President Mokgweetsi Masisi’s first year to lead the country into general elections comes with heavy burdens on his shoulders.
A respected think tank, Moody’s Investors Service sees a challenge of higher wages and protruding capital expenditures against an economy chiefly dependent on mineral revenue while it shows no further attempt of implementing drastic revenue-raising measures. In a bar graph representation, Moody’s demonstrates that Botswana has a higher wage bill as a percentage of the GDP. The think tank also shows that the capital expenditure and this could be due to investment on mineral projects like the recently launched P21.4 billion Cut 9 project.
Moody’s new presentation shows Botswana wage bill to be around 12 percent as almost equating with that of South Africa but lower than that of eSwatini and Namibia. The latest Moody’s report was focused on sovereigns in sub-Saharan Africa (SSA) which the think tanks said they plan further fiscal consolidation to stabilize their elevated debt burdens and reduces pressures on their credit profiles.
It further stated that these plans are generally set under assumptions of broadly stable economic and financing conditions. In the event of shocks, scope to cut government spending rapidly and significantly, or spending flexibility, allows sovereigns to broadly adhere to their plans and lends resiliency to fiscal strength. In the latest report, Moody’s proposed a measure of spending flexibility in SSA consistent with its earlier work for other regions, to inform our assessment of the resilience of fiscal strength to potential shocks.
“Expenditure flexibility, the result of structural features and recent measures, partly determines the resilience of fiscal strength. While SSA sovereigns are generally planning to consolidate their budgets in a way that should stabilize debt, they now face potential negative economic and financing shocks with a weaker starting fiscal position than five years ago.
Expenditure cuts are often easier to implement quickly than revenue-raising measures. Fiscal strength will likely be more resilient for those with capacity to cut expenditure quickly and significantly in the face of a shock,” says Moody’s report. For this country when looking at expenditure on borrowings, Moody’s says Botswana saw only a marginal increase in their interest expenditures.
The agency also said in some cases, higher interest expenditure offset a significant amount of the reduction to spending on wages and transfers, the other components of mandatory spending. Therefore, with Botswana having less interest expenditure pundits may argue that expenditure on wages may be raised as many believe this country’s salaries are below what is expected. Other pundits may cite Botswana’s high capital expenditure as the reason why Masisi’s regime may remain cautious when spending. In this year of elections, calls on spending remain deafening.
Moody’s shows Botswana currently lingers deep in between flexible and severely constrained SSA countries when it comes to mandatory spending. Moody’s measure expenditure flexibility as the share of discretionary spending (capital expenditures and spending on goods and services) in total expenditure. The remainder consists of spending on parts of the budget that governments generally cannot cut rapidly or which can be adjusted more easily over a longer period of time (interest payments, salaries & wages, and transfers).
The rating agency further states that higher borrowing costs and increased debt burdens saw interest expenditures increase over the four year, like it’s a case for Botswana. The time for the polls has become almost ripe with only a matter of weeks Batswana will be lined up to vote for what they expect and what they were promised. Botswana’s elections are held after every five years and Moody’s has noted that this country together with most SSA sovereigns plan to consolidate their budgets to stabilize debt as they are now more vulnerable to potential negative economic and financing because they are in a weaker fiscal position than five years ago.
In January this year Moody’s said Botswana was going at a snail’s pace in fiscal consolidation efforts and this could increase policy uncertainty ahead of the 2019 general elections. This was before Masisi increase salaries in April. According to the rating agency, ahead of elections in Botswana, the authorities have been envisaging a more gradual pace of fiscal consolidation.
The mandatory spending factor and political pressure
While Masisi may have increase salaries in April this year and adjusted wages of disciplined or armed forces later, something which some of his critics call political gimmick, he has a bigger headache of managing high wages and walking along the boundaries of mandatory spending. The International Monetary Fund (IMF) has always advised Botswana to reduce its wage bill which has been seen to be higher than expected.
April this year, the season of the national polls, Masisi led a government initiative to increase public servants salaries for financial year 2019/20 with an increment of 10 percent for scales A and B and 6 percent for scales C and D. Last year IMF suggested that Botswana cut the size of its civil service, something which Masisi appeared to have almost heeded to when he faced the international media on the issue when he said, “we are more efficient, we are leaner, meaner, and we can do business and we are more attractive to the private sector for them to invest”.
