Growth is expected to slow to about 3frac12; percent in 2019, due to weaknesses in the diamond market, a severe drought, and slower growth in neighboring countries. In 2020, it is expected to rise to 4.2 percent as the diamond market normalizes and copper production comes into stream; Fiscal consolidation should start in FY2020, supported by both expenditure and revenue measures beyond those considered by the authorities. The consolidation needs to be carefully calibrated to minimize the impact on growth, competitiveness, and the most vulnerable; Achieving Botswana's objectives of moving to a knowledge-based economy and to high-income status by 2036 will require changing the growth model from a mining and government-led model to private sector and export-driven.
An International Monetary Fund (IMF) team, led by Mr. Papa N'Diaye, visited Gaborone during November 13-27 to hold discussions for the 2019 Article IV Consultation with Botswana. The discussions focused on macroeconomic policies to increase the resilience of the economy in the face of persistently low mineral revenue and transfers from the Southern African Customs Union (SACU), as well as the structural reforms needed to achieve the authorities' objective to transition to a knowledge-based economy and high-income status by 2036. At the end of the visit, Mr. N'Diaye issued the following statement:
After a relatively good performance in 2018, the economy is facing headwinds in 2019 related to weaknesses in the diamond market, a severe drought, and slower growth in neighboring countries. Growth is expected to slow to about 3frac12; percent in 2019, while inflation will remain low. The current account is projected to move to negative territory, contributing to a decline in reserves. The fiscal deficit is expected to reach 5frac34; percent of GDP due to lower-than-expected revenue, higher-than-expected increase in public wages and other recurrent spending. Despite these challenges, the banking sector remains well capitalized and liquidity has improved.
Under staff's baseline scenario, growth is expected to recover to 4.2 percent in 2020, as the diamond market normalizes and copper production comes into stream, and hover around 4 percent thereafter�a level too low to achieve Botswana's development objectives and create enough jobs to absorb the new entrants into the labor market. Inflation will accelerate amid accommodative monetary policy but remain in the bottom half of the Bank of Botswana (BoB) target band. Fiscal consolidation will gradually reduce the deficit and would contribute to a gradual rebuilding of buffers over the medium term.
The outlook is subject to significant downside risks, including a global rise in protectionism, afaster-than-anticipated slowdown in China and in the euro area, and continued slow growth in South Africa. Over the medium term, the country remains vulnerable to volatile mineral revenue and SACU transfers and to climate shocks. Upside risks could stem from higher-than-expected mining production (e.g. coal).
The mission supports the authorities' objective to return to a fiscal surplus over the medium term in line with their track record of fiscal discipline. While Botswana still has some fiscal space that allows a gradual adjustment, fiscal consolidation should start in FY2020, supported by both revenue and expenditure measures. In advancing consolidation, the composition of the adjustment needs to be carefully calibrated to minimize the impact on competitiveness, growth, and the most vulnerable.
The accommodative monetary policy stance is appropriate and consistent with the objective of maintaining a stable real exchange rate against the currencies in the basket.rdquo;
Achieving Botswana's objectives of moving to a knowledge-based economy and to high-income status by 2036 will require changing the growth model from a mining and government-led model to a private sector and export-driven. This entails revamping the macroeconomic policy frameworks to increase the resilience of the economy and accelerating the implementation of supply-side reforms.
Recommended fiscal reforms include i) modifying the fiscal rule to prevent further erosions in buffers and achieve Botswana's intergenerational equity objectives; ii) greater revenue mobilization through broadening the tax base and advancing tax reform; iii) public financial management reforms to enhancing the efficiency of spending; iv) reforming parastatals and other extra-budgetary entities, including by enforcing compliance to best governance practices and strengthening their monitoring and accountability, and v) revamping the debt management framework.
Regarding monetary and exchange rate policy, the BoB should use the flexibility afforded by its current exchange rate regime to help the economy adjust to the persistent decline in mineral and trade resources and structural transformation. Recent reforms to strengthen the monetary transmission mechanism and deepen the domestic financial market should continue, including by further developing the secondary market for government securities, leveraging Fintech, facilitating the attachment of collateral, and improving credit information.
Supply-side policies should focus on further improving the business environment, redesigning industrial policies with a view to fostering competition and competitiveness, and reducing the government footprint in the economy. Furthermore, transitioning to a knowledge-based economy and a high-income status will require prioritizing investment in human capital, upgrading digital skills and deepening Information and Communications Technology penetration, as well as promoting integration in regional and global value chains. Strategic deficiencies in the Anti-Money Laundering/Combating the Financing of Terrorism framework should be addressed.
Source: International Monetary Fund (IMF).