IMF Concludes 2022 Article IV Consultation with Botswana

Washington, DC : The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Botswana and endorsed the staff appraisal without a meeting on a lapse-of-time basis.[1]

A successful vaccination campaign, prudent macroeconomic management, and strong demand for diamonds have allowed Botswana to recover to its pre-pandemic output level. The economy grew by 11.4 percent in 2021. Fiscal and current account deficits both narrowed sharply, and foreign reserves stabilized. Inflation, however, exceeded the central bank’s medium-term 3-6 percent objective range, while unemployment rose close to record highs. To combat rising inflation, the Bank of Botswana raised the newly introduced Monetary Policy Rate (MOPR) by a combined 101 basis points in April and June 2022.

Growth is projected at about 4¼ percent in 2022 and 4 percent per annum through the medium term. Relatively low fiscal buffers and continued reliance on mining expose Botswana to external shocks, such as geopolitical and climate shocks. The outlook depends on the course of the war in Ukraine, the pandemic, and implementation of fiscal consolidation and economic diversification plans. With inflation projected at 11 percent in 2022, additional monetary tightening will be required. In addition, some fiscal support may be needed to cushion the most vulnerable households from the effects of rising global inflation. Accelerated implementation of the “Reset Agenda” should help to diversify the economy towards financial services (facilitated by fintech), manufacturing, and tourism. This will also help create the jobs needed to reduce unemployment and absorb the 35,000 annual labor market entrants.

Executive Board Assessment[2]

Botswana’s economy is one of the few in sub-Saharan Africa where output has recovered to its pre-COVID level. This performance has been underpinned by careful management of mineral resources and a track record of very strong policies and policy frameworks.

The recovery is expected to continue through the medium term, but there is significant uncertainty. Growth will be supported by higher prices and demand for diamonds, increased copper production, prospects for a good harvest, less COVID-19 mobility restrictions, and more international tourist arrivals. These factors and a strong fiscal adjustment will strengthen buffers, particularly those held by the government. Downside risks to this outlook relate to the strength of commodity markets, China’s growth, the pace of tightening of monetary policy in advanced economies, and climate shocks.

Despite the positive outlook, Botswana faces difficult challenges. Unemployment has risen close to historic highs, and poverty and inequality have worsened following the COVID-19 pandemic. With inflation above the central bank’s objective range, providing support to the most vulnerable through the government social programs remains a priority in the near term. In this context, improving the targeting of social programs will reduce leakages. Over the medium term, a sustained reduction in poverty and inequality will require further progress on diversification and digitalization reforms as well as moving away from inward-looking policies such as import restrictions.

Implementing the planned medium-term fiscal consolidation will rebuild buffers and financial assets for future generations. The consolidation plan will achieve fiscal surplus over the medium term and rebuild the Government Investment Account to shield the economy against shocks and build an asset base. Successful implementation of the plan will require institutional fiscal reform, including to adopt a public wage formation framework, anchor fiscal policy in a credible medium-term fiscal framework, and formalize a new fiscal rule in National Development Plan 12. Joint ventures of identified SOEs with private sectors and efforts to close the tax gap should proceed as planned. In addition, greater transparency and accountability in spending is needed to help catalyze public support for fiscal reform and revenue collection. Public investment efficiency and the quality of public procurement need to improve to help create fiscal space.

Bringing inflation back within the Bank of Botswana’s objective range will require additional monetary tightening. In the absence of further tightening, the broad-based rise in inflation risks de-anchoring inflation expectations and requiring even sharper tightening later with negative effects on growth. The newly created monetary policy rate will over time enhance monetary policy transmission and implementation. Strengthened monitoring and communication would help to limit risks of volatility in interbank rates and disruptive capital flows. Lifting the restrictions on the current prime lending rate in due course would contribute to the efficiency of financial intermediation and financial access.

The external position is broadly in line with fundamentals and desirable policies. Fiscal consolidation and higher diamond exports should strengthen the current account and support reserves accumulation. Looking forward, maintaining the current crawl rate would be appropriate as domestic interest rates rise. In addition, continuing to allow flexibility within the current exchange rate regime should help the economy adjust to shocks and facilitate structural transformation.

A successful implementation of the Reset Agenda will enhance Botswana’s resilience and ensure sustained high-job rich growth. Implementation of the plan will diversify the economy towards financial services (facilitated by fintech), manufacturing, and tourism, and transform Botswana into a high-income status as per Vision 2036. Reforms should include enhancing accountability, competition, and governance, deepening trade integration, and a faster energy transition. Undue reliance on import substitution and restrictions to promote industrialization could be counterproductive.

It is expected that the next Article IV consultation with Botswana will be held on the standard 12-month cycle.