## Natural Resources and Development: Confronting Emerging Challenges in Botswana, Public Lecture at the Bank of Botswana By Mr. Naoyuki Shinohara, Deputy Managing Director, International Monetary Fund

_IMF News, March 30, 2011_

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## Bibliographic details
- Authors: Mr. Naoyuki Shinohara
- Published: March 30, 2011

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### Global economic outlook and implications for Botswana
- Global recovery expected to proceed, led by emerging markets, but will remain a multi-speed recovery with considerable downside risks.
- Advanced economies: growth subdued and unemployment still high; sovereign and banking sector risks in the euro area intensifying financial-sector strains.
- Middle East and North Africa instability contributing to rising oil prices; persistent higher oil prices could pose a risk to the global recovery.
- Emerging economies: activity remains buoyant in many, but overheating and inflationary pressures exist in some, exacerbated by large capital flows and rising commodity prices.
- IMF short-term outlook for sub-Saharan Africa:
  - Following a sharp drop in the growth rate to 2½ percent in 2009, the region’s economy expanded by 5 percent in 2010 and is projected to grow by about 5½ percent this year.
  - The region’s outlook is bi-polar: low-income countries set to return to 2000–08 average growth rates; middle-income countries expected to exhibit sizable output gaps.
  - Commodity exporters: recent commodity price increases expected to persist in the near term; net oil importers face significant external financing needs if oil prices remain elevated.
- Policy guidance for price shocks:
  - First-best response: allow pass-through of international prices to domestic prices and provide targeted support to the most vulnerable (subsidies, income support, direct provision of food).
  - Where identification of needy is difficult, consider other targeted relief (e.g., temporary lowering of import taxes on essential staple foods).
  - Monetary policy: accommodate first-round effects and tighten if second-round effects lead to generalized price pressures.
  - Rebuild policy buffers, sustain reform efforts, and maintain macroeconomic stability and growth momentum.

### Botswana: recent performance and structural challenges
- Botswana transformed from one of the poorest countries at independence into an upper middle-income country through sound macroeconomic policies, good governance, and high public investment.
- The 2008-09 global financial crisis hit Botswana hard, but rapid and appropriate policy response mitigated broader economic effects.
- Trend growth in Botswana has slowed in the last decade:
  - Declining contribution of productivity growth to overall economic growth since 2000, coinciding with deceleration in diamond extraction.
  - Decline in the contribution of labor to growth.
- Botswana’s historical growth strategy centered on capital deepening via public spending:
  - After years of high public investment, infrastructure gap narrowed considerably.
  - Diminishing returns on public expenditure have set in; outcomes (e.g., educational attainment) often poorer than in comparable middle-income countries despite high spending.
- Key policy question: how to transform the economic structure to sustain high growth and employment as natural-resource-driven success fades.

### Pillar I — Reforms to foster private sector-led growth and diversification
- Diagnostic findings:
  - Private sector productivity potential constrained by public-sector environment and cost of doing business.
  - October 2010 National Business Confederation report: need to improve competitiveness, facilitate cross-border trade, and simplify/reduce procedures to start a business.
  - Foreign direct investment currently concentrated in the diamond sector.
  - Diamond exports expected to plateau over the next decade or thereabout; risk of persistent current account deficits unless non-diamond exports rise substantially.
- Policy recommendations:
  - Preserve macroeconomic stability and implement regulatory and structural reforms to lower the cost of doing business.
  - Consider public-private partnerships where appropriate, ensuring legal and regulatory frameworks mitigate fiscal risks and maximize value for money (energy sector PPPs being considered).
  - Develop financial markets to improve capital allocation and expand access for the large “un-banked” population; nonbank financial institutions could play an important role.
  - Create futures and forward markets to meet pension funds’ hedging needs and establish a benchmark yield curve to support regional financial center ambitions.
  - Target diversification into activities with output and price trends uncorrelated with diamonds; government focus on IT services and regional financial center development noted as well-placed.
  - Attract FDI to tourism, trade, telecommunication, and non-diamond sectors by lowering business costs and linking to multinational supply chains tailored to local conditions.

