Washington, DC: An International Monetary Fund (IMF) team, led by Mr. Papa N’Diaye, Assistant Director in the IMF African Department and Mission Chief for the Republic of Botswana, visited Gaborone and held discussions on the 2022 Article IV consultation from May 4-18, 2022. At the conclusion of the discussions, Mr. N’Diaye issued the following statement:
“The 2022 Article IV consultation discussions take place in a context of high volatility in global commodities, and COVID-19 outbreaks in Botswana’s key trading partners. Commodity prices have surged following the Russian invasion of Ukraine. While higher demand for and prices of diamonds could result in some windfall for Botswana, higher food and energy prices will weigh on fiscal and external balances and threaten food security and energy affordability for the most vulnerable populations. At the same time, COVID-19 outbreaks in China, supply chain disruptions, and tighter financial conditions are projected to reduce global growth to 3.6 percent in 2022, from 6.1 percent in 2021.
“A successful vaccination campaign, prudent macroeconomic management, and strong demand for diamonds have allowed Botswana to recover to its pre-pandemic output level. The economy grew by 11.4 percent in 2021. Fiscal and current account deficits both narrowed sharply, and foreign reserves stabilized. Over 95 percent of the eligible population were fully vaccinated by May 2022 and only 22 days of schooling were lost due to pandemic lockdowns.
“Botswana’s economic recovery from the pandemic should continue into 2022 amid higher prices and demand for diamonds, good rainfall in some parts of the country and increasing international tourist arrivals. Growth is projected at 4.3 percent in the current year. Robust diamond production, favorable terms of trade, improvements in tourism, and smaller portfolio outflows should further strengthen Botswana’s external position. Buffers, particularly those held by the government, should continue to recover.
“Despite the strong outlook, long-standing challenges remain. Unemployment rose to 26 percent in 2021, while poverty and inequality have also increased. Inflation exceeded the central bank’s medium-term objective range of 3 – 6 percent in 2021 and increased sharply in the first months of 2022. Relatively low fiscal buffers and continued reliance on mining activity expose Botswana to external shocks, such as geopolitical and climate shocks. Some progress has been made on diversification and digitalization reforms, but the authorities are also relying increasingly on inward-looking policies, including import restrictions.
“To combat rising inflation, the Bank of Botswana raised the newly-introduced Monetary Policy Rate (MoPR) by 51 basis points in April 2022. With inflation at around 10 percent, real rates in negative territory and inflation expectations rising, additional tightening will be required. The financial sector was assessed to be safe and sound, but the impact of higher rates, declining liquidity and the recent monetary policy reform will have to be monitored.
“The authorities’ goal of achieving a fiscal surplus over the medium term is on track. Relative to the budget, however, social transfers will need to increase temporarily to help the most vulnerable households cope with the spillovers from the war in Ukraine. Staff estimates this additional temporary support will have a limited impact on the 2022 fiscal deficit. Beyond 2022, as energy and food prices ease, the additional pressure on the budget will fall.
“Other fiscal challenges will require institutional reform. The recently announced wage settlement was above the budgeted amount and adds to the government’s footprint in the economy. The authorities are considering several staff proposals, including a new framework for public wage formation, and a new expenditure rule which, combined with a target path for financial assets, should provide a long-term source of income and build enough buffers to counter shocks. In addition, the privatization of identified parastatals and efforts to close the tax gap must proceed as planned.
“Risks to the outlook remain elevated. Growth will depend heavily on the path of commodity prices. An abrupt slowdown in China or a protracted war in Ukraine could weaken global demand, thus lowering demand for diamonds. However, prolonged sanctions against Russia (the largest rough diamond producer) could increase demand for and prices of Botswana’s diamonds. Outbreaks of more lethal and contagious COVID-19 variants could further hamper the recovery, particularly of tourism. Faster tightening of monetary policy in key advanced economies could trigger volatility in global markets, prompt capital outflows, and reduce demand for diamonds. Climate shocks continue to pose a threat to agriculture, mining, and tourism. Domestically, shortfalls in planned consolidation could further erode buffers, exposing Botswana to external shocks.
“Growth is estimated at about 4 percent in the medium term, below the 5 percent required to attain the authorities’ goal of reaching high-income status by 2036. Excessive reliance on import substitution and restrictions to promote industrialization should be avoided. Instead, accelerated implementation of the “Reset Agenda” is required to diversify the economy towards financial services (facilitated by fintech), manufacturing, and tourism. Reforms should include deeper trade integration, implementation of planned visa and work permit reforms and faster investment in renewable energy. This will also help create the jobs needed to reduce unemployment and absorb the 35,000 annual labor market entrants.
“We would like to thank the authorities for the highly constructive nature of our dialogue during the Article IV consultation”
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