Botswana’s economy is expected to recover this year, with growth projected at 8.3%, 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 improvements in both the domestic and external environment, while its current account and fiscal deficits are projected to narrow, 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 the fuel levy and value-added tax rate, as well as the increase in administered prices.
However, inflation is expected to remain within the central objective of between 3% and 6% over the medium term.
The growth outlook is, therefore, subject to high uncertainty, with downside risks stemming 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.
Forming part of the International Monetary Fund’s (IMF’s) report following the conclusion of the Article IV consultation with Botswana, IMF 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, the directors observed that the projected recovery this year remains subject to downside risks, including from the path of the pandemic. They emphasised 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.
The directors also supported maintaining targeted support to firms and households until the recovery takes hold more firmly, and 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.
However, the directors noted that sustaining fiscal consolidation would require civil service reform, rationalising parastatals and improving their governance, and strengthening the fiscal framework.
They also supported maintaining the accommodative monetary policy stance, though they highlighted the need to monitor second-round effects from supply shocks and discretionary measures on inflation and expectations, as well as credit developments.
In this regard, Botswana authorities were encouraged 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.
With the financial sector considered to be “sound”, the IMF directors further encouraged the authorities to monitor risks, including through enhanced reporting, regular stress-testing and financial oversight.
They, however, 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 waned, and they further also encouraged the authorities to clarify the role of development banks and deepen the domestic bond market.
Taking this into account, authorities were urged to address the remaining deficiencies in the Anti-Money Laundering and Counter Financing of Terrorism framework in order to be removed from the Financial Action Task Force grey list.
The directors emphasized that successful implementation of the Economic Recovery and Transformation Plan is essential in accelerating structural transformation, creating jobs, and promoting inclusiveness.