IMF Staff Completes 2022 Article IV Mission to Botswana

IMF News, May 31, 2022

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An IMF team led by Mr. Papa N’Diaye, Assistant Director in the IMF African Department and Mission Chief for the Republic of Botswana, visited Gaborone and held discussions on the 2022 Article IV consultation from May 4-18, 2022.
End-of-Mission press releases convey preliminary findings of IMF staff and do not necessarily represent the views of the IMF’s Executive Board.
The statement reflects staff’s preliminary findings; staff will prepare a report for the IMF’s Executive Board, subject to management approval.

The economy grew by 11.4 percent in 2021.
Growth is projected at 4.3 percent in 2022.
Growth is estimated at about 4 percent in the medium term, below the 5 percent required to attain the authorities’ goal of reaching high-income status by 2036.
Factors supporting recovery:
- Higher prices and demand for diamonds.
- Prospects for good harvest following good rainfall in some parts of the country.
- Increasing international tourist arrivals.
- Robust diamond production and favorable terms of trade.
- Improvements in tourism and smaller portfolio outflows.
Buffers are recovering thanks to a strong fiscal adjustment and improving current account; buffers, particularly those held by the government, should continue to recover.

Inflation exceeded the central bank’s medium-term objective range of 3 – 6 percent in 2021 and increased sharply in the first months of 2022.
To combat rising inflation, the Bank of Botswana raised the newly-introduced Monetary Policy Rate (MoPR) by 51 basis points in April 2022.
With inflation at around 10 percent, real rates in negative territory and inflation expectations rising, additional tightening will be required.
The financial sector was assessed to be safe and sound, but the impact of higher rates, declining liquidity and the recent monetary policy reform will have to be monitored.

The authorities’ goal of achieving a fiscal surplus over the medium term is on track.
Near-term social policy:
- Social transfers will need to increase temporarily to help the most vulnerable households cope with the spillovers from the war in Ukraine.
- Staff estimates this additional temporary support will have a limited impact on the 2022 fiscal deficit.
- Beyond 2022, as energy and food prices ease, the additional pressure on the budget will fall.
Institutional and fiscal reforms recommended:
- Consider a new framework for public wage formation.
- Introduce a new expenditure rule which, combined with a target path for financial assets, should provide a long-term source of income and build enough buffers to counter shocks.
- Proceed with privatization of identified parastatals.
- Proceed with efforts to close the tax gap.
The recently announced wage settlement was above the budgeted amount and adds to the government’s footprint in the economy.

Long-standing challenges:
- Unemployment rose to 26 percent in 2021.
- Poverty and inequality have increased.
- Relatively low fiscal buffers and continued reliance on mining activity expose Botswana to external shocks, such as geopolitical and climate shocks.
- Some progress has been made on diversification and digitalization reforms, but the authorities are also relying increasingly on inward-looking policies, including import restrictions.
Recommended direction for diversification and job creation:
- Avoid excessive reliance on import substitution and restrictions to promote industrialization.
- Accelerate implementation of the “Reset Agenda” to diversify the economy towards financial services (facilitated by fintech), manufacturing, and tourism.
- Reforms should include deeper trade integration, implementation of planned visa and work permit reforms and faster investment in renewable energy.
- These measures will help create the jobs needed to reduce unemployment and absorb the 35,000 annual labor market entrants.

Global context and risks highlighted:
- High volatility in global commodities and COVID-19 outbreaks in Botswana’s key trading partners.
- Commodity prices have surged following the Russian invasion of Ukraine.
- COVID-19 outbreaks in China, supply chain disruptions, and tighter financial conditions are projected to reduce global growth to 3.6 percent in 2022, from 6.1 percent in 2021.
Specific downside and upside risks for Botswana:
- An abrupt slowdown in China or a protracted war in Ukraine could weaken global demand, thus lowering demand for diamonds.
- Prolonged sanctions against Russia (the largest rough diamond producer) could increase demand for and prices of Botswana’s diamonds.
- Outbreaks of more lethal and contagious COVID-19 variants could further hamper the recovery, particularly of tourism.
- Faster tightening of monetary policy in key advanced economies could trigger volatility in global markets, prompt capital outflows, and reduce demand for diamonds.
- Climate shocks continue to pose a threat to agriculture, mining, and tourism.
- Domestically, shortfalls in planned consolidation could further erode buffers, exposing Botswana to external shocks.

IMF Staff Completes 2022 Article IV Mission to Botswana — Press Release No. 22/176