards: "About 60 percent of population still remains unbanked (does not have an account at a bank)".
- Critical policies to promote inclusion in a stability-friendly way:
  - promoting competition;
  - enhancing domestic supervision;
  - boosting the use of technological innovation;
  - strengthening the regulatory and supervisory framework for financial services;
  - establishing a national credit bureau to improve screening of borrowers and reduce adverse selection.
- Household debt, credit reporting, and resilience:
  - Authorities view the level of household debt in an environment of slow growth as a cause for concern.
  - Current indicators point to decelerating overall credit growth and low default ratios, suggesting widespread default risks are not imminent, but household debt repayment burdens warrant close attention.
  - BoB signaled its intention to keep the current "100 percent risk weight on banks’ unsecured credit," which is above Basel II requirements.
  - Data capture caveat: part of households’ debt contracted from micro-lenders is not yet fully captured by the regulator.
  - Authorities are conducting a diagnostic study of the current credit reporting system and strengthening NBFIRA’s skill base with AfDB support.
  - Staff recommendation: use macroprudential tools to limit potential vulnerabilities; plans to establish a national credit bureau are welcomed.

### Data, surveillance, and public finance governance
- Data quality and gaps:
  - Improvements needed in representative coverage of national accounts surveys, estimation of GDP deflators, compilation of balance of payments statistics (including trade in services coverage), and quality of labor market statistics.
  - Best practice suggests rebasing national accounts about every five years; "Botswana rebased its GDP in 2012 to a base year of 2006."
  - Staff commends plans to work towards subscribing to the IMF’s Special Data Dissemination Standard.
- Fiscal policy and governance recommendations:
  - Staff welcomes medium-term fiscal strategy emphasizing rebuilding the Pula Fund and improving SOE performance.
  - Improve quality of spending on health and education and better target social welfare programs to reduce income inequality.
  - Articulate clearer measures to reduce the wage bill relative to GDP and broaden the tax base.
  - Avoid unwarranted preferential tax regimes for businesses.
  - Continuously look for opportunities to further strengthen operational aspects of the exchange rate framework and deepen money and foreign currency markets.

### Staff appraisal — concise findings and recommendations
- Findings:
  - Botswana’s economic performance has been remarkable due to good governance and prudent natural resource management, but trend growth has softened amid high unemployment and income inequality.
  - Under current conditions the economy is broadly internally and externally balanced, but lack of export diversification leaves Botswana vulnerable to international demand fluctuations for diamonds.
- Key policy recommendations reiterated:
  - use macroprudential tools to monitor and limit vulnerabilities from increasing household borrowing;
  - establish a national credit bureau;
  - focus financial inclusion policies on mitigating market failures and lowering intermediation costs while preserving financial stability;
  - improve quality of public spending—education and public investment—to transform diamond wealth into sustainable assets;
  - reduce regulatory burdens, alleviate infrastructure bottlenecks, and improve SME access to finance to reinvigorate total factor productivity.

### Selected economic and financial indicators — highlights (2010–2018)
- Real GDP (annual % change): 2010: 8.6; 2011: 6.2; 2012: 4.3; 2013: 5.9; 2014: 4.4; 2015: 4.2; 2016: 4.0; 2017: 4.1; 2018: 4.1.
- Mineral GDP growth (annual % change): 2010: 22.7; 2011: -2.3; 2012: -7.0; 2013: 10.6; 2014: 1.4; 2015: 2.7; 2016: 2.7; 2017: 3.5; 2018: 3.5.
- Nonmineral GDP growth: 2010: 6.2; 2011: 7.9; 2012: 6.3; 2013: 5.2; 2014: 4.8; 2015: 4.4; 2016: 4.3; 2017: 4.2; 2018: 4.2.
- Consumer prices (annual % change): 2010: 7.4; 2011: 9.2; 2012: 7.4; 2013: 4.1; 2014: 5.4; 2015: 5.4; 2016: 5.3; 2017: 5.3; 2018: 5.3.
- Diamond production (millions of carats): 2010: 22.8; 2011: 23.0; 2012: 20.9; 2013: 22.7; 2014: 22.4; 2015: 22.9; 2016: 23.4; 2017: 24.1; 2018: 24.9.
- Exports of goods and services (US$): 2010: 33.4; 2011: 41.7; 2012: -9.2; 2013: 28.2; 2014: 5.5; 2015: 4.0; 2016: 3.9; 2017: 4.7; 2018: 4.7.
- Of which diamonds (percent of exports): 2010: 49.9; 2011: 38.3; 2012: 7.1; 2013: 39.7; 2014: 3.6; 2015: 3.6; 2016: 3.6; 2017: 4.3; 2018: 4.3.
- Imports of goods and services (US$): 2010: 17.9; 2011: 28.0; 2012: 7.4; 2013: -5.7; 2014: 15.3; 2015: 6.0; 2016: 5.1; 2017: 5.3; 2018: 4.6.
- Gross official reserves (end period, US$ millions): 2010: 7,883; 2011: 8,386; 2012: 8,270; 2013: 8,429; 2014: 9,200; 2015: 9,765; 2016: 10,031; 2017: 10,235; 2018: 10,577.
- Overall balance (percent of GDP): 2010: -7.5; 2011: -0.2; 2012: 0.8; 2013: 0.3; 2014: 0.9; 2015: 2.0; 2016: 1.9; 2017: 1.6; 2018: 1.6.
- Total central government debt (percent of GDP): 2010: 19.5; 2011: 20.1; 2012: 19.2; 2013: 16.9; 2014: 14.8; 2015: 12.9; 2016: 11.3; 2017: 9.8; 2018: 8.5.

### Balance of payments and external assessment — key points
- Current account balance (US$ millions): 2010: -744.4; 2011: -36.7; 2012: -676.6; 2013: 1,536.1; 2014: 924.2; 2015: 725.5; 2016: 396.3; 2017: 356.6; 2018: 492.9.
- Exports, f.o.b. (US$ millions): 2010: 4,635.5; 2011: 6,449.5; 2012: 6,022.4; 2013: 7,610.1; 2014: 8,024.4; 2015: 8,342.4; 2016: 8,670.0; 2017: 9,077.1; 2018: 9,508.2.
  - Diamonds (US$ millions): 2010: 3,207.8; 2011: 4,435.2; 2012: 4,748.3; 2013: 6,631.2; 2014: 6,869.0; 2015: 7,115.3; 2016: 7,369.2; 2017: 7,685.7; 2018: 8,015.8.
- Imports, f.o.b. (US$ millions): 2010: -5,562.5; 2011: -7,182.4; 2012: -7,956.7; 2013: -7,368.5; 2014: -8,578.1; 2015: -9,103.6; 2016: -9,533.0; 2017: -9,981.2; 2018: -10,467.5.
- Reserve coverage: about 10 months of import coverage at end-2013.

### External stability and competitiveness — Appendix I highlights
- REER misalignment estimates (percentage; positive = overvaluation):
  - Macroeconomic Balance: -0.8
  - External Sustainability: 1.3
  - Purchasing Power Parity: -4.9
  - Equilibrium Real Effective Exchange Rate: -7.2
- Staff conclusion: Macroeconomic Balance and External Sustainability give point estimates not significantly different from zero; Pula broadly in line with fundamentals.
- Modeling of adverse external scenarios (GIMF four-region model) indicates potential spillovers to Botswana are limited and transitory; Botswana is more vulnerable to shocks from advanced economies than from emerging markets including South Africa.
- Policy implication: promoting export diversification would enhance external stability and broaden the base for sustainable long-term growth.

