Botswana’s economy is rebounding after a significant setback following the global financial crisis. The economy entered the crisis from a position of considerable strength because of past prudent macroeconomic management. This facilitated a timely easing of fiscal and monetary policies, which helped cushion the impact on growth of the crisis and the subsequent collapse in demand for diamonds.
The economy is likely to see some rebalancing beginning this year, as lower government spending dampens growth in the nonmining sector while recovery of the diamond sector accelerates.
Macroeconomic policies are being appropriately redirected away from short-term demand management toward medium-term considerations.
· Substantial fiscal consolidation will be needed as recovery proceeds, to put the public finances back on a sustainable footing and to safeguard external stability. Much of the adjustment will need to come from lower public spending, as mineral revenues are on a declining trend; and the scope for raising nonmineral taxes is limited by the size of the private sector. The budget for 2010/11 makes a good start on this process of adjustment. Plans to balance the budget by 2012/13 and register modest surpluses thereafter are ambitious but warranted. Recent increases in public debt, and the more challenging fiscal environment going forward, will require a clearer framework for management of the government’s assets and liabilities.
· Anchoring inflation expectations will also be important, because inflation has not yet been brought down sustainably within the authorities’ objective range of 3-6 percent. It will be important therefore to err on the side of caution before proceeding with further reductions in interest rates and to proceed with fiscal consolidation as envisaged.
The medium-term outlook is favorable provided the authorities proceed with planned fiscal consolidation. Staff projects that real GDP growth will average about 6 percent over the medium term, as diamond production gradually recovers towards pre-crisis levels and investment in the power sector boosts growth in the nonmining sector.
Sustaining high growth rates will require an ambitious set of policies and reforms to create a leaner and more effective public sector and promote private sector-led growth. The principle objectives of this economic reform agenda should be:
· Doing more with less. With the prospects of lower revenues looming over the medium-term fiscal environment, the authorities will have to find ways to increase the value for money of public spending programs. Doing so will require strengthening public financial management, including through a transition to program-based budgeting and implementation of a medium-term expenditure framework.
· Letting the private sector lead the way. Private sector-led growth will require structural reforms to encourage entrepreneurship and investment. The focus should be mainly on cross-cutting structural reforms that can benefit the whole economy. Current investments in power generation will address a key bottleneck to growth. With appropriate safeguards, plans to privatize selected parastatals, greater use of public-private partnerships, and rationalization of commercial services currently provided by the government could also mobilize greater private sector participation in the economy.
* Staff Report for the 2010 Article IV Consultation; Prepared by Staff Representatives for the 2010 Article IV Consultation with Botswana; Approved by Sharmini Coorey and Dhaneshwar Ghura; July 12, 2010