Public Information Notice: IMF Executive Board Concludes 2012 Article IV Consultation with Botswana
IMF News, August 1, 2012
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- Published: August 1, 2012
Background
- Publication: Public Information Notice (PIN) No. 12/91; concluded on July 25, 2012 under IMF lapse of time procedures.
- Recent performance:
- Real GDP growth: 5.1 percent in 2011 (down from 7 percent in 2010).
- Growth deceleration driven by a significant slowdown in diamond exports in the second half of 2011.
- Non-mineral sector recorded brisk growth in 2011 despite significant fiscal withdrawal.
- Diamond sales for Q1 2012 showed only a very modest recovery.
- Inflation dynamics:
- Consumer price inflation (year on year) declined from 9.2 percent in December 2011 to 7.7 percent in May 2012.
- Bank of Botswana’s medium-term objective range: 3–6 percent.
- Core inflation (excluding food, fuel and administered prices) declined slightly; alternative measures (including the trimmed mean) suggest a downward trend in core inflation.
Monetary and Financial Sector Developments
- Financial market conditions:
- Private sector credit growth is approaching pre-crisis levels, supported by strong growth in credit to businesses.
- Banks’ nonperforming loans fell notably in the second half of 2011 due to improved quality of household loans.
- Increased interest and non-interest income, combined with lower provisions for nonperforming loans, contributed to a rebound in banks’ profitability.
- Policy and regulatory issues:
- Staff supports Bank of Botswana’s recent reform in its liquidity management framework.
- Recommendation: greater coordination between monetary operations and debt management through enhanced issuance of treasury securities to support burden-sharing of sterilization costs.
- Macro-financial vulnerability: high exposure of the banking system to household debt warrants close monitoring.
- Urgent need to strengthen capacity of the non-bank financial institutions’ regulator because rapid expansion has made non-banks systemically important while supervisory capacity lags.
- Cross-linkages between bank and non-bank financial sectors constitute an additional systemic risk.
Fiscal and External Sector Developments
- Fiscal outturns:
- Overall fiscal deficit in FY2011/12: about 2 percent of GDP (budget target was about 6 percent).
- Non-mineral primary deficit declined from about 24 percent of non-mineral GDP in FY2010/11 to 17 percent in FY2011/12.
- Adjustment reflected sharp decline in government spending driven by:
- Savings in the education budget from increased local tertiary admissions, rationalization of student allowances, and improved administration.
- Better prioritization of development spending.
- Higher-than-expected customs revenue from the Southern Africa Customs Union (SACU) Common Revenue Pool contributed to the lower deficit.
- External position:
- Overall external position strengthened in 2011 with annual export growth (in dollar terms) of about 40 percent.
- Exports grew faster than imports, turning the current account deficit into a surplus for the first time in the last three years.
- Diamond exports benefited from higher diamond prices in H1 2011, offsetting poor performance of copper and nickel exports.
- Non-mining exports: plastic products and textile exports surged in 2011; exports of meat and meat products fell due to EU export restrictions.
- The real effective exchange rate lost ground slightly over the last 12 months.
Outlook and Risks
- Growth and inflation projections:
- 2012: Growth likely to moderate; medium-term real GDP growth expected to stabilize at around 4.5 percent.
- Inflation expected to converge to the upper band of the Bank of Botswana’s medium-term objective range in 2013.
- Fiscal and external projections:
- Projected fiscal surpluses in FY2012/13 and beyond.
- Current account surplus forecast to stabilize at about 2 percent of GDP.
- Main risks:
- Highly uncertain global environment poses significant downside risks to mineral export demand.
- In a more adverse global scenario, authorities should allow automatic stabilizers to operate on the revenue side.
Executive Board Assessment — Key Recommendations and Judgments
- Overall judgment:
- The current fragile global economic environment is likely to delay Botswana’s recovery and trend growth will likely moderate over the medium term as diamond-based wealth effects fade.
- Authorities’ policy mix of fiscal restraint and an accommodative monetary stance is appropriate under current conditions.
- Fiscal policy recommendations:
- Bolder measures required to achieve targeted reduction in the wage bill; suggested measures include:
- Streamlining the system of non-wage payments.
- Rationalizing the size and structure of government.
- Tightening the link between pay and performance.
- Strengthening payroll systems.
- Revising the wage scale.
- Broadening the tax base should be integral to fiscal consolidation; staff strongly recommends conducting a full-fledged study on tax expenditure to provide a foundation for streamlining tax incentives.
- Adopt a fiscal anchor that delinks the fiscal stance from volatile mineral revenue and SACU receipts; staff reiterates the need to adopt either the non-mineral primary balance or the structural fiscal balance (à la Chile).