### Fiscal sustainability and medium-term debt projections
- Staff analysis (permanent income hypothesis): to fully preserve mineral wealth, non-mineral primary balance (NMPB) should be reduced to about 5 percent of non-mineral GDP from current about 14 percent.
- Baseline fiscal assumption: continuing fiscal consolidation with primary surplus about 2 percent of GDP on average for 2014/15–19/20; main burden on primary expenditure.
- Projection: by 2019/20, gross public debt projected at 7 percent of GDP.
- Key baseline public debt path (percent of GDP): 2012: 11.8; 2013: 19.6; 2014: 17.5; 2015: 14.7; 2016: 13.2; 2017: 11.5; 2018: 10.0; 2019: 8.2; 2020: 7.0.

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

*Source: _cr14204 - 1. Botswana: Long-Term Economic Developments (IMF staff report and supporting tables, 2014).*

### 1. Botswana: Long-Term Economic Developments ______________________________________________ 13

### 1. Botswana: Long-Term Economic Developments

### Recent developments, outlook, and risks — Key findings
- GDP per capita more than quintupled during the last three decades.
- Poverty rate remains high at about 19 percent.
- Gini coefficient is over 0.60.
- Botswana scores well in SSA on the human development index (HDI), but improvement in the HDI has been very small over the last decade and Botswana lags peers outside the region.
- Trend growth has slowed down, driven by the decline in TFP growth, amid persistently high structural unemployment and skill mismatches.
- 2013 real GDP growth: 5.9 percent, driven by recovery in the mining sector; nonmineral sector slowed partly due to power and water supply disruptions.
- Inflation decelerated significantly in 2013 and stayed well within the BoB’s medium-term objective range.
- Credit to households continued to grow at about 24 percent.
- Banks’ nonperforming loans (NPLs) doubled to 5.3 percent in December 2013.
- Total assets of nonbank financial institutions (NBFIs) account for about 50 percent of GDP.
- NBFIs wholesale deposits constitute about 40 percent of banks’ liabilities.
- External position: REER broadly in line with fundamentals; macroeconomic balance and external sustainability approaches give point estimates not significantly different from zero.
- Botswana’s reserves are well above the adequate range suggested by the Fund’s new metric for reserve adequacy.
- Current account balance turned into a surplus in 2013 supported by a rebound in diamond exports; imports continued to grow partly due to increased electricity imports.

### Outlook and risk scenarios
- Baseline projections:
  - Real GDP growth expected to moderate to 4.4 percent in 2014.
  - Growth expected to stabilize around 4 percent in the medium-term.
  - Headline inflation likely to remain within the BoB’s medium-term objective range in 2014.
  - Current account surplus projected to stabilize at around 2 percent of GDP.
- Downside risks:
  - Uncertain external environment (potential slowdown in emerging markets) could reduce mineral export demand.
  - Botswana could lose all preferential trade access to the EU market in October 2014 if agreement is not reached with the EU (Botswana’s export to the EU is only about 5 percent of the total export base).
  - Under some adverse global spillover scenarios, output growth could be lower by 1–1½ percentage points compared with the baseline forecast.
  - Domestic risk: delays in full commencement of the Morupule B power plant; ongoing power and water supply problems could negatively affect investor sentiment and the recovery.
  - Continued rapid growth of household borrowing poses a potential risk to consumer welfare and could generate vulnerabilities in the financial sector; many household loans are contracted at floating rates.
- Policy advice under adverse scenarios:
  - If adverse global spillovers lead to a decline in diamond prices and significant revenue loss, allow automatic stabilizers to work on the revenue side to avoid a procyclical fiscal stance; Botswana’s ample reserves and very low debt level support this approach.

### Policy discussions — overarching themes
- Consultation focused on three main themes:
  1. Cost-efficient and growth-friendly fiscal consolidation.
  2. Preserving financial stability while promoting financial inclusion.
  3. Raising economy-wide productivity growth to lift potential growth over the medium term.

### Policy Theme 1 — Cost-efficient and growth-friendly fiscal consolidation
- Staff assessment:
  - The authorities’ gradual fiscal consolidation strategy is appropriate given the uncertain external environment and existing policy space.
  - Strategy would bring the nonmineral primary balance (NMPB) closer to its long-term sustainable level of about 5 percent of nonmineral GDP.
  - Emphasis on improving performance of state owned enterprises (SOE) is well placed.
  - Inclusion of a medium-term projection for government accounts in the FY2014/15 budget is welcomed.
- Recommended measures to achieve medium-term fiscal targets:
  - Short-term: streamline the system of nonwage payments and include tighter eligibility criteria for allowances.
  - Medium-term: rationalize size and structure of government, tighten the link between pay and performance, and strengthen payroll systems.
  - Broaden the tax base and improve quality of government spending.
  - Caution against further VAT exemptions that could undermine tax base broadening and simplification.
  - Conduct a comprehensive study on tax expenditures using BURS’s improved information technology system to quantify forgone tax revenues from tax incentives and inform policy.
  - Make social welfare programs more targeted to address high income inequality while minimizing adverse effects on incentives to work, save, and invest.
  - Continue privatization and merger of some SOEs; implement guidance by the Public Enterprise Evaluation and Privatization Agency and reform SOE governance to set clear performance targets and increase accountability.

### Policy Theme 2 — Strengthening the monetary regime, transmission channel, and enhancing financial stability
- Exchange rate and monetary policy:
  - Botswana’s crawling peg arrangement has served as a good anchor for monetary and financial stability and merits continued support.
  - Staff encourages continuous improvement of operational aspects of the exchange rate framework, including regularly updating the optimality of the currency basket and deepening money and foreign currency markets.
  - Capacity building in monetary policy operations is encouraged to prepare for potential future moves to a more flexible exchange rate regime.
- Banking system and consumer protection:
  - A floor on deposit rates (91-day minimum 4 percent per annum) and moratorium on increasing banks’ fees aim to boost savings and protect depositors; these measures seek to improve consumer protection and encourage banks to increase intermediation.
  - A binding floor on deposit rates combined with a moratorium on fee increases could create distortions and may not address underlying banking inefficiencies; BoB should monitor and address unintended negative consequences.
  - Positive real deposit rates would support financial inclusion and could be achieved through BoB’s liquidity management framework.
  - BoB established a consumer protection unit in its banking supervision department.
- Macroprudential and regulatory recommendations:
  - Consider macro-prudential measures to contain household borrowing growth, including tighter debt-to-income ratios and assigning higher risk weights on unsecured lending to households.
  - Address data gaps capturing household borrowing outside the banking system to make macro-prudential tools more effective.
  - Strengthen regulation of NBFIs and support capacity building in the Non-Bank Financial Institutions Regulatory Agency (NBFIRA).

