15 Apr 2021

An International Monetary Fund (IMF) team, led by Mission Chief for Botswana and head of the African Department Regional Studies Division, Mr Papa N’Diaye has commended Botswana’s efforts towards the Economic Recovery and Transformation Plan (ERTP).

A statement from IMF staff says Botswana entered the COVID-19 crisis with larger buffers and lower public debt than other countries in sub-Saharan Africa (SSA), but significantly less than in the past.

It further notes that the country was contending with structural challenges, persistent negative external shocks, and delays in adjustment that caused a weakening of international reserves and the fiscal position amid high unemployment.

“The pandemic exacerbated Botswana’s economic challenges. While strict containment measures helped to limit the spread of the virus and save lives, the heavy economic reliance on diamonds and contact-intensive activities caused a sharp GDP contraction, one of the deepest n SSA.

The current account deficit widened and foreign exchange reserves dropped further, though remaining above adequate levels,” says the statement.

Furthermore, it notes that government implemented a sizeable public wage increase agreed in 2019 and deployed an economic relief package to counter the effects of the COVID-19 crisis thus helping save people’s livelihoods.

In this context and despite the second wave of COVID-19 infections, a recovery was underway, with GDP growth expected at 8.3 per cent in 2021, driven by a strong rebound in mining activity, the easing of restrictions on mobility and the recent public wage increase, release says.

According to the statement, the fiscal and external positions are expected to strengthen gradually along with favourable terms of trade. However, uncertainty is high, and risks are dominated by the evolution of the pandemic and vaccine rollout in Botswana and globally, and lower-than-expected diamond revenue.

 As for structured developments, the statement depicts that the priority remains securing and ensuring successful rollout of vaccines to a share of the population large enough to keep the pandemic under control and prevent health systems from being overwhelmed.

The next priority was to enhance Botswana’s resilience to shocks and advance supply-side reforms to promote private sector activity and diversify its sources of growth. In this context, the mission commends the commitment to fiscal sustainability and recommends that the adjustment planned in the draft FY2021/22 budget be implemented without further delays.

It further says under the baseline, the envisaged pace and size of consolidation and shift in spending composition were appropriate. 

The gradual reduction of the fiscal deficit will put the fiscal position on a sustainable footing, while targeted investment and human capital development could raise productivity, create jobs, and help diversify the economy and revenue sources.

At the same time, the envisaged incentives for training and financial support to transformative sectors will facilitate the reallocation of factors to new sectors, says the statement.

Moreover, the press statement reiterates that there is a need to maintain targeted support to illiquid but solvent firms and affected households and make the support state-contingent or conditional to reduce moral hazard.

It also elaborates that this will help address the uneven nature of the recovery across sectors and mitigate the regressive impact of a planned increase in the VAT rate and other taxes and fees on the most vulnerable.

Given the uncertainty on the evolution of the health crisis and mineral revenue, the mission was of the view that the recommended targeted support would need to be financed through both revenue and expenditure measures.

Consequently, the statement revealed that fiscal reforms were needed to lock in consolidation efforts including civil service reform, acceleration of plans to rationalize the parastatal sector and improve its governance, and a strengthening of the fiscal framework to better anchor fiscal policy and increase credibility. 

Besides, mobilizing domestic savings to finance the deficit requires coordinated efforts to deepen the bond market.

Beyond fiscal policy, the statement suggests that accommodative monetary policy stance was appropriate and should be maintained, while carefully monitoring second-round effects from supply shocks to inflation and inflation expectations, as well as credit developments.

“The mission welcomes the recently increased crawl rate of Botswana’s exchange rate peg, which has helped the economy adjust to the COVID-19 shock. Going forward, Bank of Botswana should use the flexibility afforded by its current exchange rate regime to help the economy adjust to shocks, ensure external viability, and facilitate structural transformation,” says the statement.

The authorities’ interventions also helped to mitigate immediate macro-financial risks, and as the health crisis wanes, COVID-19 related forbearance measures should be unwound, adequate liquidity maintained in the domestic market risks closely monitored, the statement explains.

Also, the statement states that building on recent progress in addressing AML/CFT deficiencies is a priority, and decisively implementing the ERTP will diversify the sources of growth and promote private sector activity thereby creating jobs.

Successfully implementing this strategy states the release, requires its continuous appraisal of existing sectoral programs, assessment, and adaptation to changes in domestic and external markets, focusing on promising sectors, tackling market and government failures, and addressing key bottlenecks as needed (small scale, mismatched skills, lack of competition, coordination failures, information asymmetries). Ends