Public Information Notice: IMF Executive Board Concludes 2011 Article IV Consultation with Botswana
IMF News, August 2, 2011
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- Published: August 2, 2011
Background — recent macroeconomic developments and outlook
- Recovery and growth
- Since Q2 2010, Botswana’s pace of economic growth has been one of the strongest among middle-income countries, led by the diamond sector.
- Diamond sector propelled by rapidly rising prices for rough diamonds in international markets.
- Non-mining sector growth has been solid despite a deceleration of public expenditure growth.
- Inflation
- Consumer price inflation (year-on-year) rose from about 7 percent at end-2010 to 8.3 percent as of May 2011, driven almost exclusively by cost-push factors related to food and fuel price shocks and increases in administered tariffs and fees for electricity and health services.
- Core inflation (excluding food, fuel and administered prices) has not shown a trend increase in the last few months.
- Financial sector and credit
- Strong economic recovery helped stabilize financial market conditions.
- Credit growth to households has picked up somewhat but remains well below pre-crisis levels.
- Arrears on bank lending, which rose significantly during 2009, stabilized during 2010 and by September 2010 had fallen somewhat due to lower levels of non-performing loans to businesses.
- Banking sector profitability expected to improve as banks seek efficiencies in cost-to-income ratios and net interest margins rather than asset and liability growth.
- Fiscal position
- Estimated fiscal outturn in FY2010/11: deficit close to 10 percent of GDP, compared to original budget target of 12 percent of GDP.
- Non-mineral primary deficit declined from about 31 percent of non-mineral GDP in 2009/10 to 27 percent in FY2010/11.
- Adjustment reflects a sharp decline in growth of overall government spending; spending cuts centered in central government transfers to other public bodies and in development spending.
- April 2010 VAT increase (from 10 to 12 percent) did not yield significant tax revenues.
- External position
- Annual export growth (in dollar terms) was about 35 percent in 2010, narrowing the trade deficit.
- Other minerals (copper and nickel) benefitted from a surge in international prices; beef exports rose in 2010; textile sector remained weakest.
- Real effective exchange rate remained broadly unchanged over the last 12 months.
- Medium-term outlook and projections
- Recovery projected to be sustained; inflation expected to remain within the Bank of Botswana’s target band of 3 to 6 percent in the second half of 2012.
- Output growth projected to average about 5.5 percent with an important contribution by non-diamond sectors.
- External current account balance set to improve gradually due to robust export receipts from diamonds and other minerals, lower imports of energy and machinery and equipment, completion of existing projects, planned downsizing of the government’s public investment program, and a recovery of SACU revenues.
Executive Board Assessment — policy messages and recommendations
- General assessment
- Directors commended authorities for prudent macroeconomic management and welcomed Botswana’s strong economic recovery.
- Key policy challenges: reduce the size of government, strengthen the public sector institutional framework, diversify the economy, and improve the quality of growth.
- Monetary policy
- Directors broadly supported the authorities’ neutral monetary policy stance given no concrete evidence of generalized price pressures.
- If high global food and commodity prices begin to translate into economy-wide price pressures, authorities should tighten the policy stance.
- Fiscal policy and consolidation
- Directors agreed on the need for fiscal consolidation.
- Encouraged authorities to move decisively on their fiscal plan to achieve a balanced budget by FY2012/13, largely centered on prioritizing and reducing government spending.
- Important to ensure only high quality public investment projects are undertaken and to contain growth of the wage bill and large transfers on tertiary education.
- Welcomed recent measures to reform the corporate income tax system.
- Called for additional efforts to increase the effective tax rate on the VAT through rationalizing tax exemptions and incentives and to broaden the tax base.
- Saw merit in a new fiscal rule focusing on a greater role of the non-mineral primary balance as a share of non-mineral GDP to formulate fiscal policy and develop a robust medium-term fiscal sustainability plan.
