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IMF ANTICIPATES GLOBAL DIAMOND DEMAND RECOVERY IN 2016
07 January 2016
An International Monetary Fund (IMF) staff team, led by Enrique Gelbard, recently concluded a visit to Gaborone, Botswana as part of the IMF's annual bilateral discussions aimed at collecting economic and financial information, and reviewing and discussing the country's economic developments and policies.

The discussions, says the IMF announcement, centered on Botswana's near term policies to counteract the current economic slowdown and on the reforms and investments needed to foster diversification and inclusive growth in the country.

In a preliminary statement issued at the conclusion of the visit, Gelbard notes that weakness in global demand for diamonds was responsible for a slowing in the pace of economic activity in Botswana in 2015, with real GDP growth estimated at 2.3 percent for the year. He also says a gradual recovery is expected in 2016, with economic growth projected to pick up over the next couple of years as the global diamond market recovers, together with low domestic interest rates and the impact of the government's Economic Stimulus Program.

Following is the full text of mission leader Enrique Gelbard's preliminary statement of the staff team's findings, as published by the IMF:

"After recovering strongly from the 2009 downturn, Botswana's pace of economic activity is slowing in 2015 owing to weaknesses in the global demand for diamonds. For this year, real GDP growth is estimated at 2.3 percent, with a gradual recovery projected to start in 2016. The decline in mining receipts, coupled with a decline in revenues from the Southern African Custom Union (SACU), has led to a fiscal deficit of about 1.4 percent of GDP and a lower external current account surplus. Inflation has been declining and is close to the lower end of the Bank of Botswana target band of 3-6 percent, reflecting a successful monetary policy and lower fuel prices, while the Pula has been stabilized in trade-weighted terms. The financial sector remains well capitalized, broadly profitable, and stable, with a low level of nonperforming loans.

"Thanks to sizable fiscal and foreign exchange savings, the country is well positioned to weather the current slowdown. The staff team seconded the authorities' fiscal plans-focused on social and growth-promoting capital spending with appropriate limits on less productive expenditures-and encouraged them to proceed gradually by prioritizing public investment in projects with clear potential to enhance growth and human capital, while measures are being taken to improve execution capacity and efficiency.

"Economic growth is projected to pick up in the next couple of years, supported by a gradual recovery in the global diamond market, low domestic interest rates, and the impact of the government's Economic Stimulus Program. The authorities' goal to return to fiscal surpluses in 2 years is appropriate, and will require both non-mining revenue mobilization as well as moderate growth in spending. In particular, while mining receipts are expected to recover gradually, SACU transfers are expected to fall in 2016 and could remain subdued in the medium term, underscoring the importance of measures to broaden the domestic tax base.

"The authorities are contemplating a number of medium-term measures to embed in the forthcoming National Development Plan. This provides an opportunity to take stock of the experience so far and accelerate key reforms to promote economic diversification, growth, and job creation. The main reforms include improving the efficiency of public investment; involving the private sector, establishing independent regulators, and improving quality of service in electricity and water supply; reducing skills mismatches by focusing on training, apprenticeship programs, and lowering barriers to hiring skilled foreign workers; and enhancing profitability and operations of large state-owned enterprises.

"The authorities' plans to remove impediments to doing business will complement the above measures. Setting up Special Economic Zones may also promote new activities, but caution will be needed to avoid costly tax incentives and results will have to be closely monitored. Lastly, the team recommended adopting a simple fiscal rule that could enable improvements in the balance between non-mining revenues and recurrent government spending, together with a clearly prioritized public investment program to help ensure fiscal sustainability and use mining revenues for the benefit of future generations.

"The above reforms, together with a gradual scaling up of public investment over the next decade, has the potential to generate employment and diversify the economy away from diamonds, which will be critical to ensure fiscal sustainability and enable Botswana to transition into high-income status.

"The team met with Bank of Botswana Governor, Linah K. Mohohlo, Minister of Finance and Development Planning, Honorable O. Kenneth Matambo, Permanent Secretary of the Ministry of Finance and Development Planning Solomon Sekwakwa, other senior government officials, and representatives from the private sector and development partners."
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