However this was quickly tackled by critics including legislator-cum-economist Ndaba Gaolathe, who said there is no compelling evidence that can suggest that Botswana is in a desperate anomaly that requires it to cut off the size of its civil service. Masisi may have toyed with the idea of trimming jobs despite him being a self-proclaimed “Jobs President” just as he assumed office. He is yet to implement National Employment Policy and has been promising jobs in the time when Botswana faces worst record of income inequality and high unemployment rate.
Meanwhile it has been reported that the April salary increment adds additional cost of a little more than P1 billion per annum to government. It is also said the government wage bill is high by international standards, as it currently stands at 11.3 percent of GDP, against the international threshold of 5.0 percent of GDP. Moody’s places the wage bill at around 12 percent of the GDP and recognizes its loftiness when compared to its Sub-Sahara Africa counterparts. Observers believe Masisi is going to be careful with his spending despite a further call for wage hike.
On the dark-point the budget proposals for the 2018/2018 overall balance is estimated at a deficit of P6.35 billion (or 3.3 percent of GDP), which is expected to worsen to P7.79 billion (or 3.8 percent of GDP) in 2019/2020. A major factor when government considers further spending, an add to Masisi’s headache. Also, government acknowledges positive growth of 4.5 percent in the domestic propelled by non-mining sectors but points to a declining global economy which grew by 3.6 percent in 2018 and is anticipated to only grow at 3.3 percent in 2019.
Bank of Botswana however has said the new salary hike will not in anytime have any inflationary effect or cause a collapse. The central bank also said the wage increase will not shake the domestic economy. Already trade unions are seeking for a further increase of salaries.
A Malaysian private firm Performance Management and Delivery Unit(PEMANDU) who conducted a salary adjustment on behalf of the Directorate of the Public Service Management (DPSM) “remunerations system project report for grades A to D” was unfazed by government’s lack of funds to spend on increase of wages. Government hired PEMANDU as a consultant at a tune of P 17, 6 million.
On the issue of high wage bill, PEMANDU sees that as an excuse by government to avoid motivating its workforce. “The increase in wage bill represents approximately 10.3 percent of the country’s Gross Domestic Products (GDP), the current wage bill being 9.4 percent of GDP. This is still below the regional Sub-Saharan bench mark of 11 percent,” states the report.
The PEMANDU proposal if implemented will add an additional P1.23 billion per annum. PEMANDU has made a proposal of a salary hike of 20 percent for grades A and B; 10 percent for grades C and D and 15 percent for grade E and F. According to the Malaysian firm the new implementation was to bridge the widening gap between lower and higher paid civil servants, while higher grades of E and F should receive no increment in the proposals and keeps their range.
Government before increasing salaries for the public sector in April has always promised that the PEMANDU report will be implemented. However recently something seems to have changed, Vice President Slumber Tsogwane made an announcement suggesting that government is constrained to put more funds for increment of civil servant wages as per the PEMANDU report.
The partnership between Debswana and Botswana Oil Limited (BOL) which was announced a fortnight ago will create under 100 direct jobs, and scores of job opportunities for citizens in the value chain activities.
In a major milestone, Debswana and BOL jointly announced that the fuel supply to Debswana, which was in the past serviced by foreign companies, will now be reserved for citizen companies. The total value of the project is P8 billion, spanning a period of five years.
“About 88 direct jobs will be created through the partnership. These include some jobs which will be transferred from the current supplier to the new partnership,” Matida Mmipi, Head of Stakeholder Relations at Botswana Oil, told BusinessPost.
“We believe this partnership will become a blueprint for other citizen initiatives, even in other sectors of the economy. Furthermore, this partnership has succeeded in unlocking opportunities that never existed for ordinary citizens who aspire to grow and do business with big companies like Debswana.”
Mmipi said through this partnership, BOL and Debswana intend to impact citizen owned companies in the fuel supply value chain that include transportation, supply, facilities maintenance, engineering, customs clearance, trucks stops and its support activities such as workshop / maintenance, tyre services, truck wash bays among others.