### Policy Theme 3 — Raising economy-wide productivity growth
- Strategic orientation:
  - The MTR of NDP10 and planning for NDP11 emphasize structural transformation: reducing the size of government relative to GDP to let the private sector lead growth, boosting economy-wide productivity, enhancing financial inclusion, and reducing high unemployment.
  - Vision 2016 aims at “prosperity for all” with goals of poverty eradication, a more equitable distribution of income, and rapid economic growth and diversification.
- Key constraints to productivity growth:
  - Skill mismatches in the labor market despite significant government investment in education.
  - Lack of export diversification, leaving the economy vulnerable to international diamond demand fluctuations.
  - Need to remove structural bottlenecks (notably in the energy sector) and find new growth drivers to sustain long-term growth.

*Source: _cr14204 - 1. Botswana: Long-Term Economic Developments*

### 15.      The authorities, who have been exploring options to promote financial inclusion,

### _cr14204 - 15.      The authorities, who have been exploring options to promote financial inclusion,

### Financial inclusion and stability
- International experience suggests special programs to increase access to credit through public sector institutions have been costly with little sustained impact, while actions that lower intermediation costs and preserve financial stability tend to have more sustained impact.
- Financial deepening and inclusion remain low by international standards: "About 60 percent of population still remains unbanked (does not have an account at a bank)".
- Critical policies to promote inclusion in a stability-friendly way:
  - promoting competition;
  - enhancing domestic supervision;
  - boosting the use of technological innovation;
  - strengthening the regulatory and supervisory framework for financial services;
  - establishing a national credit bureau to improve screening of borrowers and reduce adverse selection.

### Household debt, credit reporting, and financial sector resilience
- Authorities view the level of household debt in an environment of slow growth as a cause for concern.
- Current indicators point to decelerating overall credit growth and low default ratios, suggesting widespread default risks are not imminent, but household debt repayment burdens warrant close attention.
- Banks are reported to remain well capitalized with low levels of NPLs and able to absorb potential losses from asset quality deterioration.
- The Bank of Botswana (BoB) signaled its intention to keep the current "100 percent risk weight on banks’ unsecured credit," which is above Basel II requirements.
- Data capture caveat: due to capacity constraints in the non-bank financial institutions regulatory agency, "the part of the households’ debt that is contracted from micro-lenders is not yet fully captured by the regulator."
- Authorities contend the portion of household borrowing not captured by the non-bank regulator is small.
- The government is conducting a diagnostic study of the current credit reporting system to identify gaps and provide recommendations on improving the credit reporting environment.
- Authorities are strengthening NBFIRA’s skill base and regulatory infrastructure with support from the African Development Bank.
- Staff recommendation: use macroprudential tools to limit potential vulnerabilities; plans to establish a national credit bureau are welcomed.

### Raising productivity — long-term growth prospects and structural bottlenecks
- Returning to strong growth and faster convergence requires reinvigorating total factor productivity.
- Identified structural bottlenecks:
  - skills mismatches in the labor market;
  - problems with SME access to finance;
  - problems with adequate access to electricity;
  - bureaucratic procedures needed to start a business.
- Priority policy focus:
  - improving the quality of public spending, most notably on education to minimize skill mismatches and on the public investment program to provide timely infrastructure;
  - reducing the regulatory burden on firms;
  - improving SME access to finance.
- Efficiency gains from higher total factor productivity would enhance prospects for economic diversification, including expanding mineral product space beyond diamonds and developing downstream sectors with large employment multipliers.
- Authorities’ initiatives:
  - recent MTR of NDP 10 aims to address long-term challenges;
  - a skills development policy announced in the "FY2014/15 Budget";
  - Government, in collaboration with the World Bank, implementing projects under the Economic Diversification and Competitiveness Program to: streamline business registration, licensing and permits; establish e-Government policies and standards including one stop shop; and build capacity for monitoring and evaluation of national strategies and policies.

### Data, surveillance, and public finance governance
- Data quality is broadly adequate for surveillance but improvements are needed:
  - representative coverage of national accounts surveys;
  - estimation of GDP deflators;
  - compilation of balance of payments statistics, including trade in services coverage;
  - quality of labor market statistics to assess job creation impacts.
- Best practice would suggest rebasing national accounts about every five years; "Botswana rebased its GDP in 2012 to a base year of 2006."
- Staff commends plans to work towards subscribing to the IMF’s Special Data Dissemination Standard.
- Fiscal policy and governance recommendations:
  - staff welcomes the medium-term fiscal strategy emphasizing rebuilding the Pula Fund and improving SOE performance;
  - improve quality of spending on health and education and better target social welfare programs to reduce income inequality;
  - articulate clearer measures to reduce the wage bill relative to GDP and broaden the tax base;
  - avoid unwarranted preferential tax regimes for businesses;
  - continuously look for opportunities to further strengthen operational aspects of the exchange rate framework and deepen money and foreign currency markets.

### Staff appraisal — concise findings and recommendations
- Botswana’s economic performance has been remarkable due to good governance and prudent natural resource management, but trend growth has softened amid high unemployment and income inequality.
- The mid-term review (MTR) of NDP10 is welcomed as the blueprint for structural transformation and emphasizes reducing the size of government relative to GDP to allow the private sector to lead growth.
- Under current conditions the economy is broadly internally and externally balanced, but lack of export diversification leaves Botswana vulnerable to international demand fluctuations for diamonds.
- Key policy recommendations reiterated:
  - use macroprudential tools to monitor and limit vulnerabilities from increasing household borrowing;
  - establish a national credit bureau;
  - focus financial inclusion policies on mitigating market failures and lowering intermediation costs while preserving financial stability;
  - improve quality of public spending—education and public investment—to transform diamond wealth into sustainable assets;
  - reduce regulatory burdens, alleviate infrastructure bottlenecks, and improve SME access to finance to reinvigorate total factor productivity.

*Source: _cr14204 - 15.      The authorities, who have been exploring options to promote financial inclusion,*

### 29.      Staff recommends that the next Article IV consultation with Botswana take place on

### _cr14204 - 29.      Staff recommends that the next Article IV consultation with Botswana take place on

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

### Long‑Term Economic Developments
- Botswana scores high on Control of Corruption (percentile) relative to peers shown (chart scale 0–1).
- Botswana’s Human Development Index shown against peers (Most Developed = 1).
- Emerging Markets: trend growth accelerated on average (IMF WEO series, 1970–2014).
- Botswana: trend/decadal growth has declined, similar to other SMICs in the region (1970–2014).
- High levels of income inequality: GINI coefficient scale shown with Botswana positioned among high values (chart lists many countries; numeric GINI values shown in chart up to 65.8).
- Unemployment and skill mismatch: charts show unemployment (Y-axis) and skill mismatch (X-axis); skills mismatch index defined as difference between skill demand and supply (see SM/13/22 for details).

### Recent Economic Developments
- Real GDP growth: charts show pickup in GDP growth driven by mining sector; nonmining sector growth slowed.
- Inflation: decelerated markedly and fell within the BoB’s objective range.
- Fiscal balance: continues to improve, driven by higher mineral and SACU revenue.
- Contributions to non-mining GDP growth (2013, through 3 quarters): sectoral contributions listed (Agriculture, Manufacturing, Water and electricity, Construction, Trade, hotels & restaurants, Transport, Financial & business services, General government, Social and personal services).
- Consumer Price Inflation (Jan 09–Mar 14): Food, Transport, Total shown (twelve-month percent change).
- Fiscal balances FY08/09–FY13/14: Overall balance and Non-mineral primary balance shown as percent of GDP.
- Revenue and Expenditure FY08/09–FY13/14: Current expenditure, Capital expenditure, Total revenue (percent of GDP).
- Real deposit rates: Botswana among lowest in region (chart scale shows rates from -13 to 12).
- Bank credit growth (2009–Dec 2013): Botswana among highest in region; household credit growth large share.
- Effective exchange rates (REER/NEER) Jan 09–Mar 14: REER slightly depreciated (index, 2005=100).
- Current account: strong export growth closed trade deficit; Current Account Balance in US$ millions shown (2003–2013).
- Foreign exchange reserves (2007–13): reserves and months of imports shown; reserves increased from 2007 to 2013.

