14 Jul 2014

The International Monetary Fund (IMF) has praised Botswana for good governance and prudent management of resources, although economic growth has softened in the midst of high unemployment and income inequality.

In a statement following Article IV consultation with Botswana, the IMF welcomed the medium term review of the National Development Plan (NDP 10), which re-emphasised the need to reduce the size of government relative to GDP to enable the private sector to play a leading role in generating economic growth.

The IMF stated that the economy was broadly internally and externally balanced and the government’s near-term macroeconomic policy stance was appropriate.

“Overall external stability is, however, affected by the lack of export diversification, which leaves Botswana’s economy vulnerable to fluctuations in the international demand for diamonds,” it said in a press release.

The IMF welcomed government’s medium-term fiscal strategy and also the rebuilding of the Pula Fund and improvement of state owned enterprises.

“Improving the quality of spending on health and education and making the social welfare programmes better targeted are essential to reducing income inequality and making growth more inclusive,” the IMF stated.

The IMF urged government to articulate a clearer set of measures to reduce the wage bill relative to GDP and broaden the tax base.

“Despite the modest wage awards in recent years and the de facto hiring freeze, the wage bill continues to be high reflecting the impact of promotions, non-wage allowances and overtime,” it was said. The government was advised to avoid granting unwarranted preferential tax regimes for businesses.

Talking about foreign exchange, the IMF said government should explore further opportunities to strengthen the operational aspects of the exchange rate framework and deepened the money and foreign currency markets.

The IMF expressed concern about the increase in household borrowing and had commended the establishment of the national credit bureau.

“Policies to enhance financial inclusion should focus on mitigating the underlying market failures in the financial system and reducing intermediation costs,” the statement stated.

Meanwhile, the IMF painted a bright prospect for the local economy despite challenges emanating from power outages, water supply constraints and high loan bills.

Botswana’s economy registered a real GDP growth of about six per cent in 2013, reflecting the cyclical recovery of the mining sector and trade.

“However, the non-mineral sector slowed down, partly reflecting recurring power supply disruptions,” the IMF said.

Inflation, consumer inflation, decelerated and stood at 4.4 per cent in March, well below the Bank of Botswana medium-term objective range of 3-6 per cent. “The deceleration in inflation largely reflects a base effect of fuel price increase in 2012 and the appreciation of the Pula against the Rand,” the IMF states.

The IMF projects Botswana’s economy to grow slow down to 4.4 per cent in 2014 and subsequently stabilize at around four per cent over the medium term.

This was due to slowdown in diamond recovery and continued problems in the electricity and water supply, which negatively affected the non-mineral sector. ENDS