IMF Executive Board Concludes 2022 Article IV Consultation with Botswana
IMF News, July 27, 2022
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- Published: July 27, 2022
Overview and Executive Board assessment
- The Executive Board concluded the Article IV consultation with Botswana and endorsed the staff appraisal without a meeting on a lapse-of-time basis.
- Botswana recovered to its pre-pandemic output level; the economy grew by 11.4 percent in 2021.
- A successful vaccination campaign, prudent macroeconomic management, and strong demand for diamonds supported the recovery.
- The next Article IV consultation is expected to be held on the standard 12-month cycle.
Economic performance and outlook
- Growth:
- The economy grew by 11.4 percent in 2021.
- Growth is projected at about 4¼ percent in 2022 and 4 percent per annum through the medium term.
- Inflation:
- Inflation exceeded the Bank of Botswana’s medium-term 3–6 percent objective range.
- Inflation is projected at 11 percent in 2022.
- Labor market:
- Unemployment rose close to record highs.
- Botswana needs to create jobs to absorb the 35,000 annual labor market entrants.
- Drivers and assumptions for the outlook:
- Higher prices and demand for diamonds, increased copper production, prospects for a good harvest, less COVID-19 mobility restrictions, and more international tourist arrivals.
- The outlook depends on the course of the war in Ukraine, the pandemic, and implementation of fiscal consolidation and economic diversification plans.
- Key projection headline figures (from Table 1):
- Real GDP (annual percent change): 2018: 4.2; 2019: 3.0; 2020: -8.7; 2021: 11.4; 2022 Projection: 4.3; 2023 Projection: 4.0.
- GDP per capita (US dollars): 2021: 7,337; 2022 Projection: 7,510; 2023 Projection: 7,765; 2027 Projection: 9,627.
- Consumer prices (average): 2021: 6.7; 2022 Projection: 11.0; 2023 Projection: 5.8.
- Diamond production (millions of carats): 2021: 23.2; 2022 Projection: 24.0; 2027 Projection: 26.6.
Fiscal policy, public finances, and public sector reforms
- Fiscal stance and objectives:
- Implementing the planned medium-term fiscal consolidation will rebuild buffers and financial assets for future generations.
- The consolidation plan will achieve fiscal surplus over the medium term and rebuild the Government Investment Account.
- Required institutional reforms:
- Adopt a public wage formation framework.
- Anchor fiscal policy in a credible medium-term fiscal framework.
- Formalize a new fiscal rule in National Development Plan 12.
- Increase transparency and accountability in spending to catalyze public support for fiscal reform and revenue collection.
- Improve public investment efficiency and the quality of public procurement.
- State-owned enterprises and revenue:
- Joint ventures of identified SOEs with the private sector and efforts to close the tax gap should proceed as planned.
- Table 1 fiscal indicators (percent of GDP unless otherwise indicated):
- Total revenue and grants: 2018: 30.5; 2019: 26.1; 2020: 31.3; 2021: 31.7; 2022 Projection: 32.3; 2023 Projection: 31.4; 2024 Projection: 30.6.
- Total expenditure and net lending: 2018: 35.6; 2019: 36.9; 2020: 37.2; 2021: 34.0; 2022 Projection: 30.3; 2023 Projection: 28.7; 2024 Projection: 28.0.
- Overall balance (deficit –): 2018: -5.1; 2019: -8.6; 2020: -11.1; 2021: -2.7; 2022 Projection: -1.8; 2023 Projection: 0.6.
- Non-mineral primary balance: 2018: -18.6; 2019: -19.0; 2020: -18.5; 2021: -16.2; 2022 Projection: -16.6; 2023 Projection: -11.9; 2024 Projection: -10.5.
- Total central government debt: 2018: 19.5; 2019: 21.5; 2020: 24.2; 2021: 24.3; 2022 Projection: 25.0; 2023 Projection: 24.6; 2027 Projection: 16.3.
Monetary policy and inflation management
- Monetary tightening:
- To combat rising inflation, the Bank of Botswana raised the newly introduced Monetary Policy Rate (MOPR) by a combined 101 basis points in April and June 2022.
- Bringing inflation back within the Bank of Botswana’s objective range will require additional monetary tightening.
- Monetary policy framework and recommendations:
- The newly created monetary policy rate will over time enhance monetary policy transmission and implementation.
- Strengthened monitoring and communication would help limit risks of volatility in interbank rates and disruptive capital flows.
- Lifting the restrictions on the current prime lending rate in due course would contribute to the efficiency of financial intermediation and financial access.
- Money and banking indicators (selected):
- Monetary Base (annual percent change): 2018: 17.5; 2019: -7.0; 2020: -42.1; 2021: 33.2; 2022 Projection: 14.3.
- Broad money (M2) (annual percent change): 2018: 8.3; 2019: 8.0; 2020: 5.9; 2021: 5.0; 2022 Projection: 6.3.
- Credit to the private sector (annual percent change): 2018: 6.6; 2019: 7.1; 2020: 5.3; 2021: 10.2; 2022 Projection: 10.3.
External sector and exchange rate policy
- External position:
- The external position is broadly in line with fundamentals and desirable policies.
- Fiscal consolidation and higher diamond exports should strengthen the current account and support reserves accumulation.
- Exchange rate policy:
- Maintaining the current crawl rate would be appropriate as domestic interest rates rise.
- Continuing to allow flexibility within the current exchange rate regime should help the economy adjust to shocks and facilitate structural transformation.
- External sector indicators (selected):
- Current account balance (percent of GDP): 2018: 0.4; 2019: -6.9; 2020: -0.5; 2021: 1.7; 2022 Projection: 2.6; 2023 Projection: 4.4; 2024 Projection: 4.9; 2025 Projection: 5.7.
- Gross Official Reserves (end of period, Millions of US$): 2018: 6,657; 2019: 6,172; 2020: 4,944; 2021: 4,806; 2022 Projection: 4,968; 2023 Projection: 5,292; 2027 Projection: 8,744.
- Months of Imports of Goods and Services: 2018: 10.4; 2019: 10.0; 2020: 6.2; 2021: 7.3; 2022 Projection: 8.1; 2023 Projection: 9.3.
- Exports of goods and services, f.o.b. (% change): 2018: 9.1; 2019: -17.3; 2020: -22.8; 2021: 63.9; 2022 Projection: -0.4; 2023 Projection: 12.0.
Risks, reform priorities, and the Reset Agenda
- Downside risks:
- Strength of commodity markets, China’s growth, the pace of tightening of monetary policy in advanced economies, geopolitical shocks (including the war in Ukraine), pandemic developments, and climate shocks.
- Vulnerabilities:
- Relatively low fiscal buffers and continued reliance on mining expose Botswana to external shocks.
- Policy priorities and recommendations:
- Some near-term fiscal support may be needed to cushion the most vulnerable households from the effects of rising global inflation; improving the targeting of social programs will reduce leakages.
- Accelerated implementation of the “Reset Agenda” should help diversify the economy towards financial services (facilitated by fintech), manufacturing, and tourism.
- Reforms to enhance accountability, competition, and governance, deepen trade integration, and accelerate the energy transition.
- Move away from inward-looking policies such as import restrictions; undue reliance on import substitution and restrictions to promote industrialization could be counterproductive.
- Expected benefits:
- Successful implementation of the Reset Agenda will enhance resilience, ensure sustained high-job rich growth, and help transform Botswana into a high-income status as per Vision 2036.
Source: IMF Press Release No. 22/275 — IMF Executive Board Concludes 2022 Article IV Consultation with Botswana