- Monetary and liquidity management:
- Support for Bank of Botswana’s liquidity management reform; enhanced issuance of treasury securities recommended to improve coordination of monetary operations and debt management.
- Structural and development priorities:
- Address long-term development and structural challenges to move to a higher level of development.
- Complement redistributive fiscal policy with policies that tackle inequality by fostering effective investment in education and health and enhancing financial inclusion.
- Public sector employment reform is critical to enhancing job creation economy-wide.
- Foster deeper institutional and capacity development as part of the reform agenda to support long-term growth.
- Exchange rate assessment:
- Staff judges the level of the real effective exchange rate as broadly in line with fundamentals from a medium-term perspective.
Selected Economic and Financial Indicators, 2009–2012 (annual percentage change, unless otherwise indicated)
- National income and prices:
- Real GDP: 2009: -4.7; 2010: 7.0; 2011: 5.1; 2012 Prel./Proj.: 3.8
- Mineral: 2009: -20.7; 2010: 6.7; 2011: -1.3; 2012 Prel./Proj.: 2.7
- Non-mineral 2: 2009: 4.6; 2010: 5.2; 2011: 7.3; 2012 Prel./Proj.: 3.9
- Consumer prices (average): 2009: 8.1; 2010: 6.9; 2011: 8.5; 2012 Prel./Proj.: 7.5
- Consumer prices (end of period): 2009: 5.8; 2010: 7.4; 2011: 9.2; 2012 Prel./Proj.: 6.4
- Nominal GDP (billions of pula) 1: 2009: 82.5; 2010: 101.3; 2011: 120.5; 2012 Prel./Proj.: 139.2
- Diamond production (millions of carats): 2009: 17.7; 2010: 22.8; 2011: 23.0; 2012 Prel./Proj.: 23.5
- External sector:
- Exports of goods and services, f.o.b. (US$): 2009: -34.0; 2010: 30.3; 2011: 39.1; 2012 Prel./Proj.: -2.9
- Diamonds: 2009: -30.3; 2010: 49.9; 2011: 38.3; 2012 Prel./Proj.: 3.4
- Imports of goods and services, f.o.b. (US$): 2009: -4.3; 2010: 21.1; 2011: 25.1; 2012 Prel./Proj.: -1.9
- Money and banking (percentage change with respect to M2 at the beginning of the period):
- Net foreign assets: 2009: -34.3; 2010: -17.5; 2011: 25.4; 2012 Prel./Proj.: 37.5
- Net domestic assets: 2009: 33.0; 2010: 29.9; 2011: -21.0; 2012 Prel./Proj.: -30.8
- Broad money (M2): 2009: 12.4; 2010: 4.3; 2011: 6.8
- Velocity (nonmineral GDP relative to M3): 2009: 1.6; 2010: 1.8; 2011: 1.9
- Credit to the private sector: 2009: 6.1; 2010: 11.8
- Central government finances (in percent of GDP, unless otherwise indicated) 3:
- Total revenue and grants: 2009: 33.3; 2010: 29.4; 2011: 29.5
- Total expenditure and net lending: 2009: 45.3; 2010: 36.2; 2011: 31.7; 2012 Prel./Proj.: 29.2
- Overall balance (deficit –): 2009: -12.0; 2010: -6.8; 2011: -2.2; 2012 Prel./Proj.: 0.3
- Nonmineral primary balance4: 2009: -30.4; 2010: -23.6; 2011: -17.2; 2012 Prel./Proj.: -10.9
- Total central government debt: 2009: 15.8; 2010: 17.6; 2011: 16.7; 2012 Prel./Proj.: 14.9
- Current account balance: 2009: -5.2; 2010: -2.0; 2011: 3.0; 2012 Prel./Proj.: (not separately listed)
- Balance of payments: 2009: -5.5; 2010: -6.4; 2011: 2.8; 2012 Prel./Proj.: 5.5
- External public debt 5 (in percent of GDP): 2009: 13.0; 2010: 10.9; 2011: 11.0
- Reserves (in millions of US$, unless otherwise indicated):
- Change in reserves (increase –): 2009: 447; 2010: 786; 2011: -503; 2012 Prel./Proj.: -987
- Gross official reserves (end of period): 2009: 8,669; 2010: 7,883; 2011: 8,386; 2012 Prel./Proj.: 9,373
- In months of imports of goods and services 6: 2009: 17.3; 2010: 12.6
- In percent of GDP: 2009: 74.8; 2010: 52.9; 2011: 53.2
Source: Public Information Notice: IMF Executive Board Concludes 2012 Article IV Consultation with Botswana, August 1, 2012.