IMF completes 2021 Article IV mission to Botswana

An International Monetary Fund (IMF) team, led by Mr. Papa N’Diaye, Mission Chief for the Republic of Botswana and head of the African Department Regional Studies Division, held virtual discussions on the 2020 Article IV consultation from March 8-23, 2021. At the conclusion of the discussions, Mr. N’Diaye issued the following statement:

“Botswana entered the COVID-19 crisis with larger buffers and lower public debt than other countries in sub-Saharan Africa (SSA), but significantly less than in the past. The country was contending with structural challenges, persistent negative external shocks and delays in adjustment that caused a weakening of international reserves and the fiscal position amid high unemployment.

“The pandemic exacerbated Botswana’s economic challenges. While strict containment measures helped to limit the spread of the virus and save lives, the heavy economic reliance on diamonds and contact-intensive activities caused a sharp GDP contraction, one of the deepest in SSA. The current account deficit widened and foreign exchange reserves dropped further, though remaining above adequate levels. The government implemented a sizeable public wage increase agreed in 2019 and deployed an economic relief package to counter the effects of the COVID-19 crisis. The relief package helped save people’s livelihoods.

“In this context and despite a second wave of COVID-19 infections, a recovery is underway, with GDP growth expected at 8.3 percent in 2021, driven by a strong rebound in mining activity, the easing of restrictions on mobility, and the recent public wage increase. The fiscal and external positions are expected to strengthen gradually along with favorable terms of trade. However, uncertainty is high, and risks are dominated by the evolution of the pandemic and vaccine rollout in Botswana and globally, and lower-than-expected diamond revenue. At the same time, a steadfast implementation of supply-side reforms could promote private sector activity and diversify the sources of growth.

“The first priority remains securing and ensuring successful rollout of vaccines to a share of the population large enough to keep the pandemic under control and prevent health systems from being overwhelmed.

“The next priority is to enhance Botswana’s resilience to shocks and advance supply side reforms to promote private sector activity and diversify its sources of growth. In this context, the mission commends the commitment to fiscal sustainability and recommends that the adjustment planned in the draft FY2021/22 budget be implemented without further delays. Under the baseline, the envisaged pace and size of consolidation and shift in spending composition are appropriate. The gradual reduction of the fiscal deficit will put the fiscal position on a sustainable footing, while targeted investment and human capital development could raise productivity, create jobs, and help diversify the economy and revenue sources. At the same time, the envisaged incentives for training and financial support to transformative sectors will facilitate the reallocation of factors to new sectors.

“There is a need to maintain targeted support to illiquid but solvent firms and affected households and make the support state-contingent or conditional to reduce moral hazard. This will help address the uneven nature of the recovery across sectors and mitigate the regressive impact of planned increase in the VAT rate and other taxes and fees on the most vulnerable. Given the uncertainty on the evolution of the health crisis and mineral revenue, the mission is of the view that the recommended targeted support would need to be financed through both revenue and expenditure measures.

“Fiscal reforms are needed to lock-in consolidation efforts. They include civil service reform, acceleration of plans to rationalize the parastatal sector and improve its governance, and a strengthening of the fiscal framework to better anchor fiscal policy and increase credibility. In addition, mobilizing domestic savings to finance the deficit requires coordinated efforts to deepen the bond market.

“Beyond fiscal policy, the accommodative monetary policy stance is appropriate and should be maintained, while carefully monitoring second-round effects from supply shocks to inflation and inflation expectations, as well as credit developments.

“The mission welcomes the recently increased crawl rate of Botswana’s exchange rate peg, which has helped the economy adjust to the COVID-19 shock. Going forward, Bank of Botswana should use the flexibility afforded by its current exchange rate regime to help the economy adjust to shocks, ensure external viability, and facilitate structural transformation.

“The authorities’ interventions also helped to mitigate immediate macro-financial risks. As the health crisis wanes, COVID-19 related forbearance measures should be unwound, adequate liquidity maintained in the domestic market, risks closely monitored. Building on recent progress in addressing AML/CFT deficiencies is a priority.

“Decisively implementing the ERTP will diversify the sources of growth and promote private sector activity thereby creating jobs. Successfully implementing this strategy requires its continuous appraisal of existing sectoral programs, assessment and adaptation to changes in domestic and external markets, focusing on promising sectors, tackling market and government failures, and addressing key bottlenecks as needed (small scale, mismatched skills, lack of competition, coordination failures, information asymmetries).”