The International Monetary Fund (IMF) has forecast a shrink in Botswana’s Gross Domestic Product (GDP) owing to a slowdown in demand for commodities and pin-pointed the country’s undiversified economy as its main vulnerability.
At the conclusion of the 2014 Article IV Consultation, the IMF said the main near-term risks for the diamond rich nation relate to the uncertain external environment, such as potential slowdown in emerging markets, which poses downside risks to mineral export demand.
“Under current conditions the economy is broadly internally and externally balanced and the authorities’ near-term macroeconomic policy stance is appropriate,” it noted. “Overall external stability is, however, affected by lack of export diversification, which leaves Botswana’s economy vulnerable to fluctuations in the international demand for diamonds.”
The Botswana’s real GDP growth is projected to slow down to 4.4 percent in 2014 and subsequently stabilize at around 4 percent over the medium-term.
“The growth slowdown in 2014 is owing to a slowdown in diamond recovery and continued problems in electricity and water supply which has affected the non-mineral sector,” IMF revealed.
“On the domestic front, the ongoing problems with power supply and continued high though decelerating growth in household borrowing are potential sources of vulnerabilities. A┬ákey medium-term risk relates to the sustainability of long-term growth as trend growth has softened in the last decade, requiring the easing of structural bottlenecks and finding new growth drivers.”
Botswana’s economy grew faster than expected reaching a real GDP growth of about 6 percent in 2013, which reflects the cyclical recovery of the mining sector along with recovery in its major trading partners, according to the Bretton Woods institute.
The diamond sector contributed to improvement as the current account recorded a surplus in 2013 compared to a deficit in 2012. However imports continued to grow. As a result, the overall external position continues to be relatively strong with official reserve coverage standing at about 10 months of import cover at end-March 2014.
“The current account surplus is expected to stabilize at around 2 percent of GDP over the medium-term supported by the planned fiscal consolidation.”
The IMF staff also urged government to articulate a clearer set of measures to reduce the wage bill relative to GDP and broaden the tax base. It said despite the modest wage awards in recent years and the de facto hiring freeze, the wage bill remains high, reflecting the impact of promotions, non-wage allowances and overtime. The authorities should avoid granting unwarranted preferential tax regimes for businesses.