“The number of companies to be on-boarded will be determined by the economics at the time of engagement,” she said. BOL will play a facilitatory role of handholding and assisting emerging citizen-owned fuel supply and fuel transportation companies to supply Debswana’s Jwaneng and Orapa Letlhakane Damtshaa (OLDM) mines with diesel and petrol for their operations.
“BOL expects to increase citizen companies’ market share in the fuel supply and transportation industries, which have over the years been dominated by foreign-owned suppliers. Consequently, the agreement will also ensure security of supply for Debswana operations, which are a mainstay of the Botswana economy,” Mmipi said.
“Furthermore, BOL will, under this agreement, transfer skills to citizen suppliers and transporters during the contract period and ensure delivery of competent and skilled citizen suppliers and transport companies upon completion of the agreement.”
Mmipi said the capacitating by BOL is limited to providing citizen companies oil industry technical capability and capacity to deliver on the requirements of the contract, when asked on helping citizen companies to access funding.
“BOL’s mandate does not include financing citizen empowerment initiatives. Securing funding will remain the responsibility of the beneficiaries. This could be through government financing entities including CEDA or through commercial banks. Further to this, there are financial institutions that have already signed up to support the Debswana Citizen Economic Empowerment Programme (CEEP),” Mmipi indicated.
While BOL is established by government as company limited by guarantee, it will not benefit financially from the partnership with Debswana, as citizen empowerment in the petroleum value chain is core to BOL’s mandate.
“BOL does not pursue citizen facilitation for financial benefit, but rather we engage in citizen facilitation as a social aspect of our mandate. Citizen facilitation comes at a cost, but it is the right thing to do for the country to develop the oil and gas industry,” she said.
Mmipi said supplying fuel to Debswana comes with commercial benefits such as supply margins. These have traditionally been made outside the country when supply was done by multi-nationals for a period spanning over 50 years. With BOL anchoring supply for Debswana, this benefit will accrue locally, and BOL will be able to pay taxes and dividends to the shareholders in Botswana.
PwC Africa has presented the eighth edition of the VAT in Africa Guide – Africa re-emerging. This backdrop of renewal informs on the re-emergence of African economies and societies which have been affected by the COVID-19 pandemic.
In this edition, which has been compiled by PwC Africa’s indirect tax experts, covers a total of 41 African countries. It is geared towards sharing insight with our clients based on the constantly changing tax environments that can have a significant impact on business operations.
Within Africa, governments continue to focus on expanding the tax net by improving revenue collection through efficient compliance systems and procedures. PwC Africa has observed that revenue authorities also continue to take a keen interest in indirect taxes as part of revenue mobilisation initiatives.
Maturing VAT system and upskilling SARS
“In South Africa, VAT is becoming more relevant as a revenue source for the government,” says Matthew Besanko, PwC South Africa’s Indirect Tax Leader. “Strides have been made to upskill South African Revenue Service (SARS) staff and identify VAT revenue leakages, particularly in respect of foreign suppliers of electronic services to people and businesses in South Africa.”
Broadening the tax base and digital economy
In the past year, South Africa, Mozambique and Zimbabwe saw updates to their VAT legislation, or introduced specific legislation targeting electronically supplied services (ESS), which is in line with the global trend of attempting to tax the digital economy. “The expectation is that Botswana will also introduce VAT legislation in due course, while the National Treasury in South Africa has also made mention of revising the rules to account for further developments in the digital economy,” Besanko says.
South Africa’s National Treasury has also drafted legislation with the intention to introduce a reverse charge on gold, which is expected to come into effect later in 2022. While in Zimbabwe, revenue authorities have introduced a tax on the export of raw medicinal cannabis ranging between 10% and 20%, which came into effect on 1 January 2021.
ESG and carbon tax
Key strides have also been made within the Environmental, Social and Governance (ESG) space. “ESG leadership, strategising and reporting is essential now for organisations that wish to flourish and remain relevant,” Kabochi says. He adds that companies need to consider how ESG and tax intersect, since tax is a significant value driver when businesses need to deliver on their ESG goals.
