Saturday, May 15, 2021

IMF projects a recovery for Botswana, warns of risks

The Botswana economy was already weakened before the COVID-19 pandemic hit, severely impacting the country’s buffers. While recovery looks to be underway, uncertainty is high and risks are dominated by the evolution of the pandemic and lower-than-expected diamond revenue, according to the International Monetary Fund.

In March, the IMF team led by Papa N’Diaye, head of the African Department Regional Studies Division, held virtual discussions with Botswana’s top officials, assessing the state of the economy.

“Botswana entered the COVID-19 crisis with larger buffers and lower public debt than other countries in sub-Saharan Africa (SSA), but significantly less than in the past,” said N’Diaye in a statement.

However, this has been changed by disruptions caused by COVID-19, which has deepened Botswana’s structural challenges, marked by persistent negative external shocks and delays in adjustment that caused a weakening of international reserves and the fiscal position amid high unemployment.

“The pandemic exacerbated Botswana’s economic challenges. While strict containment measures helped to limit the spread of the virus and save lives, the heavy economic reliance on diamonds and contact-intensive activities caused a sharp GDP contraction, one of the deepest in SSA,” he said.

Botswana’s economy went into a recession last year following sluggish economic growth, dragged in part largely by fall in diamond exports and shuttered business in the services industry. Nominal GDP – which measures a country’s gross domestic product using current prices, without adjusting for inflation – declined from 2019’s economic value of P197.5 billion to P180.7 billion in 2020, reflecting an 8.5 percent contraction in output.

From 2010 to 2018, the GDP had an average growth rate of 3.7 percent, reflecting a gradual decline in economic growth over the ten-year period. GDP growth further slowed to 3 percent in 2019, down from 4.5 percent recorded in 2018. At these rates, Botswana’s economy is said to be operating below potential output, which experts have suggested should be above 6 percent.

With diamond sales negatively impacted, and rising government expenditure, the current account deficit widened and foreign exchange reserves dropped further, though remaining above adequate levels, the IMF team said.

“The government implemented a sizeable public wage increase agreed in 2019 and deployed an economic relief package to counter the effects of the COVID-19 crisis. The relief package helped save people’s livelihoods.”

Though COVID-19 infections have increased than in 2020, N’Diaye and his team say a recovery is underway, with GDP growth expected at 8.3 percent in 2021, driven by a strong rebound in mining activity, the easing of restrictions on mobility, and the recent public wage increase. They said a strong recovery would improve Botswana’s fiscal and external positions along with favorable terms of trade.

“However, uncertainty is high, and risks are dominated by the evolution of the pandemic and vaccine rollout in Botswana and globally, and lower-than-expected diamond revenue. At the same time, a steadfast implementation of supply-side reforms could promote private sector activity and diversify the sources of growth,” the IMF team advised.

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