The FINANCIAL -- On July 28, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Botswana, and considered and endorsed the staff appraisal without a meeting.
Following a small contraction in 2015, economic activity recovered in 2016 with real GDP growth of 4.3 percent. Mineral production has remained subdued, but diamond sales rebounded as conditions in the global market begun to improve. Non-mining activities also expanded, supported by accommodative fiscal and monetary policies and reforms in the electricity sector. Year-on-year inflation has remained stable near the lower band of the Bank of Botswana’s inflation objective range of 3–6 percent, with the 12-month rate of inflation at 3.5 percent in in May 2017, according to IMF.
The fiscal position has also improved as the deficit narrowed from 4.6 percent of GDP in fiscal year 2015/16 (the fiscal year begins in April) to about 1 percent of GDP in 2016/17. This outcome was supported by a recovery in diamond revenues and constrained recurrent spending. Higher diamond sales also contributed to a large surplus in the external current account and helped sustain a high level of international reserves (45 percent of GDP at end-2016).
Executive Board Assessment
In concluding the 2017 Article IV Consultation with Botswana, Executive Directors endorsed staff’s appraisal as follows:
The economy is undergoing a cyclical recovery and the outlook is broadly positive. Supported by a gradual rebound in the global diamond market and public investment, annual real GDP growth is projected to approach 5 percent in the near term while prudent financial policies are expected to maintain inflation within the 3–6 percent objective range set by the Bank of Botswana. In the medium-term, the outlook is also positive and risks are balanced.
The authorities’ macroeconomic policies are appropriate. The fiscal stance articulated in the 2017/18 budget and the Medium-Term Expenditure Framework (MTEF) entail small deficits over the next two fiscal years and a rebalancing of expenditure composition toward development spending. This is consistent with a small output gap and the need to upgrade the water and electricity infrastructure. Starting in 2019/20, the MTEF envisages returning to fiscal surpluses, with a tighter control of the wage bill and of transfers to parastatals. At present, the authorities’ neutral monetary policy stance is appropriate as there does not seem to be room to lower interest rates. Botswana’s exchange rate regime continues to serve the country well.
Domestic revenue mobilization will provide added funding for development spending and help protect buffers. Given the volatility of diamond and revenues from the Southern African Customs Union and a relatively low domestic tax effort, there is a need to pass into law and implement the new Tax Administration Act as well as to strengthen the large taxpayers’ unit. In addition, it would be important to consider streamlining VAT exemptions, simplifying the personal income tax, and accelerating plans to register and re-evaluate properties.
Further financial sector reforms will bolster stability. The authorities should proceed with plans to set up the macroprudential policy function and improve the AML/CFT framework, establish a crisis resolution framework, finalize the implementation of Basel II requirements, and strengthen risk-based supervision of nonbank financial institutions.
Fostering private sector growth will require determination and focus on key reforms. Achieving the long-sought objectives of inclusive growth and diversification will require political commitment, improved capacity and coordination among government agencies, and focus on a few plans with a manageable set of high-impact, time-bound, monitorable reforms. In this context, the authorities need to press ahead with the key measures discussed to strengthen the efficiency of the public sector, build skills in the labor force, and create an enabling environment for the expansion of the private sector.
Public sector reforms could enhance growth prospects. In this regard, the priorities should be to proceed with measures to improve the planning, prioritization, and execution of public investment programs; build capacity in the management of public-private partnerships; improve the financial monitoring and evaluation of SOEs and accelerate the privatization of key loss-making enterprises; make the energy regulator fully operational; review the structure of electricity subsidies to set rates in line with commercial criteria and avoid political interference; and lower water losses.
Similarly, there is a need to proceed with measures to enhance education outcomes and reduce skill mismatches. The authorities need to accelerate the implementation of the strategic plan aimed at enhancing the quality of instruction and training across education levels. Deepening the dialogue and coordination with the private sector is also relevant to improve education outcomes and address skill-mismatches, as is easing the process to grant work permits to foreign workers with skills that are not present in the country. These actions will ultimately foster private sector development and facilitate the transfer of skills to the domestic labor force.
Selected reforms to lower the costs of doing business and foster financial deepening will also promote private sector development. In this regard, there is a need to accelerate the implementation of the 2015 Roadmap to improve the business environment, especially establishing a one-stop shop to start businesses, introducing risk-based inspections to speed up granting construction permits, broadening the scope of the creditor database to include both positive and negative credit data, allowing lenders to enforce securities out of court through a collateral agreement, establishing a collateral registry for immovable and movable assets, and implementing the Making Access Possible Plan to foster financial inclusion.
Lastly, efforts to diversify the economy can usefully focus on removing distortions and improving competitiveness. Capacity constraints, high transport costs, and the risks associated with industrial policies argue for an approach based on removing distortions and investing wisely in key public infrastructure. If industrial policies are pursued, the authorities should undertake careful cost-benefit analysis and ensure minimal government intervention. Furthermore, fiscal incentives and tax concessions (including in economic zones) should also be carefully evaluated and, if granted, be in the form of accelerated depreciation schemes or investment tax credits.