On March 16, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Botswana.

After a rapid recovery from the 2009 downturn, GDP growth is estimated to have turned slightly negative in 2015 owing to a decline in the global demand for diamonds and copper. Non-mining activities, while recording positive growth over the year, remained subdued owing to spillovers from lower mining activity, a regional drought, and electricity and water shortages. Inflation has been declining over the past few years and is now close to the lower bound of the Bank of Botswana’s objective range of 3–6 percent, reflecting a successful monetary policy, lower fuel prices, and an appreciation of the Pula against the South African Rand.

After three years of surpluses, the government balance has turned into a deficit, reflecting lower mining revenues, a decline in revenues from the South African Customs Union (SACU), and higher fiscal spending, part of which is related to the Government Stimulus Program. The deficit has been financed by drawing on previously accumulated savings and incurring a small amount of domestic debt. The external current account surplus has also been declining, but is estimated to be in positive territory. As Botswana entered the current downturn with large fiscal and foreign reserve buffers, the country is well positioned to deal with the decline in export demand.

A gradual economic recovery is projected in the next three years, based on an expected gradual increase in diamond prices and fiscal stimulus, while inflation is expected to remain within the BoB’s objective range. The 2016/17 budget submitted to Parliament in February envisages a fiscal deficit of about 4 percent of GDP as a result of lower mining and SACU revenues and higher capital expenditures. In the medium-term, the macroeconomic framework envisages fiscal consolidation based on a gradual recovery of the mining sector and expenditure rationalization (the authorities plan to contain the growth of wages and salaries and reduce transfers to state-owned enterprises). Lastly, the external current account surplus is projected to narrow further this year, but gradually reverse to trend thereafter along an expected recovery in export prices.

Executive Board Assessment2

Directors commended Botswana’s track record of prudent economic policies and sound institutions, which has led to low public debt and sizable fiscal and foreign exchange savings. Directors noted that, with the recent weakening of the global demand for diamonds, the near-term outlook has become more challenging. They concurred that the country is well-positioned to weather the current downturn, and that medium-term prospects are favorable, although subject to downside risks.

Directors supported the currently accommodative macroeconomic policy stance. They noted that the fiscal stimulus, envisaging high levels of public investment, is justified given the negative output gap, strong buffers, and the need to close the infrastructure gap. Nevertheless, in light of implementation and capacity constraints, Directors encouraged the authorities to exercise caution and focus on the most profitable and viable investments.

Directors emphasized that, in the medium term, fiscal consolidation will be important to safeguard fiscal and external stability. In this regard, they welcomed the authorities’ commitment to return to fiscal surpluses within the next three years by containing current spending, especially the size of the wage bill and transfers to state-owned enterprises (SOEs). In light of subdued prospects for revenues from the Southern African Customs Union and risks about future diamond receipts, Directors stressed the need to enhance non-mineral revenue mobilization, notably in the areas of value-added-tax collection, tax exemptions, and property taxation. While noting that the fiscal framework has served the authorities well, Directors generally saw merit in considering options to strengthen the framework for managing mineral revenues, including with a view to avoiding pro-cyclicality in public spending.

Directors noted that the financial system remains sound, and welcomed the authorities’ intentions to step up monitoring of financial sector risks given the slowing economy. This includes yearly on-site examinations of systemic banks, a stress test to assess households’ debt servicing capacity, implementation of Basel II requirements, improvements in access to credit information, and development of a formal macroprudential framework.

Directors stressed the importance of moving ahead with structural reforms to strengthen the efficiency of the public sector, promote private sector development, diversify the economy, and lower unemployment in the context of the forthcoming National Development Plan. Priorities include reforms to resolve the energy and water crises and improve the efficiency of SOEs more generally; strengthening the quality and efficiency of public investment by undertaking a Public Investment Management Assessment; implementation of the action plan to improve the business environment; and efforts to improve employment prospects by enhancing training programs and investments in education. Directors also recommended a gradual approach to develop special economic zones in order to contain fiscal costs and avoid unproductive investments.

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.

2 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: http://www.imf.org/external/np/sec/misc/qualifiers.htm.