The International Monetary Fund (IMF) has called on economies to pursue ambitious fiscal consolidation measures and create room for looser monetary policies, aiming to restore the sustainability of public finances.
IMF’s latest report comes as Botswana released its August financial statements which paint a decline in government savings. According to the financial statements by the Bank of Botswana (BoB), the Government Investment Account (GIA) dropped from P6.5 billion in July to P1.9 billion in August.
Under the agreement between the Ministry of Finance and the Bank of Botswana, the GIA represents the government’s share of the Pula Fund portion of the foreign exchange reserves, which has been used to cover the costs of running Botswana.
The IMF report warns that delaying consolidation could trigger disruptive market adjustments, while excessive front-loading could harm economic activity and disproportionately affect vulnerable populations.
The report notes that despite strong economic rebounds in 2022 and widespread inflationary pressures, many countries have kept fiscal policies loose.
From 2022 to 2024, monetary policy tightened significantly in most economies, leaving fiscal policy lagging or easing, complicating central banks’ efforts to contain inflation and delaying the rebuilding of fiscal buffers. Botswana’s government has been dipping into its reserves to stimulate the economy.
Government heavily relied on its fiscal savings during the COVID-19 pandemic, with GIA reserves plummeting from P23.9 billion in 2018 to P2.8 billion by December 2020. These reserves rebounded to P12.1 billion in December 2023 but declined sharply to P5.1 billion in April 2024 amid deteriorating public finances due to falling diamond revenues.
In response, the government has issued memos to departments, implementing austerity measures and pledging to cut spending.
The IMF recommends that fiscal consolidation, where necessary, should be gradual and well-communicated to avoid abrupt disruptions that could diminish economic activity, spike debt ratios, and undermine public support. However, it acknowledges that front-loading adjustments may be required in economies experiencing stress on sovereign debt or losing market access.
The IMF also emphasises the importance of a credible medium-term consolidation plan. Such a plan should outline realistic measures to meet fiscal targets, account for assumptions on interest rates, revenues, and growth, and be supported by a robust institutional framework, including binding fiscal rules and legislation.
Dr. Keith Jefferis, an economist and former Deputy Governor of the Bank of Botswana, has highlighted flaws in the country’s budgeting system. He noted that Botswana lacks a legal requirement for mid-budget adjustments, meaning approved expenditures remain unchanged even when revenue forecasts fall short. Without adjustments, the projected deficit could widen to 8% of GDP instead of the initially forecasted 2.8%, potentially leading to unsustainable borrowing.
Jefferis points out that while other countries like the UK and South Africa conduct mid-year budget reviews, Botswana does not have similar mechanisms. He suggests adopting a stronger legal framework to enhance accountability and allow Parliament to adjust spending based on actual revenue flows.
The IMF cautions that many emerging and low-income countries are struggling with debt service due to elevated borrowing costs and sovereign spreads. For countries in or near debt distress, achieving sustainability may require both fiscal consolidation and debt restructuring.
In Botswana, the government faces a P2.2 billion bond maturing in 2025. Observers have advocated for a bond switch to alleviate debt obligations.
Lesego Moseki, Director of the Financial Market Department at the Bank of Botswana, recently told the media that a bond switch could be discussed by the Bond Auction Committee to ease the debt burden. “This will be driven by government finances, the redemption profile, and investor interest in switching to longer-dated bonds,” Moseki explained.
The IMF notes that fiscal deficits and debt levels remain above pre-pandemic levels, with debt service costs still rising in many countries. It advises tightening fiscal policy to restore budgetary flexibility and ensure debt sustainability, while also recommending growth-friendly adjustments that protect vulnerable groups. Such an approach can increase social acceptability and gather political support.
The IMF also underscores the importance of continuing public investments, particularly in productivity-enhancing sectors like digital and physical infrastructure. However, it has advised Botswana to scale back on social projects to prioritise fiscal consolidation.
Jefferis warns that if spending remains unchecked, the government could borrow more than initially planned, further compromising fiscal sustainability. He likened Botswana’s potential deficit to that of the U.S., stating, “What everybody is saying is that the U.S. is on an unsustainable path because its debt is rising very fast.”
The IMF highlights that well-timed fiscal consolidation could pave the way for looser monetary policy, creating a favorable feedback loop. “As inflation declines toward target levels, central banks should consider the implications of monetary policy on growth and employment, provided it does not jeopardize price stability,” the report states. Easing monetary policy could lower debt-servicing costs, thereby facilitating fiscal consolidation.
The IMF also emphasises the need for supply-side reforms to boost productivity, curb inflation, and accelerate progress toward higher income standards. Botswana, which aims to achieve high-income status by 2036, may struggle to meet this goal, according to some experts.
As central banks shift toward less restrictive policies, the IMF concludes that renewed efforts toward medium-term fiscal consolidation are crucial. This will not only restore budgetary flexibility but also fund priority investments and ensure long-term debt sustainability, enabling economies to return to pre-pandemic growth rates.