### Pillar II — Tackling high unemployment, income inequality, and poverty
- Key challenges:
  - High unemployment linked to capital-intensive mining sector and “Dutch disease” effects; job creation insufficient to absorb growing labor force.
  - Skills mismatch: key skills still imported; local workforce skills do not fully match labor-market demands.
  - Poverty and inequality:
    - According to the last Household and Income Survey, about 30 percent of the population lives below the country-specific poverty line.
    - Some estimates of the Gini-index suggest high income inequality.
  - Poverty increases vulnerability to shocks; rising food prices hit the poor disproportionately and can have long-lasting effects.
- Policy recommendations:
  - Foster private sector growth and diversification to increase productivity and investment in labor-intensive non-mining industries.
  - Improve education system to produce workers with in-demand skills; invest in education and skills training to maximize returns on public spending.
  - Attract FDI into non-diamond sectors and integrate into multinational supply chains to create employment.
  - Implement a combination of carefully designed initiatives and faster growth—no single measure is sufficient to address unemployment.
  - Consider fiscal resources to ameliorate surge in food and fuel prices’ impact on vulnerable groups, ensuring coherent and effective social safety nets for targeting and effectiveness.
- Ongoing government measures noted:
  - Plans to create a Human Resource Development Council in 2012 to improve skills development.
  - Establishment of a Labor Market Observatory to enhance dissemination of labor market information and reduce frictional unemployment.
  - Shift in policy emphasis from poverty reduction to poverty eradication.
  - Botswana Core Welfare Indicator Survey expected in May 2011 to assess poverty levels and assist government decision-making.

### Pillar III — Strengthening fiscal institutions, fiscal rules, and asset-liability management
- Rationale:
  - Natural resource-rich economies face volatile commodity prices and political pressures to spend windfall revenues, leading to pro-cyclical fiscal policies and macroeconomic volatility.
  - Strong fiscal institutions help prevent excess spending in booms and preserve resources for downturns.
- Current fiscal framework and recommendations:
  - Key fiscal objective: achieve an overall budget balance in Fiscal Year 2012–13.
  - IMF suggestion: give greater prominence to the non-mining fiscal balance in fiscal policy formulation.
    - Decomposing overall balance into mining and non-mining balances is critical to interpret fiscal developments and macroeconomic impact.
    - Overall fiscal balance may not reliably indicate impact on domestic demand or government adjustment effort.
    - Examples: Norway focuses on the non-oil balance; Chile uses a structural balance rule to insulate spending from copper price fluctuations.
  - Botswana introduced a fiscal rule limiting government expenditures to 40 percent of GDP.
    - Advantages: simple and signals balance between public spending and available resources.
    - Drawback: can be procyclical because rising diamond prices increase GDP and allow higher spending.
    - Consider complementing with a cap on real spending growth (examples cited: Australia and The Netherlands) to reduce procyclicality.
  - Critical components of a fiscal policy rule:
    - (i) a clear and, as simple as possible, set of operating fiscal variables;
    - (ii) sufficient flexibility to respond to unanticipated shocks so the rule does not exacerbate adverse macroeconomic impacts while avoiding procyclicality.
  - Recommendation: adopt a medium-term expenditure framework to connect annual budgets to longer-term policies; tailor to Botswana’s public financial management reforms and guide restrained spending given commodity-price uncertainty.
- Asset-liability management:
  - Resource revenue flows create challenges and opportunities for asset-liability management.
  - Botswana’s accumulated financial assets divided into:
    - Liquidity portfolio: buffer against short-term trade and capital-account fluctuations.
    - Pula Fund: designed to contribute to long-term development by diversifying income away from commodities into global financial assets.
  - Botswana does not have a formal sovereign wealth fund but has a good reputation for managing accumulated financial assets.
  - Botswana has begun to contract external debt; access to debt financing options exists.
  - Recommendation: establish a comprehensive framework for public-sector asset and liability management.
  - IMF support: plan to establish a multi donor trust fund to provide natural resource-rich countries with technical assistance on asset-liability management and related issues.

### Closing observations
- The challenges of sustaining growth, diversifying the economy, tackling unemployment and inequality, and strengthening fiscal institutions are serious but not insurmountable.
- Government plans referenced: the 10th National Development Plan (NDP10) and the Fiscal Year 2011 to 12 Budget Speech by Minister Matambo outline responses to these challenges.
- IMF intends to contribute through surveillance work and technical assistance to help realize Botswana’s Vision.

*March 30, 2011 — As prepared for delivery*

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## References

- [People's Republic of China and the IMF](http://www.imf.org/external/country/CHN/index.htm)
- [Botswana and the IMF](http://www.imf.org/external/country/BWA/index.htm)
- [Chile and the IMF](http://www.imf.org/external/country/CHL/index.htm)
- [India and the IMF](http://www.imf.org/external/country/IND/index.htm)
- [Speeches](https://www.imf.org/en/news/searchnews)
- [Naoyuki Shinohara](https://www.imf.org/external/np/omd/bios/ns.htm)
- [PRESS CENTER](http://presscenter.imf.org/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/sp033011_