Botswana at little risk of debt distress - IMF

Brian Benza
Staff Writer | Friday August 20, 2010 00:00

In a report published recently following consultations between government officials and the Fund's staff, the IMF says external debt for Botswana is expected to reach nearly 50 percent of the GDP by 2012, to finance construction of two power stations, but should stay below 60 percent of GDP in stress test scenarios.

'Public debt would rise to 25 percent of GDP in 2010, before falling to 15 percent by 2014,' the report says. 'If growth and the primary balance were to return to recent levels, however, Botswana would be able to repay its public debt by 2012.'

According to IMF statistics, Botswana's gross external debt stood at $1.2 billion (11.2 percent of GDP) at the end of 2008, with short-term debt accounting for one-fifth of total external debt.

The initial increase in 2009 is also explained by the projected 10.3 percent contraction in real GDP due to significantly lower diamond production.

'Our analysis suggests that Botswana's external debt position would remain sustainable even if there are shocks,' the report adds.

'Botswana's external debt-to-GDP ratio is robust to growth and interest rate shocks, but appears more sensitive to a current account shock and an exchange rate shock (a 30-percent depreciation), and to a combination of growth, interest rate, and current account shocks.'

On the other hand, revenues and grants are projected to remain stable at around 33 percent of GDP in the medium-term, while primary expenditure is projected to increase by 8.5 percentage points of GDP in 2010 as the government undertakes large infrastructure projects.

 'Expenditures would gradually decline in the medium-term as ongoing infrastructure projects are completed,' the report continues. 'Reflecting the more expansionary fiscal stance, the public debt-to-revenue ratio, which was 17.1 percent in 2008, would increase to 46.4 percent of GDP by 2014.'

Regarding the country's outlook, the report says there are significant downside risks over the next several years. In their analysis, the IMF staff considered two alternative scenarios: the first assumed a larger reduction (54 percent) in diamond production in 2009 with a slower recovery in international demand while the second presumed that the Mmamabula project does not move forward.

 'Both scenarios would have a significant impact on the fiscal and external positions,' the report notes.

Looking ahead, the IMF says the fall in diamond production expected after 2020 clouds the longer-term forecast.

 'Although there has been some progress toward diversification, the non-mining sector continues to be heavily influenced by government expenditure, highlighting the importance of diversification for sustaining long-term growth and mitigating risks to the outlook,' reads the report.

'Improving competitiveness and productivity remains key to achieving broad-based long-term growth and reducing high structural unemployment.'