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Executive summary
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Recent economic developments in Botswana have been positive. Growth has picked up, especially in the non-mineral economy. Inflation has fallen substantially, stabilizing near the top of the Bank of Botswana (BoB) target range, though inflation risks remain. Continued high mineral prices are contributing to healthy fiscal and balance of payments surpluses. Though the incidence of poverty, unemployment, and HIV/AIDS remain high, all have declined recently.
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The economy is slowly diversifying but the expected sharp decline in diamond production after 2020 poses a challenge. Continued and prospective development of minerals and large-scale investment in electricity generation are projected to support fiscal and balance of payments surpluses through 2011, but more rapid diversification away from diamonds is needed to support growth and generate employment.
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Maintaining fiscal surpluses over the medium term is essential to sustain budgetary spending when diamond revenues decline. Although the authorities have met their fiscal goal of keeping public expenditures below 40 percent of GDP, the next National Development Plan (NDP 10) should have more ambitious goals for maintaining fiscal savings and boosting non-mineral revenues.
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The creation of an explicit sovereign wealth fund could strengthen support for fiscal savings by underscoring the link between fiscal surpluses now and more stable spending in the future when diamond revenues decline, and also the need to channel the bulk of returns on public financial assets back to government.
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Striking an appropriate balance between monetary and exchange rate policy objectives is critical. Devaluation provided a competitive boost to exports, but the rapid expansion in BoB certificates (BoBCs) to absorb excess liquidity is imposing a high interest cost on the bank. Further reduction in the rate of crawl, consistent with inflation differentials, would facilitate further interest rate reductions. The real effective exchange rate has stabilized in the past year at close to its equilibrium value.
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The banking sector is sound and near-term risks are well contained, but the agenda for financial sector reform is still sizable. The authorities should build on the Financial Sector Assessment Program (FSAP) to formulate a reform plan that would substantially strengthen supervision of nonbank financial institutions (NBFIs).
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Structural reforms are needed to raise productivity. The privatization agenda has slowed, but large parastatals should still be privatized, with appropriate regulation. The skills mismatch should be addressed by reforming education and vocational training. Recent government initiatives on foreign investment and competition policy need to be completed. Liberalizing administered prices would improve efficiency. Better statistics would enhance policy analysis.
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