In South Africa, a carbon tax regime, which is being implemented in three phases, has been adopted. The second phase was scheduled to start in January 2023, however phase one was extended by three years until 31 December 2025.
Until then, taxpayers will enjoy substantial tax-free allowances which reduce their carbon tax liability. At the beginning of 2022, the South African government increased the carbon tax rate to R144 (about US$9), which is expected to increase annually to enable South Africa to uphold its COP26 commitments.
With effect from 1 January 2023, carbon tax payers in South Africa will also be required to submit carbon budgets and adhere to the provisions of the carbon budgeting system which will be governed by the Climate Change Bill. Where set carbon budgets are exceeded, the government plans to impose penalties. “At PwC, we are continuously focused on our renewed global strategy, ” The New Equation,” Kabochi says. “Through this strategy, a key focus area for PwC Africa is to support clients in adding value to their ESG ambitions and building trust through sustained outcomes.”
The New Equation is also an acknowledgement of the fundamental changes in the business environment in which PwC’s clients and other stakeholders operate. PwC continues to reinvent and adapt to these changes as a community of problem solvers, combining knowledge and human-led technology to deliver quality services and value.
Local and international economists have lowered their projections on Botswana’s economic growth for 2022 and 2023, saying the country is highly likely to fail to maintain high growth rate recorded in 2021 hence will not reach initial forecasts.
Economists this week lowered 2022 forecasts for Botswana’s economic growth rate, from the initial 5.3% to 4.8% and added that in 2023 growth could further decline to 4.0%. The lower projections come on the backdrop of an annual economic growth that recovered sharply in 2021 with figures showing that year-on-year real Gross Domestic Product (GDP) growth increased to 11.4%, up from a contraction of 8.7% in 2020.
Economists from the local research entity, E-consult, this week stated that the 2021 double digit growth that exceeded projections made at the time of the 2022 budget may be short lived due to other developments taking place in the global economy. E-consult Economist Sethunya Kegakgametse stated that the war in Ukraine has worsened supply problems in the global economy and added that before the war, macroeconomic indicators were seen as improving and returning to pre-COVID levels.
According to the economist the global economy was projected to improve in 2022 and 2023. Recent figures show that global growth projections have been revised downwards from the initial forecast of 4.9% in 2022 with the World Bank’s new estimate for global growth in 2022 at 3.2%.
The statistics also shows that International Monetary Fund revised their growth projections for 2022 and 2023 down by 0.8% and 0.2% respectively, falling to 3.6% for both years. “The outbreak of war has severely dampened the global recovery that was under way following the COVID-19 pandemic,” said the economist.
She stated that despite Botswana being geographically removed from the conflict, the country has not and will not be exempt from the disruptions in the global economy. “The disruptions to global supply chains resulting from the war will have a negative effect on both Botswana’s growth and trade activities.
The economic sanctions against diamonds from Russia will add uncertainty to the market which will have knock on effects to Botswana’s growth, exports, and government revenues,” said the economists who added that the disruptions are driving prices up and result with very high inflation in the local economy.
Kegakgametse projected that in an attempt to limit inflation Bank of Botswana will be forced to raise interest rate “Should the sharp increase in both global and local inflation persist, Bank of Botswana much like other central banks around the world will be forced to raise interest rates in a bid to control rising prices. This would mean an end to the expansionary monetary policy stance that had been adopted post COVID-19 to aid economic growth,” she said.
In the latest projections, the UK based economic research entity Fitch Solutions lowered 2022 real GDP growth forecast for Botswana from 5.3% to 4.8% “In 2023, we see economic growth rate decelerating to 4.0%,” said Fitch Solutions economists who also noted that the 2022 and 2023 economic growth projections may come out lower than the current forecasts, as it is possible that new vaccine-resistant virus variants may be identified, which could result in the re-implementation of restrictions. “In such circumstances, we cannot rule out that Botswana’s economy may post weaker growth than our baseline scenario currently assumes,” said the economists.
According to the projections, Fitch Solution stated that there is limited scope for Botswana government to increase diamond production and exports, following the economic sanctions imposed on Russian diamond mining companies operating in Botswana. The research entity added that De Beers is unlikely to scale up diamond output from Botswana in order to prop up diamond prices.