### Financial Landscape in Sub‑Saharan African MICs
- Private credit (percent of GDP): Botswana below EM peers (series 1996–2011).
- Household debt growth (latest available): chart shows Botswana among regional values.
- Number of borrowers per 1000 adults (2004*/2012**): Botswana values displayed.
- Bank concentration (percent of assets top 3 banks): Botswana higher concentration compared with peers.
- Unbanked population (percent of adults): Botswana shown among peers.
- Firms identifying finance as a constraint (percent): Botswana high relative to peers.

### Competitiveness
- Global Competitiveness Index scores (Index 1 low -7 high): Botswana improves over 2006, 2010, 2013 across pillars (Institutions, Infrastructure, Macroeconomic environment, Health and primary education, Higher education and training, Goods market efficiency, Labor market efficiency, Financial market development, Technological readiness, Business sophistication, Innovation).
- Ease of Doing Business: rank out of 189 presented (improvement over time).
- Infrastructure access impediment: Access to Electricity (percent of population) and Internet Users (per 100 people) shown; ICT access lags.
- Unit labor costs (Index, 2001=100): Botswana’s labor cost less competitive and rising (2001–2012 series).
- Time required to start a new business (days): bureaucratic procedures remain an obstacle.

### Authorities’ Response to Past IMF Policy Recommendations (Table 1)
Fiscal policy recommendations and authorities’ responses:
- Consolidate fiscal policy and rebuild fiscal buffers; develop medium term expenditure framework.
  - FY2014/15 Budget targets a small fiscal surplus and includes medium term projection of government accounts.
- Rationalize state owned enterprises (SOE); contain the wage bill.
  - FY2014/15 budget emphasizes addressing SOE performance and reducing reliance on budgetary resources; outsourcing of low-skilled services has not significantly reduced the wage bill as redeployment occurred.
- Broaden the tax base.
  - MTR of NDP 10 aims for a simplified tax system with high compliance and low administration cost; measures partially consistent with staff advice.

Financial sector policy recommendations and responses:
- Strengthen regulation and supervision of nonbank financial institutions.
  - Authorities strengthening NBFIRA skill base and regulatory infrastructure with AfDB assistance; progress on retirement and Securities bills.
- Enhance monitoring of banks’ exposure to households; consider macroprudential measures to limit household borrowing growth.
  - Authorities conducting diagnostic study of Credit Reporting System; BoB subscribed to quarterly property market report and working on property price index.
- Establish a national credit bureau; develop reliable property market index.
  - As above; measures partially consistent with staff advice.

### Risk Assessment Matrix (Table 2) — Summary of key risks, likelihoods, impacts, and staff advice
External Risks:
- Surges in global financial market volatility (Short term): Relative Likelihood: High; Impact if Realized: Low. Staff: Botswana not significantly affected by recent capital outflows; no evidence of significant spillovers from South Africa once global shocks controlled for. See paragraph 7.
- Protracted slower growth in advanced economies (Short/Medium term): Relative Likelihood: High; Impact: Medium to High. Staff: Could negatively affect mineral exports and fiscal revenue. See paragraph 7.
- Protracted slower growth in emerging market economies (Short/Medium term): Relative Likelihood: High; Impact: Medium. Staff: Could lower commodity prices, impacting balance of payments, fiscal revenue, and growth. See paragraph 7.
- Sustained decline in commodity prices (Medium likelihood): Impact: Medium. Staff: Diamonds’ storable nature and inventory use by Debswana likely limit price decline, but protracted decline could hurt growth and fiscal revenues. See paragraph 7.
- Growth slowdown and persistent labor unrest in South Africa: Relative Likelihood: Medium/Low; Impact: Low. Staff: Possible exchange rate and financial linkage channels, but staff analysis finds no significant spillovers after controlling for global shocks. See paragraph 7.

Domestic Risks:
- Delayed commencement of the Morupule B power plant (Short term): Relative Likelihood: Medium; Impact: Medium to High. Staff: Delay would lower electricity output, increase import bills for electricity/fuel, and weigh on private sector. See paragraph 7.
- Deterioration of unsecured lending credit portfolio (Short/Medium term): Relative Likelihood: Low; Impact: Medium to High. Staff: Could undermine banking system soundness as unsecured loans >55 percent of banks’ total loans and could propagate through nonbank sector. See paragraph 14.

(Note: RAM definitions — "low" <10 percent, "medium" 10–30 percent, "high" ≥30 percent — as provided in the table footnote.)

### Selected Economic and Financial Indicators (Table 3, 2010–2018)
- Real GDP (annual % change): 2010: 8.6; 2011: 6.2; 2012: 4.3; 2013: 5.9; 2014: 4.4; 2015: 4.2; 2016: 4.0; 2017: 4.1; 2018: 4.1.
- Mineral GDP growth (annual % change): 2010: 22.7; 2011: -2.3; 2012: -7.0; 2013: 10.6; 2014: 1.4; 2015: 2.7; 2016: 2.7; 2017: 3.5; 2018: 3.5.
- Nonmineral GDP growth: 2010: 6.2; 2011: 7.9; 2012: 6.3; 2013: 5.2; 2014: 4.8; 2015: 4.4; 2016: 4.3; 2017: 4.2; 2018: 4.2.
- Consumer prices (annual % change): 2010: 7.4; 2011: 9.2; 2012: 7.4; 2013: 4.1; 2014: 5.4; 2015: 5.4; 2016: 5.3; 2017: 5.3; 2018: 5.3.
- Diamond production (millions of carats): 2010: 22.8; 2011: 23.0; 2012: 20.9; 2013: 22.7; 2014: 22.4; 2015: 22.9; 2016: 23.4; 2017: 24.1; 2018: 24.9.
- Exports of goods and services (US$): 2010: 33.4; 2011: 41.7; 2012: -9.2; 2013: 28.2; 2014: 5.5; 2015: 4.0; 2016: 3.9; 2017: 4.7; 2018: 4.7.
- Of which diamonds (percent of exports): 2010: 49.9; 2011: 38.3; 2012: 7.1; 2013: 39.7; 2014: 3.6; 2015: 3.6; 2016: 3.6; 2017: 4.3; 2018: 4.3.
- Imports of goods and services (US$): 2010: 17.9; 2011: 28.0; 2012: 7.4; 2013: -5.7; 2014: 15.3; 2015: 6.0; 2016: 5.1; 2017: 5.3; 2018: 4.6.
- Net foreign assets (percent of M3): 2010: -17.5; 2011: 25.4; 2012: 0.2; 2013: 16.8; 2014: 10.5; 2015: 15.8; 2016: 5.3; 2017: 4.1; 2018: 5.4.
- Broad money (M2) growth (percent): 2010: 12.4; 2011: 4.3; 2012: 7.4; 2013: 4.0; 2014: 12.5; 2015: 10.3; 2016: 10.9; 2017: 10.9; 2018: 10.8.
- Credit to the private sector (annual % change): 2010: 6.1; 2011: 11.8; 2012: 13.9; 2013: 9.6; 2014: 10.9; 2015: 8.0; 2016: 8.4; 2017: 8.3; 2018: 8.1.
- Gross official reserves (end period, US$ millions): 2010: 7,883; 2011: 8,386; 2012: 8,270; 2013: 8,429; 2014: 9,200; 2015: 9,765; 2016: 10,031; 2017: 10,235; 2018: 10,577.
- Months of imports of goods and services (prospective): 2010: 11.8; 2011: 11.1; 2012: 11.2; 2013: 9.9; 2014: 10.3; 2015: 10.5; 2016: 10.2; 2017: 10.0; 2018: 10.1.
- Overall balance (percent of GDP): 2010: -7.5; 2011: -0.2; 2012: 0.8; 2013: 0.3; 2014: 0.9; 2015: 2.0; 2016: 1.9; 2017: 1.6; 2018: 1.6.
- Total central government debt (percent of GDP): 2010: 19.5; 2011: 20.1; 2012: 19.2; 2013: 16.9; 2014: 14.8; 2015: 12.9; 2016: 11.3; 2017: 9.8; 2018: 8.5.

