The International Monetary Fund (IMF) has advised the Botswana government that the country’s fortunes hinge on a successful vaccine rollout that will target a large part of society, complemented by building resilience to shocks and implementing supply side reforms to promote private sector activity and diversify its sources of growth.
The IMF team last month held discussions with government officials, dissecting the structure of the economy and current developments. The Bretton Wood institution says Botswana’s first priority should be securing and ensuring successful rollout of vaccines to a share of the population large enough to keep the pandemic under control and prevent health systems from being overwhelmed.
With that in check, the diamond dependent economy should then be configured to withstand shocks by diversifying the economy. The IMF team recommended that the adjustments planned by the ministry of Finance and Economic Development for the financial year 2021/2022 budget be implemented without further delays. This largely involves cutting government expenditure to reduce budget deficits.
Between 2017 and 2019, budget shortfalls have added to P21.8 billion, while projections for 2020/2021 financial year points to an all-time high budget deficit of P21 billion. Another P6 billion budget outrun is projected for the financial year 2021/2022.
“The gradual reduction of the fiscal deficit will put the fiscal position on a sustainable footing, while targeted investment and human capital development could raise productivity, create jobs, and help diversify the economy and revenue sources,” said Papa N’Diaye, head of the African Department Regional Studies Division at IMF.
“At the same time, the envisaged incentives for training and financial support to transformative sectors will facilitate the reallocation of factors to new sectors. Given the uncertainty on the evolution of the health crisis and mineral revenue, the mission is of the view that the recommended targeted support would need to be financed through both revenue and expenditure measures.”
The Fiscal reforms suggested involves restructuring the public service, which accounts for the largest formal employment in a country that is battling with soaring unemployment. The country’s civil service wage bill increased in the lead up to the 2019 general elections, and is now nearing P30 billion annually, representing around 53 percent of the recurrent budget. The amount spent on public service salaries have for many years been a thorny issue between politicians and officials from the World Bank and the IMF.
As part of Government efforts to right-size the public service and reduce the wage bill, the government has since abolished 50 percent of vacant positions, in value, beginning of April.
Other fiscal reforms put in the table target acceleration of plans to rationalize the parastatal sector and improve its governance, and a strengthening of the fiscal framework to better anchor fiscal policy and increase credibility.
The IMF praised Bank of Botswana’s accommodative monetary policy stance, saying it is appropriate and should be maintained, while carefully monitoring second-round effects from supply shocks to inflation and inflation expectations, as well as credit developments. The central bank has been cutting bank rates over the years, and the rate which at 3.75 percent is at historic lows, with plans to further reduce should economic activities continue to be subdued.
“Decisively implementing the Economic Recovery Transformation (ERTP) will diversify the sources of growth and promote private sector activity thereby creating jobs. Successfully implementing this strategy requires its continuous appraisal of existing sectoral programs, assessment and adaptation to changes in domestic and external markets, focusing on promising sectors, tackling market and government failures, and addressing key bottlenecks as needed,” concluded the IMF team.