- Financial sector supervision and stability
- Welcomed efforts to make fully operational the newly established financial stability unit at the Bank of Botswana and to strengthen the regulatory and supervisory framework for non-bank financial institutions.
- Structural reforms to improve quality and inclusiveness of growth
- Commended increased focus on poverty reduction and initiatives to enhance economic diversification and foster more inclusive growth.
- Supported measures to address skills mismatches in the labor market to tackle high unemployment.
- Noted that successful economic diversification will likely demand sizeable foreign direct investment in the non-mineral sector, requiring sustained efforts to improve the business environment without impairing the tax base.
Selected economic and financial indicators, 2008–2011 (highlights)
- National income and prices (annual percentage change unless otherwise indicated)
- Real GDP: 2008: 3.0; 2009: -4.9; 2010: 7.2; 2011 Prel./Proj.: 6.5
- Mineral GDP: 2008: -3.8; 2009: -21.0; 2010: 7.0; 2011: 8.8
- Nonmineral GDP: 2008: 7.9; 2009: 4.5; 2010: 5.4; 2011: 5.6
- Consumer prices (average): 2008: 12.6; 2009: 8.1; 2010: 6.9; 2011: 7.8
- Consumer prices (end of period): 2008: 13.7; 2009: 5.8; 2010: 7.4; 2011: (not provided)
- Nominal GDP (billions of pula) 1: 2008: 92.0; 2009: 82.1; 2010: 100.9; 2011: 117.6
- Diamond production (millions of carats): 2008: 32.3; 2009: 17.7; 2010: 23.8; 2011: 26.1
- External sector
- Exports of goods and services, f.o.b. (US$): 2008: -2.9; 2009: -35.7; 2010: 33.6; 2011: 11.1
- Diamonds (exports): 2008: -8.1; 2009: -30.3; 2010: 36.4; 2011: 11.2
- Imports of goods and services, f.o.b. (US$): 2008: 18.2; 2009: -3.5; 2010: 18.1; 2011: 2.4
- Money and banking (percentage change with respect to M2 at the beginning of the period)
- Net foreign assets: 2008: 37.8; 2009: -34.3; 2010: -17.5; 2011: 30.6
- Net domestic assets: 2008: -16.1; 2009: 33.0; 2010: 29.9; 2011: -16.8
- Broad money (M2): 2008: 21.7; 2009: -1.3; 2010: 12.5; 2011: 13.9
- Velocity (nonmineral GDP relative to M3): 2008: 1.4; 2009: 1.6; 2010: (not provided)
- Credit to the private sector: 2008: 5.1; 2009: 6.1
- Central government finances (in percent of GDP; year beginning April 1)
- Total revenue and grants: 2008: 34.0; 2009: 34.6; 2010: 28.8; 2011: 30.4
- Total expenditure and net lending: 2008: 39.3; 2009: 45.5; 2010: 38.5; 2011: 36.2
- Overall balance (deficit −): 2008: -5.2; 2009: -10.9; 2010: -9.7; 2011: -5.8
- Nonmineral primary balance4: 2008: -28.5; 2009: -30.6; 2010: -26.6; 2011: -23.0
- Total central government debt: 2008: 6.4; 2009: 16.1; 2010: 13.2; 2011: 15.6
- Balance of payments and reserves (in millions of US$, unless otherwise indicated)
- Change in reserves (increase −): 2008: 628; 2009: 447; 2010: 786; 2011: -499
- Gross official reserves (end of period): 2008: 9,116; 2009: 8,669; 2010: 7,883; 2011: 8,382
- In months of imports of goods and services: 2008: 21.9; 2009: 17.6; 2010: 17.3
- In percent of GDP: 2008: 67.2; 2009: 75.2; 2010: 53.0; 2011: 53.7
Public Information Notice (PIN) No. 11/106 — August 2, 2011. Executive Board concluded the Article IV consultation with Botswana on July 29, 2011.