### Central Government Operations (Tables 4a–4e, select figures)
- Total revenue and grants (millions of pula): 2009/10: 29,023; 2010/11: 31,210; 2011/12: 38,487; 2012/13: 41,658; 2013/14: 45,426; 2014/15: 50,205; 2015/16: 52,749; 2016/17: 53,492; 2017/18: 56,039.
- Tax revenue (millions of pula): 2009/10: 20,045; 2010/11: 20,505; 2011/12: 24,847; 2012/13: 29,787; 2013/14: 31,741; 2014/15: 35,751; 2015/16: 36,981; 2016/17: 36,539; 2017/18: 40,338.
- Mineral royalties and dividends (millions of pula): 2009/10: 6,729; 2010/11: 9,111; 2011/12: 10,687; 2012/13: 8,814; 2013/14: 9,225; 2014/15: 11,124; 2015/16: 12,247; 2016/17: 13,242; 2017/18: 12,738.
- Total expenditure and net lending (millions of pula): 2009/10: 39,490; 2010/11: 38,417; 2011/12: 38,668; 2012/13: 40,736; 2013/14: 45,040; 2014/15: 48,857; 2015/16: 49,682; 2016/17: 50,240; 2017/18: 53,026.
- Wages and salaries (millions of pula): 2009/10: 9,252; 2010/11: 11,899; 2011/12: 12,941; 2012/13: 14,548; 2013/14: 15,128; 2014/15: 15,749; 2015/16: 17,072; 2016/17: 17,487; 2017/18: 18,414.
- Overall balance (millions of pula): 2009/10: -10,467; 2010/11: -7,208; 2011/12: -181; 2012/13: 922; 2013/14: 386; 2014/15: 1,348; 2015/16: 3,067; 2016/17: 3,252; 2017/18: 3,014.
- Non‑mineral primary balance (millions of pula, fiscal years series): 2009/10: -19,218; 2010/11: -18,781; 2011/12: -16,312; 2012/13: -12,011; 2013/14: -14,036; 2014/15: -13,927; 2015/16: -13,704; 2016/17: -14,892; 2017/18: -15,311.

### Balance of Payments (Table 5, 2010–2018, select figures)
- Current account balance (US$ millions): 2010: -744.4; 2011: -36.7; 2012: -676.6; 2013: 1,536.1; 2014: 924.2; 2015: 725.5; 2016: 396.3; 2017: 356.6; 2018: 492.9.
- Exports, f.o.b. (US$ millions): 2010: 4,635.5; 2011: 6,449.5; 2012: 6,022.4; 2013: 7,610.1; 2014: 8,024.4; 2015: 8,342.4; 2016: 8,670.0; 2017: 9,077.1; 2018: 9,508.2.
  - Diamonds (US$ millions): 2010: 3,207.8; 2011: 4,435.2; 2012: 4,748.3; 2013: 6,631.2; 2014: 6,869.0; 2015: 7,115.3; 2016: 7,369.2; 2017: 7,685.7; 2018: 8,015.8.
- Imports, f.o.b. (US$ millions): 2010: -5,562.5; 2011: -7,182.4; 2012: -7,956.7; 2013: -7,368.5; 2014: -8,578.1; 2015: -9,103.6; 2016: -9,533.0; 2017: -9,981.2; 2018: -10,467.5.
- Services (US$ millions): 2010: -432.7; 2011: -338.6; 2012: -377.4; 2013: -277.7; 2014: -282.4; 2015: -298.5; 2016: -350.7; 2017: -425.9; 2018: -415.4.
- SACU receipts (US$ millions): 2010: 977.7; 2011: 1,153.9; 2012: 1,677.4; 2013: 1,646.5; 2014: 1,798.4; 2015: 1,794.6; 2016: 1,586.3; 2017: 1,647.7; 2018: 1,806.2.
- Capital and financial account (US$ millions): 2010: -404.1; 2011: 807.1; 2012: 89.3; 2013: -919.4; 2014: -153.1; 2015: -161.1; 2016: -130.3; 2017: -152.4; 2018: -150.9.
- End‑of‑year reserves (US$ millions): 2010: 7,883.1; 2011: 8,386.1; 2012: 8,269.6; 2013: 8,429.3; 2014: 9,200.4; 2015: 9,764.8; 2016: 10,030.9; 2017: 10,235.1; 2018: 10,577.1.
- Months of imports of goods and services (prospective): 2010: 11.8; 2011: 11.1; 2012: 11.2; 2013: 9.9; 2014: 10.3; 2015: 10.5; 2016: 10.2; 2017: 10.0; 2018: 10.1.

### Monetary Survey (Table 6, 2010–2018, select figures)
- Net foreign assets (millions pula): 2010: 52,550; 2011: 63,596; 2012: 63,682; 2013: 71,886; 2014: 77,221; 2015: 86,215; 2016: 89,527; 2017: 92,376; 2018: 96,530.
- Net domestic assets (millions pula): 2010: -9,016; 2011: -18,174; 2012: -14,880; 2013: -21,122; 2014: -20,129; 2015: -23,218; 2016: -19,683; 2017: -14,899; 2018: -10,658.
- Money plus quasi‑money (M2, millions pula): 2010: 43,534; 2011: 45,422; 2012: 48,802; 2013: 50,763; 2014: 57,091; 2015: 62,997; 2016: 69,844; 2017: 77,476; 2018: 85,872.
- Broad money (M3) growth rates (percent): Net foreign assets -17.5, 25.4, 0.2, 16.8, 10.5, 15.8, 5.3, 4.1, 5.4; Net domestic assets 29.9, -21.0, 7.3, -12.8, 2.0, -5.4, 5.6, 6.8, 5.5.

