IMF Staff Completes 2021 Article IV Mission to Botswana

IMF News, April 9, 2021

Source details

Press Release No. 21/103; April 9, 2021.
IMF team led by Mr. Papa N’Diaye, Mission Chief for the Republic of Botswana and head of the African Department Regional Studies Division.
Virtual Article IV discussions held from March 8-23, 2021.
Statement reflects preliminary findings of IMF staff and does not necessarily represent the views of the IMF’s Executive Board.

The COVID-19 crisis severely impacted Botswana’s economy.
Relief measures implemented by the authorities helped moderate the immediate effects of the pandemic.
A recovery is underway but uncertainty is high; risks are dominated by the evolution of the pandemic and lower-than-expected diamond revenue.
GDP growth expected at 8.3 percent in 2021, driven by:
- a strong rebound in mining activity,
- easing of restrictions on mobility,
- the recent public wage increase.
The current account deficit widened and foreign exchange reserves dropped further, though reserves remained above adequate levels.

First priority: secure and ensure successful rollout of vaccines to a share of the population large enough to keep the pandemic under control and prevent health systems from being overwhelmed.
Maintain targeted support to illiquid but solvent firms and affected households; make support state-contingent or conditional to reduce moral hazard.
Given uncertainty on the health crisis and mineral revenue, recommended targeted support should be financed through both revenue and expenditure measures.

Commendation for commitment to fiscal sustainability; recommendation to implement the adjustment planned in the draft FY2021/22 budget without further delays.
Under the baseline, the envisaged pace and size of consolidation and shift in spending composition are appropriate.
Fiscal reforms needed to lock-in consolidation efforts include:
- civil service reform,
- acceleration of plans to rationalize the parastatal sector and improve its governance,
- strengthening of the fiscal framework to better anchor fiscal policy and increase credibility.
Mobilizing domestic savings to finance the deficit requires coordinated efforts to deepen the bond market.
Gradual reduction of the fiscal deficit will put the fiscal position on a sustainable footing while targeted investment and human capital development could raise productivity, create jobs, and help diversify the economy and revenue sources.
Envisaged incentives for training and financial support to transformative sectors will facilitate reallocation of factors to new sectors.
Caution that planned increases in the VAT rate and other taxes and fees could have regressive impacts; mitigation via targeted support is recommended.

Accommodative monetary policy stance is appropriate and should be maintained, while carefully monitoring:
- second-round effects from supply shocks to inflation and inflation expectations,
- credit developments.
Mission welcomes the recently increased crawl rate of Botswana’s exchange rate peg; Bank of Botswana should use the flexibility afforded by its current exchange rate regime to:
- help the economy adjust to shocks,
- ensure external viability,
- facilitate structural transformation.
Authorities’ interventions helped mitigate immediate macro-financial risks; as the health crisis wanes:
- COVID-19 related forbearance measures should be unwound,
- adequate liquidity maintained in the domestic market,
- risks closely monitored.
Building on recent progress in addressing AML/CFT deficiencies is a priority.

Decisive implementation of the ERTP will diversify sources of growth and promote private sector activity, thereby creating jobs.
Successful implementation requires continuous appraisal of existing sectoral programs, assessment and adaptation to changes in domestic and external markets, focusing on promising sectors, and tackling market and government failures.
Key bottlenecks to address include small scale, mismatched skills, lack of competition, coordination failures, and information asymmetries.

Botswana entered the COVID-19 crisis with larger buffers and lower public debt than other countries in sub-Saharan Africa (SSA), but significantly less than in the past.
The country faced structural challenges, persistent negative external shocks, delays in adjustment, weakening international reserves, a weaker fiscal position, and high unemployment prior to the pandemic.
The mission thanked the authorities for excellent discussions and support during the Article IV consultation.

IMF Staff Completes 2021 Article IV Mission to Botswana — Press Release No. 21/103, April 9, 2021.