Natural Resources and Development: Confronting Emerging Challenges in Botswana, Public Lecture at the Bank of Botswana By Mr. Naoyuki Shinohara, Deputy Managing Director, International Monetary Fund
IMF News, March 30, 2011
Source details
- Canonical URL
- Natural Resources and Development: Confronting Emerging Challenges in Botswana, Public Lecture at the Bank of Botswana By Mr. Naoyuki Shinohara, Deputy Managing Director, International Monetary Fund
Other formats
Bibliographic details
- Authors: Mr. Naoyuki Shinohara
- Published: March 30, 2011
Global economic outlook and implications for Botswana
- Global recovery expected to proceed, led by emerging markets, but will remain a multi-speed recovery with considerable downside risks.
- Advanced economies: growth subdued and unemployment still high; sovereign and banking sector risks in the euro area intensifying financial-sector strains.
- Middle East and North Africa instability contributing to rising oil prices; persistent higher oil prices could pose a risk to the global recovery.
- Emerging economies: activity remains buoyant in many, but overheating and inflationary pressures exist in some, exacerbated by large capital flows and rising commodity prices.
- IMF short-term outlook for sub-Saharan Africa:
- Following a sharp drop in the growth rate to 2½ percent in 2009, the region’s economy expanded by 5 percent in 2010 and is projected to grow by about 5½ percent this year.
- The region’s outlook is bi-polar: low-income countries set to return to 2000–08 average growth rates; middle-income countries expected to exhibit sizable output gaps.
- Commodity exporters: recent commodity price increases expected to persist in the near term; net oil importers face significant external financing needs if oil prices remain elevated.
- Policy guidance for price shocks:
- First-best response: allow pass-through of international prices to domestic prices and provide targeted support to the most vulnerable (subsidies, income support, direct provision of food).
- Where identification of needy is difficult, consider other targeted relief (e.g., temporary lowering of import taxes on essential staple foods).
- Monetary policy: accommodate first-round effects and tighten if second-round effects lead to generalized price pressures.
- Rebuild policy buffers, sustain reform efforts, and maintain macroeconomic stability and growth momentum.
Botswana: recent performance and structural challenges
- Botswana transformed from one of the poorest countries at independence into an upper middle-income country through sound macroeconomic policies, good governance, and high public investment.
- The 2008-09 global financial crisis hit Botswana hard, but rapid and appropriate policy response mitigated broader economic effects.
- Trend growth in Botswana has slowed in the last decade:
- Declining contribution of productivity growth to overall economic growth since 2000, coinciding with deceleration in diamond extraction.
- Decline in the contribution of labor to growth.
- Botswana’s historical growth strategy centered on capital deepening via public spending:
- After years of high public investment, infrastructure gap narrowed considerably.
- Diminishing returns on public expenditure have set in; outcomes (e.g., educational attainment) often poorer than in comparable middle-income countries despite high spending.
- Key policy question: how to transform the economic structure to sustain high growth and employment as natural-resource-driven success fades.
Pillar I — Reforms to foster private sector-led growth and diversification
- Diagnostic findings:
- Private sector productivity potential constrained by public-sector environment and cost of doing business.
- October 2010 National Business Confederation report: need to improve competitiveness, facilitate cross-border trade, and simplify/reduce procedures to start a business.
- Foreign direct investment currently concentrated in the diamond sector.
- Diamond exports expected to plateau over the next decade or thereabout; risk of persistent current account deficits unless non-diamond exports rise substantially.
- Policy recommendations:
- Preserve macroeconomic stability and implement regulatory and structural reforms to lower the cost of doing business.
- Consider public-private partnerships where appropriate, ensuring legal and regulatory frameworks mitigate fiscal risks and maximize value for money (energy sector PPPs being considered).
- Develop financial markets to improve capital allocation and expand access for the large “un-banked” population; nonbank financial institutions could play an important role.
- Create futures and forward markets to meet pension funds’ hedging needs and establish a benchmark yield curve to support regional financial center ambitions.
- Target diversification into activities with output and price trends uncorrelated with diamonds; government focus on IT services and regional financial center development noted as well-placed.
- Attract FDI to tourism, trade, telecommunication, and non-diamond sectors by lowering business costs and linking to multinational supply chains tailored to local conditions.