### Banking System Prudential Indicators (Table 7, 2007–2013, select figures)
- Regulatory capital (millions pula): 2007: 2,020.6; 2008: 2,991.6; 2009: 3,670.7; 2010: 4,582.0; 2011: 4,801.9; 2012: 6,919.1; 2013: 7,365.0.
- Tier 1 capital (millions pula): 2007: 1,185.4; 2008: 1,832.2; 2009: 2,191.6; 2010: 2,692.0; 2011: 2,798.7; 2012: 4,103.0; 2013: 5,049.0.
- Risk weighted assets (millions pula): 2007: 10,947.2; 2008: 17,694.4; 2009: 18,734.7; 2010: 22,311.8; 2011: 22,784.9; 2012: 33,255.3; 2013: 37,665.2.
- Total assets (millions pula): 2007: 33,988.1; 2008: 45,317.7; 2009: 44,090.1; 2010: 49,067.9; 2011: 50,320.7; 2012: 58,109.6; 2013: 60,231.2.
- Regulatory capital to risk‑weighted assets (percent): 2007: 18.5; 2008: 16.9; 2009: 19.6; 2010: 20.5; 2011: 21.1; 2012: 20.8; 2013: 19.6.
- Nonperforming loans (NPLs)-to-gross loans (percent): 2007: 1.3; 2008: 1.6; 2009: 3.2; 2010: 4.6; 2011: 2.5; 2012: 0.8; 2013: 3.6.
- Loans-to-deposits (percent): 2007: 40.8; 2008: 46.6; 2009: 52.1; 2010: 53.3; 2011: 61.9; 2012: 59.5; 2013: 79.9.
- Liquid assets to total assets (percent): 2007: 47.2; 2008: 50.5; 2009: 39.6; 2010: 34.4; 2011: 33.4; 2012: 16.7; 2013: 12.4.
- Return on average assets (percent): 2007: 2.6; 2008: 2.9; 2009: 2.8; 2010: 0.9; 2011: 0.6; 2012: 0.3; 2013: 2.9.

### Trade Balance and Diamond Trade (Figure)
- Time series (2003–2013) in US$ millions: series shown for Non‑mining exports, Mining exports excl. diamonds, Diamonds exports, Imports excl. diamonds, Diamond imports, Trade balance, Trade balance excl. diamonds (chart displays magnitudes on ±10,000 scale).

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14204.pdf*

### Appendix I. External Stability and Competitiveness

### Appendix I. External Stability and Competitiveness Assessment

### Current Account and Trade Balance
- Botswana returned to a current account surplus in 2013 for the first time after the 2008-09 financial crisis.
- The trade balance improved over 2012-2013 after being in a deficit for six years.
- SACU revenues partly contributed to financing the trade deficit during the deficit years.
- The return to a current account surplus in 2013 was supported by a rebound in diamond exports.
- While the overall trade balance improved, the trade balance excluding diamonds widened due to continued import growth.
- Diamond exports increased, reflecting increased demand from advanced economies such as the United States.
- Significant import growth in 2013 worsened the deficit in the trade balance excluding diamonds; increased electricity imports contributed to import growth.

### Capital Flows and International Reserves
- Capital inflows were relatively stable over the past three years covered by the assessment.
- Net inflows under foreign direct investment and portfolio investment remained stable both in absolute terms and relative to GDP.
- Their average value amounted to 2.1 and -1.2 percent of GDP in 2012 and 2013, respectively, consistent with the post-2009 pattern.
- Reserve coverage remained at about 10 months of import coverage at end-2013.

### Exchange Rate Assessment
- The Pula is broadly in line with fundamentals from a medium-term perspective.
- The exchange rate assessment used the Macroeconomic Balance (MB), External Sustainability (ES), Purchasing Power Parity (PPP), and Equilibrium Real Exchange Rate (ERER) methodologies adapted for emerging and developing economies.
- Table 1. Estimated Real Exchange Rate Misalignments (in percentage; positive numbers signify overvaluation):
  - Macroeconomic Balance: -0.8
  - External Sustainability: 1.3
  - Purchasing Power Parity: -4.9
  - Equilibrium Real Effective Exchange Rate: -7.2
- The two most relevant approaches for a natural resource–rich economy (Macroeconomic Balance and External Sustainability) give point estimates not significantly different from zero.

### Competitiveness and Non-Price Indicators
- Non-price competitiveness indicators show:
  - Botswana performs well relative to peers on macroeconomic-related indicators.
  - Botswana performs better than other middle-income countries in strength of institutions and financial market development.
  - In 2013 Botswana significantly improved its macroeconomic environment.
  - No progress in 2013 on health and education related indicators, where Botswana consistently lags peers.
  - Innovation slightly deteriorated in 2013 relative to 2012.
- Figure 4 (scores from 1 [less competitive] to 7 [more competitive]) compares Botswana 2012 and 2013 with middle-income countries 2012 and 2013 across:
  - Institutions; Infrastructure; Macroeconomic environment; Health and primary education; Higher education and training; Financial market development; Innovation.

### Risks, Spillovers, and Modeling Results (summary)
- Staff used a four-region GIMF structural model to simulate adverse external scenarios affecting Botswana (regions: Botswana, United States, Euro area, rest of world including emerging markets and South Africa).
- Scenario findings (qualitative summary):
  - Scenario 1 (global financial market volatility / US interest rate increase): would negatively affect Botswana real GDP growth but impact is short-lived; US$ appreciation vs Pula, effective exchange rate appreciates, trade balance deteriorates, initial mild decline in real GDP growth, eventual Pula depreciation.
  - Scenario 2 (Euro-area slowdown): negative short-term effect on Botswana; effective exchange rate appreciates on impact, exports reduced, GDP impact less pronounced; policy rate declines, investment and real GDP growth rise in the second period.
  - Scenario 3 (slowdown in emerging market economies): Botswana exports decline; initial decline in real investment and GDP growth, followed by recovery as domestic interest rates respond and real investment picks up.
  - Scenario 4 (re-emergence of Euro-area financial stress—temporary 1 percentage point increase in Euro-area sovereign risk): negative but short-lived effect on real GDP growth; demand for imports from Botswana declines temporarily; real investment initially falls then recovers as domestic interest rates decline.
- A growth slowdown in South Africa would have limited potential spillovers to Botswana once global shocks are controlled for; links (trade, investment, financial, institutional) exist but recent empirical analysis has not detected a clear impact after 1994 once global shocks are accounted for.
- Overall, structural modeling suggests potential spillovers to Botswana would be limited and transitory; Botswana is more vulnerable to external shocks from advanced economies than from emerging markets including South Africa.

### Conclusions and Policy Implications
- From a medium-term perspective, the balance of payments position is broadly in line with macroeconomic fundamentals and the REER is broadly consistent with fundamentals.
- The current account and trade balance improvements in 2012-13 and high international reserves in recent years relied heavily on increases in diamond exports.
- Policy implication emphasized:
  - Promoting export diversification would enhance Botswana’s external stability and broaden the base for achieving sustainable long-term growth.

*Prepared by Emmanouil Kitsios; IMF staff estimates and analysis as presented in Appendix I.*

### 13. Systematic Country Diagnostics

### 13. Systematic Country Diagnostics

### Statistical Issues — Assessment of Data Adequacy for Surveillance
- General: Data provision is broadly adequate for surveillance with some shortcomings in national accounts, fiscal, monetary, and external sector statistics.
- Macroeconomic data: Adequate for surveillance, but accuracy/reliability issues in source data and statistical techniques for national accounts, government finance, and balance of payments statistics.
- Timeliness needs:
  - Central bank survey: currently lagging (about three months); SDDS recommendation is two weeks.
  - Detailed government expenditure data by economic classification: timeliness needs increase.
- Dissemination improvements suggested: monthly diamond production, quarterly aggregate financial soundness indicators.
- Authority actions underway:
  - Review of source data and methodologies for estimated/problematic series.
  - Stronger collaboration among source data producers for consistency and reconciliation.
  - Production of leading economic indicators underway.
  - Staff shortages being addressed within budget constraints.

