IMF Executive Board Concludes 2011 Article IV Consultation with Botswana

Public Information Notice (PIN) No. 11/106
August 2, 2011

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On July 29, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Botswana.1


Botswana’s economy staged an impressive recovery during the past year. Since the second quarter of 2010, the pace of economic growth has been one of the strongest among middle-income countries. The recovery was led by the diamond sector which was propelled by rapidly rising prices for rough diamonds in international markets. The non-mining sector growth has also been solid, notwithstanding the deceleration of public expenditure growth.

Despite the recovery, underlying inflation pressures remain contained. Consumer price inflation (year-on-year) rose from about 7 percent at end-2010 to 8.3 percent as of May 2011, but driven almost exclusively by cost-push factors related to food and fuel price shocks and the impact of increases in administered tariffs and fees on the provision of electricity and health services. Core inflation (excluding food, fuel and administered prices) has not shown a trend increase in the last few months.

The strong economic recovery has helped stabilize financial market conditions. Credit growth to households has picked up somewhat but is still well below pre-crisis levels. Arrears on bank lending, which rose significantly during 2009, stabilized during 2010 and by September 2010 had fallen somewhat due to lower levels of non-performing loans to businesses. Banking sector profitability should improve over time as banks are now seeking efficiencies in cost-to-income ratios and net interest margins, rather than in growing assets and liabilities.

The fiscal position has improved. The estimated fiscal outturn in FY2010/11 was better than expected with a deficit close to 10 percent of GDP, compared to the original budget target of 12 percent of GDP. The non-mineral primary deficit declined from about 31 percent of non-mineral GDP in 2009/10 to 27 percent in FY2010/11. The adjustment reflects a sharp decline in the growth of overall government spending which more than compensated for reduced customs revenues (as net repayments to the Southern Africa Customs Union-SACU Common Revenue Pool were made in 2010) and slow growth of income taxes from the non-mineral economy. Spending cuts were centered in central government transfers to other public bodies and in development spending. The impact of the April 2010 increase in value-added tax (VAT) rates (from 10 to 12 percent) did not yield significant tax revenues.

The overall external position has also strengthened. Annual export growth (in dollar terms) was about 35 percent in 2010. Strong export growth led to a considerable narrowing of the trade deficit in 2010. Beyond diamonds, other minerals such as copper and nickel have benefitted from a strong surge in international prices. Outside mining, beef exports also rose in 2010, while the weakest performer continues to be the textile sector. The real effective exchange rate remained broadly unchanged over the last 12 months.

The medium-term outlook is for a recovery to be sustained, while inflation remains within the central bank’s target band of 3 to 6 percent in the second half of 2012. Output growth is projected to average about 5.5 percent with an important contribution by sectors other than diamonds. The external current account balance is set to improve gradually. This reflects robust exports receipts from diamonds and other minerals, together with lower imports of energy and machinery and equipment due to the completion of existing projects and the planned downsizing of the government’s public investment program. A recovery of SACU revenues should also support an improved current account balance over the medium-term.

Executive Board Assessment

Executive Directors commended the authorities for their prudent macroeconomic management and welcomed Botswana’s strong economic recovery. Looking ahead, the key policy challenges are to reduce the size of government, strengthen the public sector institutional framework, diversify the economy and improve the quality of growth.

Directors broadly supported the authorities’ neutral monetary policy stance given that at present there appears to be no concrete evidence of generalized price pressures in the domestic economy. However, if high global food and commodity prices begin to translate into economy-wide price pressures, the authorities should tighten the policy stance.

Directors agreed on the need for fiscal consolidation. They encouraged the authorities to move decisively on their fiscal plan to achieve a balanced budget by FY2012/13, largely centered on prioritizing and reducing government spending. It will be important to ensure that only high quality public investment projects are undertaken and that the growth of the wage bill and the large transfers on tertiary education are appropriately contained. Directors welcomed recent measures to reform the corporate income tax system, and called for additional efforts to increase the effective tax rate on the VAT through rationalizing tax exemptions and incentives and to broaden the tax base.

Directors saw merit in a new fiscal rule which focuses on a greater role of the non-mineral primary balance as a share of non-mineral GDP in the formulation of fiscal policy. Such a fiscal rule would help develop a more robust medium-term fiscal sustainability plan.

Directors welcomed the authorities’ efforts to make fully operational the newly established financial stability unit at the Bank of Botswana, and strengthen the regulatory and supervisory framework for non-bank financial institutions.

Directors noted that Botswana faces the challenge of improving the quality of growth. They commended the authorities for their increased focus on poverty reduction and policy initiatives to enhance economic diversification and foster more inclusive growth. In particular, they supported measures to address skills mismatches in the labor market to tackle the high rate of unemployment. Directors noted that successful economic diversification will likely demand sizeable foreign direct investment in the non-mineral sector, which will require sustained efforts to improve the business environment, without impairing the tax base.

Botswana: Selected Economic and Financial Indicators, 2008–2011
  2008 2009 2010 2011


    Prel. Proj.
(Annual percentage change, unless otherwise indicated)

National income and prices


Real GDP 1

3.0 -4.9 7.2 6.5


-3.8 -21.0 7.0 8.8

  Nonmineral 2

7.9 4.5 5.4 5.6

Consumer prices (average)

12.6 8.1 6.9 7.8

Consumer prices (end of period)

13.7 5.8 7.4 7.2

Nominal GDP (billions of pula) 1

92.0 82.1 100.9 117.6

Diamond production (millions of carats)

32.3 17.7 23.8 26.1

External sector


Exports of goods and services, f.o.b. (US$)

-2.9 -35.7 33.6 11.1

  Of which:



-8.1 -30.3 36.4 11.2

Imports of goods and services, f.o.b. (US$)

18.2 -3.5 18.1 2.4
(Percentage change with respect to M2 at the beginning of the period)

Money and banking


Net foreign assets

37.8 -34.3 -17.5 30.6

Net domestic assets

-16.1 33.0 29.9 -16.8

Broad money (M2)

21.7 -1.3 12.5 13.9

Velocity (nonmineral GDP relative to M3)

1.4 1.6 1.6 1.6

Credit to the private sector

12.6 5.1 6.1 6.5
(In percent of GDP, unless otherwise indicated)

Central government finances 3


Total revenue and grants

34.0 34.6 28.8 30.4

Total expenditure and net lending

39.3 45.5 38.5 36.2

Overall balance (deficit –)

-5.2 -10.9 -9.7 -5.8

Nonmineral primary balance4

-28.5 -30.6 -26.6 -23.0

Total central government debt

6.4 16.1 13.2 15.6

External sector


Current account balance

6.9 -5.8 -4.9 -3.9

Balance of payments

8.0 -5.5 -5.5 3.1

External Public debt 5

2.1 14.3 15.1 15.8
(In millions of US$, unless otherwise indicated)

Change in reserves (increase –)

628 447 786 -499

Gross official reserves (end of period)

9,116 8,669 7,883 8,382

  In months of imports of goods and services 6

21.9 17.6 15.6 17.3

  In percent of GDP

67.2 75.2 53.0 53.7

Sources: Botswana authorities and IMF staff estimates and projections.

1 Calendar year.

2 Refers to the growth of value added of sectors other than mining, excluding statistical adjustments. The latter includes financial intermediation services indirectly measured (FISIM), taxes on products, and subsidies.

3 Year beginning April 1.

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

5 Includes publicly guaranteed debt.

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

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. 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:


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