Pillar II — Tackling high unemployment, income inequality, and poverty
- Key challenges:
- High unemployment linked to capital-intensive mining sector and “Dutch disease” effects; job creation insufficient to absorb growing labor force.
- Skills mismatch: key skills still imported; local workforce skills do not fully match labor-market demands.
- Poverty and inequality:
- According to the last Household and Income Survey, about 30 percent of the population lives below the country-specific poverty line.
- Some estimates of the Gini-index suggest high income inequality.
- Poverty increases vulnerability to shocks; rising food prices hit the poor disproportionately and can have long-lasting effects.
- Policy recommendations:
- Foster private sector growth and diversification to increase productivity and investment in labor-intensive non-mining industries.
- Improve education system to produce workers with in-demand skills; invest in education and skills training to maximize returns on public spending.
- Attract FDI into non-diamond sectors and integrate into multinational supply chains to create employment.
- Implement a combination of carefully designed initiatives and faster growth—no single measure is sufficient to address unemployment.
- Consider fiscal resources to ameliorate surge in food and fuel prices’ impact on vulnerable groups, ensuring coherent and effective social safety nets for targeting and effectiveness.
- Ongoing government measures noted:
- Plans to create a Human Resource Development Council in 2012 to improve skills development.
- Establishment of a Labor Market Observatory to enhance dissemination of labor market information and reduce frictional unemployment.
- Shift in policy emphasis from poverty reduction to poverty eradication.
- Botswana Core Welfare Indicator Survey expected in May 2011 to assess poverty levels and assist government decision-making.
Pillar III — Strengthening fiscal institutions, fiscal rules, and asset-liability management
- Rationale:
- Natural resource-rich economies face volatile commodity prices and political pressures to spend windfall revenues, leading to pro-cyclical fiscal policies and macroeconomic volatility.
- Strong fiscal institutions help prevent excess spending in booms and preserve resources for downturns.
- Current fiscal framework and recommendations:
- Key fiscal objective: achieve an overall budget balance in Fiscal Year 2012–13.
- IMF suggestion: give greater prominence to the non-mining fiscal balance in fiscal policy formulation.
- Decomposing overall balance into mining and non-mining balances is critical to interpret fiscal developments and macroeconomic impact.
- Overall fiscal balance may not reliably indicate impact on domestic demand or government adjustment effort.
- Examples: Norway focuses on the non-oil balance; Chile uses a structural balance rule to insulate spending from copper price fluctuations.
- Botswana introduced a fiscal rule limiting government expenditures to 40 percent of GDP.
- Advantages: simple and signals balance between public spending and available resources.
- Drawback: can be procyclical because rising diamond prices increase GDP and allow higher spending.
- Consider complementing with a cap on real spending growth (examples cited: Australia and The Netherlands) to reduce procyclicality.
- Critical components of a fiscal policy rule:
- (i) a clear and, as simple as possible, set of operating fiscal variables;
- (ii) sufficient flexibility to respond to unanticipated shocks so the rule does not exacerbate adverse macroeconomic impacts while avoiding procyclicality.
- Recommendation: adopt a medium-term expenditure framework to connect annual budgets to longer-term policies; tailor to Botswana’s public financial management reforms and guide restrained spending given commodity-price uncertainty.
- Asset-liability management:
- Resource revenue flows create challenges and opportunities for asset-liability management.
- Botswana’s accumulated financial assets divided into:
- Liquidity portfolio: buffer against short-term trade and capital-account fluctuations.
- Pula Fund: designed to contribute to long-term development by diversifying income away from commodities into global financial assets.
- Botswana does not have a formal sovereign wealth fund but has a good reputation for managing accumulated financial assets.
- Botswana has begun to contract external debt; access to debt financing options exists.
- Recommendation: establish a comprehensive framework for public-sector asset and liability management.
- IMF support: plan to establish a multi donor trust fund to provide natural resource-rich countries with technical assistance on asset-liability management and related issues.
Closing observations
- The challenges of sustaining growth, diversifying the economy, tackling unemployment and inequality, and strengthening fiscal institutions are serious but not insurmountable.
- Government plans referenced: the 10th National Development Plan (NDP10) and the Fiscal Year 2011 to 12 Budget Speech by Minister Matambo outline responses to these challenges.
- IMF intends to contribute through surveillance work and technical assistance to help realize Botswana’s Vision.
March 30, 2011 — As prepared for delivery