Public Information Notice No. 98/28

Press Information Notice: IMF Concludes Article IV Consultation with Botswana

April 10, 1998

The IMF Executive Board on March 13, 1998 concluded the Article IV consultation¹ with Botswana.

Background

Botswana’s sound macroeconomic policies and the harnessing of its substantial mineral resources, together with a stable democratic system, have helped transform Botswana from one of the world’s poorest countries in the 1960s and 1970s to a middle-income country in the 1990s. Real GDP growth, which averaged 16 percent in the 1970s and 11 percent in the 1980s, was underpinned importantly by the exploitation of Botswana’s abundant diamond resources; the diamond sector accounts for about 30 percent of GDP, and about two-thirds of exports and central government revenue. In the early 1990s, economic growth slowed markedly reflecting a weakening in the international diamond market and several years of serious drought. However, real GDP growth rebounded due to expanded capacity in the diamond sector to an annual average of almost 7 percent in 1995-97. Despite strong real GDP growth, employment growth in the formal sector has remained sluggish, at slightly over 1 percent a year, and unemployment is estimated at around 20 percent of the labor force. Consumer price inflation has declined over recent years, reaching 7.8 percent for the year ended December 1997; it has moved roughly in line with the South African inflation rate during 1997.

Botswana’s strong economic performance has been buttressed by sustained fiscal surpluses over many years. In 1996/97, the government’s overall fiscal surplus was equivalent to 7.6 percent of GDP, reflecting marked gains in mineral tax revenue and increased interest income on sharply higher foreign exchange reserves, as well as restraint in government spending. A fiscal surplus equivalent to 6.6 percent of GDP was recorded in 1997/98. The 1998/99 budget, announced on February 9, 1998, projects a surplus equivalent to almost 1 percent of GDP for the fiscal year, which reflects lower mineral tax revenue owing to a projected slowdown in diamond sales, particularly to Asian markets, and growth in government spending, due in part to an acceleration in the implementation of projects.

In recent years, broad money has expanded rapidly, due principally to a substantial increase in the net foreign assets of the banking system. Bank credit to the private sector has revived in recent months, owing largely to increased lending to the household sector. The authorities continued their efforts to absorb excess liquidity in the banking system through open market operations. Despite this excess liquidity, interest rates on financial assets have remained positive in real terms, comparable to those in major international financial centers.

The strength of Botswana’s external position, as reflected in its sizable current account surplus which improved to an estimated 13 percent of GDP in 1996, has contributed to the accumulation of substantial official reserves, amounting to US$5.2 billion by end-1996, equivalent to about 35 months of imports of goods and services. By end-1997, international reserves had risen further to US$5.7 billion. Over the years, Botswana’s exchange rate policy has accorded a high priority to preserving competitiveness to help promote economic diversification and expand employment in the nontraditional industries, while giving due attention to containing the inflationary impact of exchange rate developments. The nominal and real effective exchange rates at end-November 1997 had depreciated by 7 percent and 3 percent, respectively, compared with two years earlier. Botswana has fully liberalized external current account transactions (in November 1995, Botswana accepted the obligations of the IMF’s Article VIII), and has also liberalized most capital account transactions.

The Eighth National Development Plan (NDP8) covering the 1997/98-2002/03 period has economic diversification as its central theme, which is considered critical for generating employment, alleviating poverty, and reducing income inequality. Botswana’s strong external position provides considerable flexibility to pursue these objectives in an increasingly liberalized external trade and payments environment. The strategy incorporates further external sector liberalization, rationalization of government activities aimed particularly at promoting employment through selective public works programs, and further development of the infrastructure where present inadequacies are hindering economic growth. In preparation for exposure to greater competition, the public enterprise sector will be restructured through rationalizing and downsizing, privatization, and productivity improvements. With unemployment affecting primarily the young and unskilled, the quality of education is to be improved, in cooperation with the private sector, at all levels, including through the development of technical, entrepreneurial, and managerial skills.

Improvements have occurred in the preparation and availability of Botswana’s economic statistics. The authorities are continuing with their efforts to secure needed further improvements in preparing the national accounts, fiscal, monetary, and balance of payments data.

Executive Board Assessment

Executive Directors commended the authorities for their continued prudent approach to economic policy, which had contributed to sustained economic growth, low inflation, and a strong external position. Noting that Botswana's large dependence on the diamond sector remained a source of vulnerability, Directors underscored the need for the authorities to pursue additional structural policies aimed at economic diversification over the medium term, while maintaining prudent macroeconomic policies. Such policies would be essential to boost employment opportunities and to reduce income inequality.

Noting the prospect for a substantial reduction in the fiscal surplus budgeted for 1998/99, Directors encouraged the authorities to take actions to tighten the fiscal stance so as to preserve macroeconomic stability. In this regard, they stressed that the recent and projected growth in government expenditure, while helpful in easing some key structural bottlenecks in the economy, ran the danger of providing an excessive fiscal stimulus. Directors were of the view that undue front-loading of the development projects envisaged in the plan should be avoided, in light of the limited absorptive capacity of the economy; and lower priority expenditure should be scrutinized rigorously to allow increased budgetary allocation for well-targeted social safety nets and essential social sectors. Attention should also be paid to reducing, over time, the government’s fiscal dependence on the diamond sector and on taxes related to external trade, by broadening the base of the sales tax and replacing it eventually with a value-added tax.

Directors underscored the need to pursue the restructuring and privatization effort in the public sector more vigorously, particularly in areas that would reduce reliance on budgetary resources.

Directors considered that monetary policy had been appropriately focused on maintaining positive real interest rates on financial assets. However, financial markets needed to be deepened and the array of financial assets widened, especially in view of the heavy dependence on Bank of Botswana certificates to absorb excess liquidity. A secondary market for these certificates and long-term debt instruments could be developed. Furthermore, adoption of a comprehensive program of financial and technical support enabling small- and medium-scale enterprises to borrow from the commercial banks could increase financial intermediation.

Directors welcomed the recently announced further steps in exchange control liberalization, and encouraged the authorities to continue their efforts in this area. Directors considered that the policy of pegging the Botswana pula to a basket of currencies had served Botswana well, and encouraged the authorities to make the composition of the basket transparent.