The recent visit by the International Monetary Fund (IMF) has reaffirmed the worst fears about the Botswana economy going forward and warned the country to play a balancing act if it were to survive the sloppy and declining economy that Botswana is experiencing and feeling at the moment.
The annual mission, known as the Article IV Consultation, which took place at the end of May, focused on reviewing recent economic developments, prospects and risks, and policies to ensure continued macroeconomic stability and growth.
As usual the mission met with Minister of Finance and Development Planning, Kenneth Matambo, Bank of Botswana Governor, Linah K. Mohohlo, Solomon Sekwakwa, Permanent Secretary at the Ministry of Finance and Development Planning, senior government officials, development partners, and representatives from the private sector and civil society.
Led by Lamin Leigh, IMF Mission Chief for Botswana said overall real GDP growth would be lower at about 4 percent in 2012 compared to 5 percent in 2011.
“The international diamond market showed some signs of recovery in the first quarter of 2012, following a relatively poor performance towards the end of 2011. Non-mining GDP growth is likely to moderate on the back of the imminent completion of large construction projects. Going forward, the current fragile external environment poses considerable uncertainty on the global economic outlook and mineral export demand. Thus, the period ahead will require a delicate balancing act on the implementation of macroeconomic policies,” said Leigh at the end of the visit.
While inflation is currently higher than the Bank of Botswana’s medium-term objective range of 3 -6 percent, it has trended downward in recent months pegged at 7.5 percent as of April but IMF says, at this stage, there appears to be no firm evidence of generalized price pressures in the domestic economy. Thus, the mission supports the Bank of Botswana’s current accommodative monetary policy stance.
The mission has commended the Government of Botswana on the 2012/13 Budget which targets a small fiscal surplus. The budget is centred on further expenditure restraint, while improving the quality of spending to ensure value for money.
Specifically, the mission supported the emphasis on expenditure control as the government’s spending envelope of above 30 percent of GDP is high by international standards, thus warranting a thorough assessment of pockets of unproductive spending and ways to increase efficiencies.
The mission also recommends the rebalancing of revenue-raising and expenditure-cutting measures.
“This could be achieved by complementing the measures in the budget with policies that widen the domestic tax base and prepare the economy for an eventual decline in diamond revenues,” Leigh pointed out.
Suggested measures in this regard include a judicious rationalization of tax exemptions and improvements in tax administration to broaden the revenue base.
“The mission welcomes the emphasis given by the government to broaden access to financial services and improve financial intermediation. While Botswana’s financial system has grown and diversified considerably over the last decade, the level of financial intermediation is relatively low compared with other high middle-income countries although it has improved in more recent years. Thus, greater financial development and inclusion are consistent with current government policies as described in both the Vision 2016 and National Development Plan (NDP) 10.
The missions said: “The government’s emphasis on poverty eradication, inclusive growth, tackling the high level of unemployment and diversifying the economy is well placed. Considerable strides have been made towards reducing absolute poverty as reflected in the Botswana Core Welfare Indicators survey of 2009/10. Efforts to encourage greater financial inclusion and measures to target inequality at its sources should together help enhance inclusive growth.
The IMF is disturbed with levels of unemployment and says tackling the high level of unemployment in Botswana will require faster economic growth and addressing distortions in the labour market including the skill mismatch. The government’s tertiary education reform program and the establishment of the Human Resource Development Council, combined with the graduates’ internship program would contribute to addressing the skill mismatch in the labour market.
“The mission urges the government to move ahead with a number of regulatory reforms to improve the business climate to support the goals of the recently approved Economic Diversification Drive (EDD),” said Leigh.