National Accounts
- GDP rebased to 2006 (revised time series announced October 2012).
- Weaknesses: representativeness of national accounts surveys; GDP deflator estimation.
- Labor Force Survey (2005/06) is out of date; more frequent surveys needed for poverty and unemployment analysis.

Price Statistics
- Official monthly CPI: timely, comprehensive, urban/rural breakdowns, tradable/nontradable breakdowns.
- CPI weights: being updated from recent Household Income and Expenditure Survey.
- Compilation challenges: inclusion of owner-occupied housing price data; producer/wholesale price compilation discontinued.

Government Finance Statistics
- Concepts/definitions follow GFSM 1986 but cover only budgetary central government activities.
- No fiscal statistics for extra budgetary institutions, consolidated central government, or consolidated general government.
- No decision yet on migration path to GFSM 2001; authorities working with STA.
- Recurrent and development expenditure data published with significant lag.
- Development spending mixes current and capital classifications.

Monetary and Financial Statistics
- Compilation consistent with Monetary and Financial Statistics Manual.
- Central bank survey lag: about three months (STA recommends preliminary data with status identification).
- Authorities cautious about dissemination to avoid reputation damage from revisions.
- BoB seeking to expand coverage to NBFIs (pension funds, insurance companies, unit trusts, finance companies, financial auxiliaries).
- STA recommends focusing data collection on handful of large institutions in each NBFI category.

Balance of Payments and IIP Statistics
- Annual and quarterly BOP published in Botswana Financial Statistics and BoB Annual Report.
- Preliminary BOP data: generally within two months; revised (final) data: after nine months.
- Concepts/definitions follow BPM5.
- Source data adequate, but ITRS data unreliable for services and transfer items.
- Inadequate methods for estimating missing data (unrecorded trade), f.o.b./c.i.f. adjustments, and flows-from-stocks.
- Trade data discrepancies: valuation of diamond exports; SACU settlements related imports/exports/payments.
- BoB introduced new detailed diamond import/export forms after De Beers’ London relocation to capture re-exports.
- Compilation challenges: treatment of diamond re-export trade in national accounts and BOP.
- BoB conducts annual IIP survey; quarterly IIP survey produced for internal use using ITRS data.

### Data Standards and Quality
- Botswana has participated in the GDDS since late 2002.
- Data ROSC publications: April 2002, March 2004, April 2007.

### Reporting to STA
- Monetary data: reported for IFS publication using Standardized Report Forms.
- Botswana reports annual BOP and IIP data to STA.
- No government financial statistics currently reported for GFS Yearbook publication.

### Medium-Term Public Debt Sustainability (Public Sector DSA)
- Gross public debt: broadly unchanged in nominal pula terms; decreased slightly relative to GDP in 2013/14 vs 2012/13.
- Debt structure change: external debt decreased slightly; domestic debt increased; external share of total debt decreased slightly to 67 percent in 2013/14.
- Staff analysis (permanent income hypothesis): to fully preserve mineral wealth, non-mineral primary balance (NMPB) should be reduced to about 5 percent of non-mineral GDP from current about 14 percent.
- Baseline fiscal assumption: continuing fiscal consolidation with primary surplus about 2 percent of GDP on average for 2014/15–19/20; main burden on primary expenditure.
- Projection: by 2019/20, gross public debt projected at 7 percent of GDP.
- Alternative scenarios (Figure 1 summary):
  - Historical 10-year averages scenario: debt-to-GDP stabilizes at about 14 percent of GDP.
  - Constant primary balance at 2014/15 level (1.4 percent of GDP): public debt stabilizes at a level higher than baseline.
- Key figures from Table 1 (Baseline Scenario, As of March 12, 2014):
  - Nominal gross public debt (percent of GDP): 2012: 11.8; 2013: 19.6; 2014: 17.5; 2015: 14.7; 2016: 13.2; 2017: 11.5; 2018: 10.0; 2019: 8.2; 2020: 7.0.
  - Public gross financing needs (percent of GDP): 2012: 1.1; 2013: 2.3; 2014: 1.6; 2015: 1.2; 2016: 0.3; 2017: 0.0; 2018: 0.3; 2019: 0.2; 2020: 0.4.
  - Real GDP growth (percent): 2012: 4.4; 2013: 4.3; 2014: 5.9; 2015: 4.4; 2016: 4.2; 2017: 4.0; 2018: 4.1; 2019: 4.1; 2020: 3.8.
  - Inflation (GDP deflator, percent): 2012: 8.6; 2013: 1.6; 2014: 5.9; 2015: 7.7; 2016: 4.7; 2017: 5.6; 2018: 5.4; 2019: 5.4; 2020: 5.2.
  - Nominal GDP growth (percent): 2012: 13.5; 2013: 5.9; 2014: 12.2; 2015: 12.4; 2016: 9.1; 2017: 9.9; 2018: 9.8; 2019: 9.7; 2020: 9.2.
  - Effective interest rate (percent): 2012: 5.7; 2013: 3.1; 2014: 3.5; 2015: 3.6; 2016: 4.8; 2017: 5.8; 2018: 6.8; 2019: 7.2; 2020: 8.4.
  - Cumulative change in gross public sector debt (2012–2020): -10.5 (projection).
  - Identified debt-creating flows cumulative: -10.3.
  - Primary (noninterest) revenue and grants cumulative: 189.4 (percent of GDP over period shown).
  - Primary (noninterest) expenditure cumulative: 176.9.
- Notes on decomposition: automatic debt dynamics, interest rate/growth differentials, privatization receipts, residuals and projections are presented in Table 1 (see source).

### Medium-Term External Debt Sustainability
- Gross external debt: decreased to 26 percent of GDP in 2013 from 28.5 percent in 2012.
- Government external borrowing sources: mainly multilateral (IBRD, AfDB).
- Projection: gross external debt projected to decline from about 26 percent of GDP in 2013 to about 13.5 percent of GDP in 2019 (Table 2).
- Drivers of decline: ongoing fiscal consolidation, improvement in international terms of trade, stable FDI inflows.
- Alternative historical-average scenario: Botswana could become a net creditor vis-à-vis the rest of the world over the medium term.
- Sensitivity: external debt-to-GDP ratio most sensitive to a current account shock; real depreciation shock has marginal medium-term impact; limited sensitivity to shocks in interest rates and economic activity.
- Key figures from Table 2 (Baseline, 2009–2019 highlights):
  - External debt (percent of GDP): 2009: 28.4; 2010: 29.6; 2011: 27.0; 2012: 28.5; 2013: 26.3; 2014: 24.0; 2015: 21.1; 2016: 19.2; 2017: 17.0; 2018: 15.1; 2019: 13.5.
  - Change in external debt (percent of GDP): 2009: 18.0; 2010: 1.2; 2011: -2.6; 2012: 1.4; 2013: -2.1; 2014: -2.3; 2015: -2.9; 2016: -1.9; 2017: -2.1; 2018: -1.9; 2019: -1.7.
  - Debt-stabilizing non-interest current account (percent of GDP): -1.2.
  - External debt-to-exports ratio (percent): 2009: 78.2; 2010: 82.8; 2011: 59.5; 2012: 65.5; 2013: 48.0; 2014: 45.8; 2015: 42.1; 2016: 39.7; 2017: 37.0; 2018: 34.4; 2019: 32.2.
  - Gross external financing need (US$, millions and percent of GDP): table provides series including negative and positive values (see Table 2).
- Macroeconomic assumptions (selected):
  - Real GDP growth (percent): historic and projections series include values such as -7.8, 8.6, 6.2, 4.3, 5.9, 4.5, 4.5, 4.4, 4.2, 4.0, 4.1, 3.8.
  - Nominal external interest rate (percent): series includes 9.6, 1.7, 4.6, 6.8, 7.0, 6.9, 2.4, 7.8, 7.0, 7.6, 7.4, 7.5.
  - Growth of exports (US$ terms, percent): series includes  -26.8, 33.4, 41.7, -9.2, 28.2, 12.2, 22.2, 5.5, 4.0, 3.9, 4.7, 4.7, 3.9.

