IMF Executive Board Concludes 2023 Article IV Consultation with Botswana

August 31, 2023

  • Botswana’s growth is expected to slow to 3.8 percent in 2023 due to a projected decline in diamond production, before picking up over the following two years. Inflation has fallen since August 2022, and is now below the lower bound of the central bank's objective range.
  • The authorities plan a fiscal expansion in FY2023 followed by two years of substantial fiscal adjustment to reach a small fiscal surplus by FY2025. This adjustment should support rebuilding of foreign exchange reserves and government cash deposits.
  • The financial sector is broadly sound, stable, and resilient.

Washington, DC : The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Botswana. This also included a discussion of the findings of the Financial Sector Assessment Program (FSAP) exercise for Botswana. [2]

Following a strong recovery of almost 12 percent growth in 2021, Botswana’s economy grew by 5.8 percent in 2022, significantly above the long-run average of 4 percent. The ongoing recovery from the pandemic primarily reflects elevated mining production. Inflation has declined sharply since August of 2022. After declining in 2022, FX reserves have stabilized and remained at adequate levels at end-2022. The unemployment rate remains elevated at
25 percent.

Botswana’s growth is expected to slow to 3.8 percent in 2023 due to the projected decline in diamond production and the weaker global environment. Growth is forecast to rebound gradually in 2024 and 2025, to above 4 percent, due to higher prices and quantities of diamonds produced. Inflation is projected to revert to and remain within the central bank’s objective range.

The authorities plan a fiscal expansion in FY2023 followed by two years of substantial fiscal adjustment to reach a small fiscal surplus by FY2025. Together with a gradual recovery in diamond production and prices, FX reserves are projected to stabilize at 5 ½ months of imports over the medium term. The outlook remains heavily dependent on demand for diamonds and the global economic cycle.

As outlined in the Financial System Stability Assessment (FSSA), the financial sector appears broadly sound, stable, and resilient. However, it is essential to monitor contagion risk from banks to non-bank financial institutions due to the concentration of large non-bank deposits. Banking supervision should be further enhanced on the basis of a risk-based framework and data gaps closed for requisite calibration of macroprudential tools. The crisis management and safety net framework has been strengthened significantly with the introduction of a deposit insurance scheme. The Financial Stability Council should play an important role in developing and coordinating a comprehensive framework for crisis management and resolution.

Executive Board Assessment[3]

Directors agreed with the thrust of the staff appraisal. They welcomed Botswana’s prudent macroeconomic policies and strong recovery from the pandemic, but also highlighted the continued decline in external and fiscal buffers and the expected depletion of diamond reserves in coming decades. They noted the slowdown in economic activity this year and risks to the outlook, which include commodity price volatility and a sharper global slowdown. Directors welcomed Botswana’s robust capacity development strategy.

Directors agreed that fiscal consolidation is critical to preserve fiscal sustainability and support the accumulation of foreign exchange reserves. They welcomed the authorities’ medium-term plan to achieve a fiscal surplus by FY2025, noting the need for measures to contain expenditures and mobilize additional revenues. Some Directors urged cautious implementation of this year’s planned fiscal expansion to avoid hindering disinflation and to support the rebuilding of fiscal buffers. Directors noted that the credibility of the medium- term adjustment path could be enhanced through the introduction of an expenditure rule.

Directors concurred that the monetary policy stance remains appropriate, noting the slowdown in inflation, but urged the authorities to stand ready to raise rates if inflationary pressures emerge. They welcomed the Bank of Botswana (BoB)’s efforts to strengthen its governance frameworks and encouraged the BoB to further enhance the monetary policy transmission mechanism. They supported refinements to the REER targeting exchange rate regime to bolster competitiveness and reduce potential frictions between monetary and exchange rate policies.

Directors welcomed the 2023 FSAP, which found that the financial sector is sound and resilient to a wide range of shocks. They positively noted the good progress in strengthening legal and regulatory frameworks for financial stability and AML/CFT, and Botswana’s removal from the FATF grey list. Directors concurred that enhancing the interbank and government bond markets would support financial sector development, strengthen public financial management, and improve monetary policy transmission. They stressed the need to enhance financial inclusion by strengthening digital financial services and the regulatory frameworks for lending to MSMEs.

Directors underscored the importance of advancing structural reforms to promote economic diversification and private sector development, thereby boosting growth and employment potential, and reducing inequality. They highlighted, as policy priorities, trade facilitation and integration, comprehensive SOE reforms, improving the business environment, enhancing climate change resilience, implementing the digitalization strategy, and more targeted support for high-productivity, export-led sectors.


[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] Under the FSAP, the IMF assesses the stability of the financial system, and not that of individual institutions. The FSAP assists in identifying key sources of systemic risk and suggests policies to help enhance resilience to shocks and contagion. The last FSAP exercise for Botswana took place in 2007.

 

[3] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm

Table 1. Botswana: Selected Economic and Social Indicators, 2019-2028 1

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

Act.

Act.

Act.

Est.

