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International Monetary Fund (IMF)
Jun 03, 2021, 07:22 PDT

WASHINGTON, 02 June 2021 / PRN Africa / -- The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Botswana.

Botswana entered the COVID-19 crisis with larger buffers than most countries but was already contending with structural challenges. The pandemic caused a 7.9 percent contraction in GDP, due to heavy reliance on diamonds and contact-intensive services, while the unemployment rate reached 24.5 percent in the last quarter of 2020—the highest in the last three and half decades. The authorities have taken decisive measures to limit the health and economic fallout of the pandemic. While the fiscal relief package has focused on supporting firms and vulnerable households to cope with the shock, the monetary stance has been eased to maintain adequate liquidity in the banking system.

The Botswana economy is expected to recover in 2021, with growth projected at 8.3 percent, driven by improvements in the global demand for diamonds, the easing of restrictions on mobility, and the expansionary fiscal stance. The recovery is expected to be uneven across sectors, depending on improvement in both domestic and external environment. Current account and fiscal deficits are projected to narrow in 2021, reflecting the expected improvement in the global demand for diamonds, phasing out of the one-off COVID-related spending, and implementation of revenue enhancing and expenditure consolidation measures. Inflationary pressures are expected to rise temporarily in the near term, following the rebound in oil prices, the increase in fuel levy and VAT rate, and the increase in administered prices. However, inflation is expected to remain within the central objective of 3–6 percent over the medium term.

The growth outlook is subject to high uncertainty. Downside risks stem mainly from the evolution of the pandemic, availability and deployment of vaccines, and lower-than-expected diamond revenue. On the upside, a faster rollout of vaccines in Botswana and worldwide could raise growth; while steadfast implementation of supply side reforms could promote private sector activity and diversify the sources of growth.

Executive Board Assessment [2]

Executive Directors noted that careful management of mineral resources and a track record of very strong policies and policy frameworks have allowed Botswana to enter the crisis with larger fiscal space than most countries and they commended the authorities for their decisive pandemic response. However, Directors observed that the projected recovery in 2021 remains subject to downside risks, including from the path of the pandemic, and emphasized the need for a successful rollout of vaccines to support recovery. Going forward, they underscored the need for steadfast commitment to structural reforms to increase diversification, tackle climate change challenges, and boost potential growth.

Directors supported maintaining targeted support to firms and households until the recovery takes hold more firmly. They welcomed the planned fiscal consolidation through a combination of revenue and expenditure measures, which will be critical to rebuild buffers, guard against shocks, and create fiscal space for growth-oriented investment. Directors noted that sustaining fiscal consolidation will require civil service reform, rationalizing parastatals and improving their governance, and strengthening the fiscal framework.

Directors supported maintaining the accommodative monetary policy stance. They highlighted the need to monitor second-round effects from supply shocks and discretionary measures on inflation and expectations, as well as credit developments. Directors encouraged the authorities to use the exchange rate flexibility within the existing crawl arrangement to help the economy adjust to shocks, and facilitate structural transformation to enhance competitiveness.

Directors agreed that the financial sector is sound. They encouraged the authorities to monitor risks, including through enhanced reporting, regular stress-testing and financial oversight. Directors concurred with the need to maintain targeted support to solvent but illiquid firms while reducing moral hazard and underscored the need to unwind COVID-related forbearance measures as the health crisis wanes. They also encouraged the authorities to clarify the role of development banks and deepen the domestic bond market. Directors urged the authorities to address the remaining deficiencies in the AML/CFT framework in order to be removed from the FATF grey list.

Directors emphasized that successful implementation of the Economic Recovery and Transformation Plan (ERTP) is essential in accelerating structural transformation, creating jobs, and promoting inclusiveness. They commended the authorities' focus on promoting non-mineral export, manufacturing, and transformative sectors, including digitalization and green and climate adaptation technologies.

[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 .

IMF Communications Department

SOURCE International Monetary Fund (IMF)