Directors took positive note of the country’s track record of good governance
Persistently lower mineral revenues and SACU proceeds and delays in the needed fiscal adjustment, including the large increase in the wage bill, have contributed to a moderately overvalued exchange rate, and eroded buffers and savings for future generations. These challenges, together with a severe drought, have contributed to slower real GDP growth and a deterioration in the fiscal and external balances in 2019.
Growth is expected to pick up in the near-term mostly driven by the mining sector. Yet, over the medium term, absent bold fiscal and structural reforms, growth will remain around 4 percent, a level that is insufficient to achieve the authorities’ objectives of reducing unemployment and transitioning to high-income status. Inflation is expected to remain within the Bank of Botswana’s target range.
The outlook is subject to significant downside risks, including potential disruptions from COVID-19, most of which will affect Botswana through diamond and SACU revenue. Over the medium and longer term, Botswana could also be affected by climate change.
In the FY2020 budget, the first after the October 2019 general election, the authorities envisage resuming fiscal consolidation, mostly through reprioritization of capital spending, cuts in non-priority recurrent expenditures, and increases in fees, while the public wage bill will continue to increase. With a constrained fiscal position, the budget also acknowledged the need to transform the economy toward a private sector, export-led and knowledge-based growth model, and increase the efficiency of public spending while aligning the human and physical capital on the transformation agenda.
EXECUTIVE BOARD ASSESSMENT
Executive Directors noted that economic growth slowed last year following a contraction in diamond activity and a severe drought. Expansionary fiscal policy in the face of persistent lower diamond and trade revenues has widened the fiscal deficit, eroding buffers and weakening the external position. With the outlook subject to downside risks, Directors highlighted the need to rebuild buffers to guard against future shocks, including from a global growth slowdown, coronavirus-related spill-overs, and climate change and natural disasters. Reforms to facilitate structural transformation and diversify the economy will be crucial to promote stronger, sustainable, and inclusive growth.
Directors welcomed the planned gradual fiscal consolidation, stressing the need to start without delay. They underscored the importance of carefully calibrating the adjustment to minimize the impact on competitiveness and growth and protect the most vulnerable, as well as using fiscal space should downside risks materialize. They encouraged greater efforts in mobilizing revenue, including by broadening the tax base, reducing exemptions, and advancing tax reform, while containing the wage bill to protect efficient capital and social spending. Directors commended the authorities’ focus on increasing spending efficiency through public investment management and parastatal reforms. They highlighted the importance of strengthening the fiscal framework aimed at ensuring intergenerational equity and smoothing cyclical fluctuations. They also recommended defining a medium-term anchor and modifying the existing fiscal rule, and took positive note of the authorities’ interest in Fund technical assistance in this area.
Directors agreed that the current accommodative monetary policy stance is appropriate and welcomed the authorities’ readiness to loosen the stance further if needed. They encouraged the authorities to use the flexibility within the current exchange rate framework to cushion against external shocks and help the economy adjust over time to the persistent decline in mineral receipts and revenues from the Southern African Customs Union. Directors urged a further strengthening of monetary transmission by deepening domestic financial markets. They emphasized the need to continue to closely monitor risks in household balance sheets and employ macroprudential tools as necessary.
Directors encouraged acceleration of the implementation of supply-side reforms to promote private sector activity and economic diversification, building on recent progress in improving the business environment. To foster competitiveness and boost jobs, they recommended reducing the government footprint in the economy, further enhancing human capital, and promoting greater integration into regional and global value chains. Continuing to enhance resilience to climate change will be important.
Directors took positive note of the country’s track record of good governance and encouraged continued efforts to strengthen fiscal transparency and address the remaining deficiencies identified in the 2017 AML/CFT evaluation.
Learn More: International Monetary Fund
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