The latest IMF report on Botswana (2012 Article IV Consultation) says that the country’s economic
recovery after the 2008ÔÇô09 financial crisis was one of the strongest among middle-income countries.
Exports grew faster than imports turning the current account deficit into a surplus for the first time in the last three years. Diamond exports benefited from higher diamond prices in the first half of 2011, which more than offset the poor performance of copper and nickel exports.
Besides mining, plastic products and textile exports surged in 2011. Core inflation (excluding food, fuel and administered prices) has declined slightly in the last few months. Alternative measures, including the trimmed mean, also suggest a downward trend in core inflation.
There is even better news for the future. The planned relocation of De Beers’ diamond-sorting and sales activity from London to Botswana by end-2013 is expected to boost economic activity.
With projected fiscal surpluses in the 2012/13 financial year and beyond, the current account surplus is forecast to stabilise at about 2 percent of GDP. With projected fiscal surpluses in the next financial year and beyond, the current account surplus is forecast to stabilise at about 2 percent of GDP.
The report also notes that there was a sharp decline in government spending as the number of students admitted to local tertiary institutions increased, student allowances were rationalised and administered more effectively and development spending was better prioritised.
The picture is not all rosy though because Botswana also faces medium-term risks. Most notable is the sustainability of economic growth as economic diversification effort continues to flounder. To mitigate the situation, the report highlights the need to find new non-diamond growth engines.
Another medium-term risk is of a possible decline in Southern African Customs Union (SACU) revenue (which represents about 20 percent of total revenue) in the long-run, either owing to low global growth or changes in the SACU revenue-sharing formula which currently under negotiation.
While the economic forecast for Botswana is generally positive, the report says that the current fragile global economic environment may delay the pace of recovery. Should global financial markets become severely disrupted again or if world growth falters beyond what is envisaged, IMF’s baseline forecast is that Botswana’s policy framework is well-positioned to respond to such shocks.
As regards the banking sector, its analysis is that “the direct, immediate impact of a financial stress in Europe on Botswana’s banking system will likely be small given its limited reliance on external funding, with bank funding being largely domestic, and low cross-border financial linkages.” Using a model which explores both trade and financial channels, IMF staff found that financial stress in the euro area through further deleveraging would have limited and short-lived impact on real GDP growth in Botswana.
“However, the estimated impact on diamond prices is significant which could lead to a loss in fiscal revenues,” the report says.