### Article IV Consultation — Executive Board Conclusion and Staff Projections
- IMF Executive Board concluded the 2014 Article IV consultation with Botswana on July 3, 2014; considered and endorsed staff appraisal without a meeting.
- Recent outcomes (to end-March 2014 / FY 2013/14):
  - Real GDP growth about 6 percent in 2013.
  - Non-mineral sector slowed; power supply disruptions cited.
  - Consumer price inflation: 4.4 percent at end-March 2014 (BoB medium-term objective range: 3–6 percent).
  - Fiscal balance: preliminary small surplus in FY 2013/14.
  - Current account: surplus in 2013 vs deficit in 2012.
  - Official reserve coverage: about 10 months of import cover at end-March 2014.
  - Household borrowing: grew about 24 percent annually in January 2014.
  - Banks’ nonperforming loans rising but still low by international standards.
- Staff projections:
  - Real GDP growth: slow to 4.4 percent in 2014; stabilize around 4 percent over the medium-term.
  - Headline inflation: likely to remain within BoB’s 3–6 percent objective range in 2014.
  - Current account surplus: expected to stabilize around 2 percent of GDP over the medium-term, supported by fiscal consolidation.
- Risks:
  - External: potential slowdown in emerging markets affecting mineral export demand.
  - Domestic: ongoing power supply problems; high but decelerating household borrowing.
  - Medium-term: sustainability of long-term growth amid softened trend growth; need to ease structural bottlenecks and find new growth drivers.

Executive Board Assessment — Key Messages and Policy Recommendations
- Botswana’s performance: remarkable; prudent management of natural resources noted; trend growth has softened; high unemployment and income inequality remain.
- Structural agenda: MTR of NDP10 supports structural transformation; emphasis on reducing government size relative to GDP so private sector leads growth.
- Fiscal policy: near-term stance appropriate; staff welcomes medium-term fiscal strategy emphasizing rebuilding the Pula Fund and improving SOE performance.
- Public spending: improve quality of spending on health and education; better targeting of social welfare to reduce inequality and make growth more inclusive.
- Wage bill and tax base: staff urges clearer measures to reduce wage bill relative to GDP and broaden tax base; avoid unwarranted preferential tax regimes.
- Exchange rate and markets: exchange rate regime served well; encourage strengthening operational aspects and deepening money and foreign currency markets.
- Financial stability: monitor household borrowing; use macroprudential tools; welcome plans for a national credit bureau.
- Growth-enhancing reforms: reinvigorate total factor productivity via better public spending quality (education, public investment), reduce regulatory burden, alleviate infrastructure bottlenecks, improve SME access to finance.

### Selected Economic and Social Indicators, 2010–2014 (Selected highlights)
- Real GDP (annual percent change): 2010: 8.6; 2011: 6.2; 2012: 4.3; 2013: 5.9; 2014 (Proj.): 4.4.
  - Mineral growth: 2010: 22.7; 2011: -2.3; 2012: -7.0; 2013: 10.6; 2014 (Proj.): 1.4.
  - Nonmineral growth: 2010: 6.2; 2011: 7.9; 2012: 6.3; 2013: 5.2; 2014 (Proj.): 4.8.
- Consumer prices (annual percent change): 2010: 7.4; 2011: 9.2; 2012: 7.4; 2013: 4.1; 2014 (Proj.): 5.4.
- Diamond production (millions of carats): 2010: 22.8; 2011: 23.0; 2012: 20.9; 2013: 22.7; 2014 (Proj.): 22.4.
- Exports of goods and services, f.o.b. (US$ percent change): 2010: 33.4; 2011: 41.7; 2012: -9.2; 2013: 28.2; 2014 (Proj.): 5.5.
  - Of which: diamonds (percent change): 2010: 49.9; 2011: 38.3; 2012: 7.1; 2013: 39.7; 2014 (Proj.): 3.6.
- Imports of goods and services, f.o.b. (US$ percent change): 2010: 17.9; 2011: 28.0; 2012: 7.4; 2013: -5.7; 2014 (Proj.): 15.3.
- Central government finances (percent of GDP):
  - Total revenue and grants: 2010: 32.4; 2011: 36.3; 2012: 36.5; 2013: 35.5; 2014 (Proj.): 35.2.
  - Total expenditure and net lending: 2010: 39.9; 2011: 36.4; 2012: 35.7; 2013: 35.2; 2014 (Proj.): 34.2.
  - Overall balance (deficit –): 2010: -7.5; 2011: -0.2; 2012: 0.8; 2013: 0.3; 2014 (Proj.): 0.9.
  - Non-mineral primary balance (percent of non-mineral GDP): 2010: -25.9; 2011: -20.1; 2012: -13.2; 2013: -14.0; 2014 (Proj.): -12.3.
  - Total central government debt (percent of GDP): 2010: 19.5; 2011: 20.1; 2012: 19.2; 2013: 16.9; 2014 (Proj.): 14.8.
- External sector:
  - Current account balance (percent of GDP): 2010: -5.4; 2011: -0.2; 2012: -4.6; 2013: 10.4; 2014 (Proj.): 5.7.
  - External public debt (percent of GDP): 2010: 19.7; 2011: 20.7; 2012: 19.8; 2013: 17.4; 2014 (Proj.): 14.7.
  - Gross official reserves (end period, US$ millions): 2010: 7,883; 2011: 8,386; 2012: 8,270; 2013: 8,429; 2014 (Proj.): 9,200.
  - Months of imports of goods and services (based on following year imports): 2010: 11.8; 2011: 11.1; 2012: 11.2; 2013: 9.9; 2014 (Proj.): 10.3.
- Money and banking (percent change with respect to M2):
  - Broad money (M2): 2010: 12.4; 2011: 4.3; 2012: 7.4; 2013: 4.0; 2014 (Proj.): 12.5.
  - Credit to the private sector: 2010: 6.1; 2011: 11.8; 2012: 13.9; 2013: 9.6; 2014 (Proj.): 10.9.

*Source: IMF staff report and supporting tables (2014 Article IV Consultation, Botswana).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14204.pdf_