IMF Completes 2024 Article IV Review of Botswana

• Botswana's economic growth is expected to slow to 1 percent in 2024 primarily because of a diamond market contraction, before picking up next year. Inflation has declined sharply since the peak of mid-2022 and returned to the central bank's medium-term objective range of 3-6 percent, where it is expected to remain in the medium term.
• The government plans a fiscal expansion in FY2024 followed by two years of substantial fiscal adjustment. Public debt is low (20 percent of GDP), but government deposits at the central bank have significantly reduced over the past decade.
• The financial sector is sound, stable, and resilient.

Washington, DC: On August 28, 2024, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1] with Botswana and endorsed the staff appraisal without a meeting on a lapse-of-time basis.[2]

Botswana's economic growth decelerated from 5.5 percent in 2022 to 2.7 percent in 2023, below the long-run potential growth of 4 percent. A sharp decline in diamond trading and mining activities was the main contributor to the slowdown, as global demand for rough diamonds decreased. Inflation has remained below the ceiling of the central bank's medium-term objective range since July 2023. Despite lower diamond exports, FX reserves increased in 2023 supported by higher customs union receipts. The financial sector is broadly sound, stable, and resilient.

Botswana's economy is expected to decelerate further this year, with growth projected at

1 percent. The continued slowdown is mainly due to a fall in diamond production, partly offset by construction projects financed by the fiscal expansion. Growth is forecast to rebound – averaging 5 percent over the next two years – due to higher prices and quantities of diamonds produced. Inflation is projected to remain within the central bank's objective range of

3–6 percent.

The fiscal deficit is projected to widen further to 6 percent of GDP in FY2024, reflecting a further decline in mineral revenues and higher capital expenditure. The government plans a substantial fiscal adjustment in the following two years to reach a fiscal surplus. The external position should soften over the medium term (with FX reserves decreasing to 5 months of imports) due to weak growth in customs revenues and higher government foreign debt repayments. Risks to the outlook remain elevated due to the emergence of cheaper lab-grown diamonds, and uncertainty over the recovery of major export markets.

Executive Board Assessment

In concluding the 2024 Article IV consultation with Botswana, Executive Directors endorsed staff's appraisal, as follows:

Botswana is facing a severe slowdown from a diamond market contraction in 2023 and 2024. Growth is expected to fall to 1.0 percent this year, from 2.7 percent in 2023 and 5.5 percent in 2022. This reflects weaker global demand for diamonds and a sharp increase in inventories.

Real GDP growth should rebound next year, although risks to the outlook remain elevated. A strong recovery is projected in 2025, driven by the rebound in diamond production and trade. But the economic outlook is highly uncertain, with the emergence of cheaper lab-grown diamonds, and the announced sale of De Beers by its UK parent company.

In the near term, the fall in diamond revenues could be accommodated by a mix of higher fiscal deficit and reprioritization of capital expenditure. Some fiscal relaxation is warranted in light of the widening of the output gap, but staff encourages the authorities to reprioritize capital projects to limit the increase in the deficit and ensure that they achieve the highest value for money.

Over the medium term, the authorities' planned fiscal consolidation is critical to put a stop to the depletion of government's financial buffers, build resilience against shocks, and preserve fiscal sustainability. Staff assesses that targeting a 1 percent of GDP fiscal surplus would generate sufficient savings to protect the budget against major economic shocks. While the authorities' adjustment plan focuses mostly on expenditure restraint, there is also scope to increase revenues. The medium-term adjustment should be supported by institutional reforms, including a fiscal rule, more credible medium-term budgeting, and possibly a well-designed SWF.

The monetary policy stance is appropriate. Inflation has declined since August 2022 and is projected to remain within the central bank's objective range in the medium term. Underlying pressures, as measured by core inflation indicators, seem contained, while inflation expectations are well anchored. The 2023 external position is assessed to be broadly in line with fundamentals and desirable policies.

The authorities' plans to strengthen financial sector oversight, deepening, and inclusion are welcomed. The financial sector is broadly sound and stable despite the economic slowdown. Faster implementation of the 2023 FSAP recommendations will further reduce financial risks. These include moving to implement Basel III liquidity standards, enhancing risk-based supervision of banks, reinforcing the crisis management framework (ELA, bank resolution), and deploying macroprudential tools to address household debt risk.

Accelerating growth and job creation requires a fundamental shift towards greater private sector participation, a more diversified export base, and a more efficient public sector. The authorities should prioritize SOE modernization, improved infrastructure for doing business (internet, energy, logistics), trade facilitation measures, more efficient social protection, and financial inclusion reforms that support small entrepreneurs. These goals could be enshrined in the new NDP, supported by time-bound and well-prioritized action plans.

[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.