IMF Staff Completes 2019 Article IV Mission to Botswana

IMF News, November 26, 2019

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Growth is expected to slow to about 3½ percent in 2019, due to weaknesses in the diamond market, a severe drought, and slower growth in neighboring countries.
Under staff’s baseline scenario, growth is expected to recover to 4.2 percent in 2020 as the diamond market normalizes and copper production comes into stream, and hover around 4 percent thereafter.
Inflation will remain low in 2019 and "will accelerate amid accommodative monetary policy but remain in the bottom half of the Bank of Botswana (BoB) target band."
The current account is projected to move to negative territory, contributing to a decline in reserves.

The fiscal deficit is expected to reach 5¾ percent of GDP in 2019 due to lower-than-expected revenue, higher-than-expected increase in public wages and other recurrent spending.
The mission supports the authorities’ objective to return to a fiscal surplus over the medium term.
Fiscal consolidation should start in FY2020, supported by both revenue and expenditure measures beyond those considered by the authorities.
The consolidation needs to be carefully calibrated to minimize the impact on growth, competitiveness, and the most vulnerable.

Recommended fiscal reforms (as stated by staff):

i) modifying the fiscal rule to prevent further erosions in buffers and achieve Botswana’s intergenerational equity objectives;
ii) greater revenue mobilization through broadening the tax base and advancing tax reform;
iii) public financial management reforms to enhancing the efficiency of spending;
iv) reforming parastatals and other extra-budgetary entities, including by enforcing compliance to best governance practices and strengthening their monitoring and accountability;
v) revamping the debt management framework.

"The accommodative monetary policy stance is appropriate and consistent with the objective of maintaining a stable real exchange rate against the currencies in the basket."
The BoB should use the flexibility afforded by its current exchange rate regime to help the economy adjust to the persistent decline in mineral and trade resources and structural transformation.
Recommended actions to strengthen monetary transmission and deepen the domestic financial market:
- further developing the secondary market for government securities;
- leveraging Fintech;
- facilitating the attachment of collateral;
- improving credit information.

Despite challenges, "the banking sector remains well capitalized and liquidity has improved."
Fiscal consolidation would contribute to a gradual rebuilding of buffers over the medium term.

Achieving the authorities’ objectives of moving to a knowledge-based economy and to high-income status by 2036 requires changing the growth model from a mining and government-led model to private sector and export-driven.
Supply-side policy priorities:
- further improving the business environment;
- redesigning industrial policies to foster competition and competitiveness;
- reducing the government footprint in the economy;
- prioritizing investment in human capital;
- upgrading digital skills and deepening Information and Communications Technology penetration;
- promoting integration in regional and global value chains.
Strategic deficiencies in the Anti-Money Laundering/Combating the Financing of Terrorism framework should be addressed.

Downside risks cited:
- a global rise in protectionism;
- a faster-than-anticipated slowdown in China and in the euro area;
- continued slow growth in South Africa;
- medium-term vulnerability to volatile mineral revenue and SACU transfers and to climate shocks.
Upside risks could stem from higher-than-expected mining production (e.g. coal).

IMF Communications Department, November 26, 2019.