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Real Economy News in Real Time
R/€ = 19.55 Change: -0.07
R/$ = 17.59 Change: -0.06
Au 1739.80 $/oz Change: 18.71
Pt 832.50 $/oz Change: 0.56
 
 
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Botswana’s challenges contribute to overvalued exchange rate, IMF finds

27th March 2020 BY: Simone Liedtke
Writer

Persistently lower mineral revenues and Southern African Customs Union (Sacu) proceeds and delays in the needed fiscal adjustment, including the large increase in the wage bill, have contributed to a moderately overvalued exchange rate and “eroded buffers and savings for future generations", the International Monetary Fund (IMF) has found.

These were the findings of an IMF executive board consultation with Botswana.

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These challenges, the IMF said on March 27, combined with a severe drought, have contributed to slower real gross domestic product (GDP) growth and a deterioration in the fiscal and external balances in 2019 for the country.

However, growth is expected to pick up in the near term, mainly driven by the mining sector.

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Although, over the medium term, absent bold fiscal and structural reforms, growth will remain around 4% - a level that the IMF states is “insufficient to achieve the authorities’ objectives of reducing unemployment and transitioning to high-income status”.

Inflation is expected to remain within the Bank of Botswana’s target range.

This outlook is subject to significant downside risks, including potential disruptions from Covid-19, most of which will affect Botswana through diamond and Sacu revenue. And, over the medium to longer term, Botswana could also be affected by climate change.

In the budget for 2020, the authorities envisage resuming fiscal consolidation, mostly through reprioritisation of capital spending, cuts in non-priority recurrent expenditures, and increases in fees, while the public wage bill will continue to increase, the IMF found during the consultation process.

With a constrained fiscal position, the budget also acknowledged the need to transform the economy toward a private sector, export-led and knowledge-based growth model, and increase the efficiency of public spending while aligning the human and physical capital on the transformation agenda.

Following the consultation process, the executive directors noted that economic growth slowed last year following a contraction in diamond activity and a severe drought.

Expansionary fiscal policy in the face of persistent lower diamond and trade revenues has widened the fiscal deficit, eroding buffers and weakening the external position, and with the outlook subject to downside risks, the directors highlighted the need to rebuild buffers to guard against future shocks, including from a global growth slowdown, coronavirus-related spillovers, and climate change and natural disasters.

Reforms to facilitate structural transformation and diversify the economy will be crucial to promote stronger, sustainable and inclusive growth, the IMF found.

The directors welcomed the planned gradual fiscal consolidation, stressing the need to start without delay.

However, the importance of carefully calibrating the adjustment to minimise the impact on competitiveness and growth, while protecting the vulnerable, as well as using fiscal space, should downside risks materialise, was underscored.

The directors encouraged greater efforts in mobilising revenue, including by broadening the tax base, reducing exemptions and advancing tax reform, while containing the wage bill to protect efficient capital and social spending.

The directors also found that Botswana’s current accommodative monetary policy stance was appropriate, and they welcomed the authorities’ readiness to loosen the stance further if needed.

They encouraged the authorities to use the flexibility within the current exchange rate framework to cushion against external shocks and help the economy adjust over time to the persistent decline in mineral receipts and revenues from Sacu.

A further strengthening of monetary transmission by deepening domestic financial markets was also urged, with emphasis placed on the need to continue to closely monitor risks in household balance sheets and employ macroprudential tools as necessary.

Directors further encouraged the acceleration of the implementation of supply-side reforms to promote private sector activity and economic diversification, building on recent progress in improving the business environment.

To foster competitiveness and boost jobs, a reduction in government’s footprint in the economy was encouraged, and should this be done, it would further enhance human capital, and promote greater integration into regional and global value chains. 

EDITED BY: Chanel de Bruyn Creamer Media Senior Deputy Editor Online
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