Projection

(Annual percent change, unless otherwise indicated)

National Income and Prices

Real GDP

3.0

-8.7

11.9

5.8

3.8

4.1

4.3

4.0

4.0

4.0

Mineral 2

-3.7

-26.5

29.8

7.5

0.6

2.6

3.5

2.4

2.1

2.3

Nonmineral

5.2

-3.5

7.8

5.3

4.7

4.5

4.6

4.4

4.5

4.5

GDP per capita (US dollars)

6,679

5,863

7,239

7,738

7,741

8,013

8,417

8,943

9,446

10,034

GNI per capita (US dollars) 3

6,329

5,868

7,169

7,515

7,538

7,793

8,188

8,693

9,193

9,761

Consumer prices (average)

2.7

1.9

6.7

12.2

5.9

4.7

4.5

4.5

4.5

4.5

Diamond production (millions of carats)

23.7

16.9

22.7

24.5

24.5

25.1

25.9

26.6

27.1

27.8

Money and Banking

Monetary Base

5.7

-3.8

-8.8

14.0

9.7

7.6

8.9

8.4

9.2

9.2

Broad money (M2)

8.0

5.9

5.0

12.0

9.7

7.6

8.9

8.4

9.2

9.2

Credit to the private sector

7.1

5.3

5.4

14.7

8.9

8.4

8.7

8.8

8.7

8.7

(Percent of GDP, unless otherwise indicated)

Investment and Savings

Gross investment (including change in inventories)

30.9

32.8

27.4

25.0

29.9

30.7

32.5

32.8

32.6

32.7

Public

7.8

6.5

5.5

5.4

7.2

7.3

7.1

6.8

6.6

6.6

Private

23.0

26.3

21.9

19.5

22.8

23.4

25.4

26.0

26.0

26.1

Gross savings

23.8

26.5

28.2

28.4

30.8

32.2

33.6

33.5

33.2

33.2

Public

0.5

-4.3

0.7

4.0

4.5

5.4

6.6

6.3

6.1

6.1

Private

23.3

30.8

27.5

24.4

26.2

26.8

27.0

27.2

27.1

27.1

Central Government Finances 4

Total revenue and grants

28.3

25.6

29.0

28.9

29.8

28.7

28.6

28.4

28.3

28.4

SACU receipts

7.9

9.1

6.5

5.4

8.7

7.5

7.2

7.0

7.0

7.0

Mineral revenue

8.2

5.3

10.6

13.2

9.7

9.6

9.8

9.9

9.7

9.6

Total expenditure and net lending

36.9

36.5

31.4

28.9

31.7

29.7

28.1

27.9

27.8

27.9

Overall balance (deficit –)

-8.6

-10.9

-2.4

0.0

-1.9

-1.0

0.5

0.5

0.5

0.5

Non-mineral primary balance 5

-19.0

-18.5

-15.9

-16.3

-13.6

-12.5

-10.8

-10.9

-10.6

-10.5

Total central government debt 6

21.5

23.5

22.1

20.8

21.3

20.3

18.9

18.4

18.2

17.9

Net Debt

5.3

15.3

12.8

11.6

13.0

13.1

11.7

10.3

9.2

8.0

External Sector

Exports of goods and services, f.o.b. (% change)

-17.3

-25.3

70.3

11.9

-8.8

10.6

5.8

9.2

5.7

6.0

o/wdiamonds

-19.8

-21.8

80.0

7.9

-13.3

10.4

5.2

10.6

4.0

4.5

Imports of goods and services, f.o.b. (% change)

4.5

-2.3

23.1

-6.4

2.8

7.8

5.6

9.6

6.1

6.1

Current account balance

-6.9

-10.4

-1.4

2.9

0.8

1.5

1.1

0.6

0.6

0.5

Overall Balance

-6.7

-11.7

-1.4

1.8

2.5

1.8

0.7

0.6

0.7

0.7

Nominal effective exchange rate (2018=100) 7

98.2

94.0

94.1

90.8

-

-

-

-

-

-

Real effective exchange rate (2018=100) 7

98.8

94.4

97.7

99.1

-

-

-

-

-

-

Terms of trade (2005=100)

143.4

140.6

178.9

161.2

145.5

150.5

150.5

159.1

158.5

156.7

External public debt 8

12.5

11.8

11.1

9.6

10.0

8.6

7.2

6.5

5.9

5.3

o/w public and publicly guaranteed

3.9

4.0

2.9

2.2

1.9

1.6

1.4

1.2

1.1

1.0

(Millions of US$, unless otherwise indicated)

Change in reserves (increase –)

Gross official reserves (end of period)

6,172

4,944

4,806

4,281

4,800

5,196

5,369

5,516

5,692

5,884

Months of imports of goods and services 9

9.8

6.4

6.7

5.8

6.0

6.1

5.8

5.6

5.5

5.5

Months of non-diamond imports 9

13.4

9.3

8.9

7.7

8.2

8.4

8.2

8.0

7.7

7.4

Percent of GDP

36.5

31.2

27.2

21.7

23.6

24.1

23.3

22.0

21.4

20.3

Sources: Botswana authorities and IMF staff estimates and projections.

1 This table is based on calendar years unless otherwise indicated.

2 The projection is based on current value added and projected growth rates by different types of minerals.

3Based on Atlas method from the World Bank.

4 Fiscal variables are based on fiscal years (starting on April 1).

5The non-mineral primary balance is computed as the difference between non-mineral revenue and expenditure (excluding interest receipts and interest payments), divided by non-mineral GDP.

6Includes guarantees.

7 For 2019-2022, both effective exchange rates are from IMF INS database.

8 External debt data measured in fiscal years.

9Based on imports of goods and services for the following year.

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