• Reference: P-BW-KA0-004
• Approval date: 22/09/2010
• Start date: 20/01/2012
• Appraisal Date: 15/03/2010
• Status: OngoingOnGo
• Implementing Agency: GOVERNMENT OF BOTSWANA
• Location: GABORONE BOTSWANA

Economic diversification has been a central objective of Botswana's development policy, in recognition of the excessive dependence of Botswana's economy on diamonds (Government Paper No 2 of 1984). Results to date have however been mixed: Botswana achieved an impressive average growth rate of 8% since the 1980s and the share of mining in Botswana's GDP declined from 48% in 1990 to 34% in 2008 - services, including financial services have grown from 34% to 49% over the same period. However, other sectors, identified as strategic, have stagnated or declined. For example manufacturing has decreased from 5% to 3% over the same period. As a result, accelerating economic diversification remains an important Government agenda.

Economic diversification has become even more relevant in the wake of the recent global economic crisis. Indeed, the decline in diamond prices has weakened Botswana's fiscal position and negatively affected the performance of the economy as a whole. In response to the crisis, the African Development Bank provided in 2009 to the Government of Botswana an Economic Diversification Support Loan (EDSL) of US$ 1.5 bn to bridge the revenue gap and support economic diversification reforms, of which 66% has been already disbursed.

The development of financial services, including the non-banking financial sector, plays a key role in the country's economic diversification strategy. National Development Plan 10 aims at positioning Botswana as the financial services center of Southern Africa. As part of this strategy, the Non-Banking Financial Institutions Regulatory Authority of Botswana (NBFIRA) was established in 2008; NBIFIRA regulates pensions, insurances and capital markets and aims at fostering the stability, fairness and efficiency of the non-bank financial sector, and hence enhance its attractiveness.

The objective of the proposed project is to enable NBFIRA to deliver first class regulation by setting up a Risk Based Regulatory Model (RBRM). Risk based regulation is recognized as the international best practice. One of its key benefits is to help the regulator focus its attention on systemic risks, while allowing for limited and necessary failures to occur, as part of normal market dynamics.

The risk based regulatory model is key for NBFIRA to achieve financial sustainability and independence. The Government is currently funding NBFIRA but is forced to reduce its support as a result of the recent economic crisis. The RBRM would enable NBFIRA to provide effective regulation and services, and thus position it to negotiate adequate fees with the regulated industry.

The proposed project complements the EDSL reform program. It provides critically needed capacity building to deepen one of the key reforms supported by the EDSL program: the improvement of financial sector governance and the strengthening of the regulation of non-bank financial institutions.

The project provides consulting services for the design of a RBRM, and the development of the necessary operational procedures, IT systems and training. The total cost is estimated at UA 632,000, out of which it is proposed that UA 600,000 be financed through a grant from the MIC trust fund, and the balance by NBFIRA's training budget. The proposed project includes recommendations to adjust NBFIRA's operations and revise the legal, institutional and regulatory environment in order to adequately implement the RBRM. The assignment is expected to be carried during the period 2010-2012.

Economic diversification has been a central objective of Botswana's development policy, in recognition of the excessive dependence of Botswana's economy on diamonds (Government Paper No 2 of 1984). Results to date have however been mixed: Botswana achieved an impressive average growth rate of 8% since the 1980s and the share of mining in Botswana's GDP declined from 48% in 1990 to 34% in 2008 - services, including financial services have grown from 34% to 49% over the same period. However, other sectors, identified as strategic, have stagnated or declined. For example manufacturing has decreased from 5% to 3% over the same period. As a result, accelerating economic diversification remains an important Government agenda.

Economic diversification has become even more relevant in the wake of the recent global economic crisis. Indeed, the decline in diamond prices has weakened Botswana's fiscal position and negatively affected the performance of the economy as a whole. In response to the crisis, the African Development Bank provided in 2009 to the Government of Botswana an Economic Diversification Support Loan (EDSL) of US$ 1.5 bn to bridge the revenue gap and support economic diversification reforms, of which 66% has been already disbursed.

The development of financial services, including the non-banking financial sector, plays a key role in the country's economic diversification strategy. National Development Plan 10 aims at positioning Botswana as the financial services center of Southern Africa. As part of this strategy, the Non-Banking Financial Institutions Regulatory Authority of Botswana (NBFIRA) was established in 2008; NBIFIRA regulates pensions, insurances and capital markets and aims at fostering the stability, fairness and efficiency of the non-bank financial sector, and hence enhance its attractiveness.

The objective of the proposed project is to enable NBFIRA to deliver first class regulation by setting up a Risk Based Regulatory Model (RBRM). Risk based regulation is recognized as the international best practice. One of its key benefits is to help the regulator focus its attention on systemic risks, while allowing for limited and necessary failures to occur, as part of normal market dynamics.

During the preparation of the EDSL (Economic and Diversification Development Loan), the government of Botswana has requested assitance to improve the regulation and supervision of the NBFI sector.

This request was submitted by the Government of Botswana in accordance with the provisions of the guidelines, and arises from capacity development needs identified at Botswana's regulatory authority (NBFIRA). The Bank's Country Strategy Paper (CSP) of May 2009 identified two pillars:

(i) support actions to expand private sector investment; and

(ii) remove infrastructure bottlenecks to enhance competitiveness growth. In addition, the CSP extends Bank's support to efforts aimed at strengthening critical capacities in both the public and private sectors. Under the non lending activities, the CSP emphasizes capacity building activities that will enhance the ability of the public sector to provide effective service delivery.

LUMBILA Kevin Numbi - OSGE2

Finance source	Amount
MICF	UAC 600,000
Government	UAC 32,000
Delta	UAC 11,000
Total	UAC 643,000