- Botswana's growth is expected to slow from 5.8 percent in 2022 to 3.8 percent in 2023 due to the projected decline in diamond production and the weaker global environment.
- Inflation has fallen since August 2022 and has recently returned to the central bank's medium-term objective range of 3 - 6 percent. The monetary policy stance is appropriate.
- The government's medium-term plan to close to the fiscal deficit by FY2025 is critical to preserve fiscal sustainability and support foreign exchange reserves.
Washington, DC: An International Monetary Fund (IMF) team, led by Mr. Luc Eyraud, Division Chief in the IMF African Department and Mission Chief for the Republic of Botswana, visited Gaborone, and held discussions on the 2023 Article IV consultation from July 4-14, 2023.
At the conclusion of the discussions, Mr. Eyraud issued the following statement:
"Following a strong recovery of almost 12 percent growth in 2021, Botswana's economy grew by 5.8 percent in 2022, significantly above the long-run average of 4 percent. The recovery from the pandemic primarily reflects elevated mining production, but also robust manufacturing and construction. After peaking at 14.6 percent in August 2022, inflation has fallen gradually to 4.6 percent in June 2023, with lower oil prices delivering a steep decline in transport inflation. This has helped return inflation to the Bank of Botswana's medium-term objective range of 3 - 6 percent.
"The budgetary position improved from a 2.4 percent of GDP deficit in FY2021 to a balanced budget in FY2022, mainly due to measured expenditure growth and higher mineral revenue. On the monetary policy side, the Bank of Botswana has maintained its policy rate at 2.65 percent since August 2022, after raising it by a combined 151 basis points between April and August 2022.
"Going forward, growth is projected to slow to 3.8 percent in 2023. The expected slowdown reflects a decline in diamond production and prices this year, with weaker global growth likely to depress other exports. This will be partly offset by growth in the non-mining sector, with a fiscal relaxation supporting household consumption and public investment. Growth is forecast to rebound gradually in 2024 and 2025, to above 4 percent, due to higher prices and quantities of diamonds produced.
"Monthly inflation is projected to remain within the Bank of Botswana's medium-term objective range of 3 - 6 percent this year and next. This reflects the decline in international oil prices, positive real lending rates, and the prospect of regulated prices remaining unchanged. The monetary policy stance is appropriate, but the central bank should stand ready to raise the policy rate if inflation risks materialize.
"The fiscal deficit is projected to widen by about 2 percent of GDP in FY2023, mostly due to higher budgeted capital expenditure. In the subsequent two years, the government plans to improve the fiscal position by 2½ percent of GDP and achieve a small fiscal surplus, by containing the wage bill and transfers. Consolidation is critical to preserve fiscal sustainability and support FX reserves. The large depletion of government deposits in recent years, combined with the longer-term prospects of exhaustion of diamond resources, calls for fiscal prudence.
"The financial sector is sound, stable, and resilient. Financial stability could be further strengthened by operationalizing the frameworks for emergency liquidity assistance, deposit insurance, and bank resolution, as well as continuing to enhance financial sector supervision. Deepening the interbank and bond markets would support financial sector development, while improving public financial management and monetary policy transmission.
"Supply-side structural reforms are necessary to support the diversification of the economy and increase the relative size of the private sector. This will help boost the economy's growth potential, reduce unemployment, and enhance resilience to external shocks. Policy priorities include trade facilitation and integration, parastatal reform, more efficient and climate-resilient infrastructure investment, and more targeted support for high-productivity, export-oriented sectors.
"We would like to thank the authorities for the highly constructive dialogue during the Article IV consultation."
