Parliament is expected to pass transfer duty law amendment which is already colliding with negative reactions –it is feared the law comes with changes that will sabotage the country’s Foreign Direct Investment (FDI) and almost inhibit the ease of doing business in Botswana.
The new major changes on the transfer duty law which have caused a row in the business community is that, now transfer duty shall be charged at the rate of 5% of the transfer value of property for citizens and 30% for non-citizens. The other change is that the sale or issue of shares in a company owning property which changes beneficial ownership shall be deemed to be the transfer of the property and transfer duty shall be payable.
According to fresh information received by this publication, already businesses have engaged the Business Botswana to make representations to Ministry of Finance and Economic Development and government in general to have some parts removed, especially the nationalistic clause that comes with increasing transfer duty from 5 percent to 30 percent for non-citizens. Tax expert believe this will kill FDI.
Also, those buying shares from any stock exchange will be liable to transfer duty and experts believe this is going to inhibit ease of doing business in Botswana. This is because this will cause delays and disadvantage buyers of shares while at the same time affecting property companies’ performance on bourses.
The Transfer Duty Amendment Bill 2018 (Bill) was published on 2 November 2018. Amendment of the transfer duty law is yet to be tabled for debate before parliament and is expected to be enacted into law once it sails through the parliamentary processes. Some observers fears Parliament is going to rubberstamp the law and the upcoming debates would not change anything. It is expected to become a fully fledged law in the parliament sessions of December 2018 or January 2019.
On the issue of foreigners previously required to pay transfer duty of 5 percent, and is now asked to pay 30 percent, on its “high level synopsis” of the transfer duty amendment bill of 2018, accounting firm Mazars’ tax advisory stance is not approval of the new nationalistic changes. “The amendment has increased this rate to 30%. In our view this may adversely affect the property market by stifling competitiveness in the market as participation of non-citizens in the property space may be limited or inhibited by the new regulations. This may lead to drops in property prices in the market,” said Mazars.
A tax specialist Jonathan Hore believes increasing transfer duty for non-citizens will forkout more or not be able to afford land, especially finished property. Foreigners will resort to buying low value and undeveloped land and develop it and demand for property is likely to shrink, affecting property dealers. “The changes like increase of transfer duty for non-citizens from 5 percent to 30 percent come with fears that it will kill existing businesses. The property market is likely to crash as prices soar while demand becomes flat.
The property prices will fall due to reduced demand. On the other hand banks may lose out on loans provided under mortgage arrangements as loaned amounts will exceed property values (collateral). Also, some suggest that ownership of land by non-citizens be subject to ministerial approval but that will complicate ease of doing business. Better increase transfer duty to say 12 percent maximum,” said Hore when doing analysis for the transfer duty law change.
In an interview with BusinessPost, Hore said those buying shares from any stock exchange will be liable to transfer duty. He said the issue on shares is likely to cause commotion at any bourse for property companies and it is ideal that this move is reconsidered. “Citizens should take advantage of exemption to acquire more property and non-citizens fast-track any current property acquisitions. Also, even if 30 percent transfer duty does not sail through for non-citizens, this is a signal that owning property in future may be difficult, so maximize whilst there is time,” advised Hore.
This century is always looking at improving new super high speed technology to make life easier. On the other hand, beckoning as an emerging fierce reversal force to equally match or dominate this life enhancing super new tech, comes swift human adversaries which seem to have come to make living on earth even more difficult.
The recent discovery of a pandemic, Covid-19, which moves at a pace of unimaginable and unpredictable proportions; locking people inside homes and barring human interactions with its dreaded death threat, is currently being felt.
Member of Parliament for Kanye North, Thapelo Letsholo has cautioned Government against excessive borrowing and poorly managed debt levels.
He was speaking in Parliament on Tuesday delivering Parliament’s Finance Committee report after assessing a motion that sought to raise Government Bond program ceiling to P30 billion, a big jump from the initial P15 Billion.
Government Investment Account (GIA) which forms part of the Pula fund has been significantly drawn down to finance Botswana’s budget deficits since 2008/09 Global financial crises.
The 2009 global economic recession triggered the collapse of financial markets in the United States, sending waves of shock across world economies, eroding business sentiment, and causing financiers of trade to excise heightened caution and hold onto their cash.
The ripple effects of this economic catastrophe were mostly felt by low to middle income resource based economies, amplifying their vulnerability to external shocks. The diamond industry which forms the gist of Botswana’s economic make up collapsed to zero trade levels across the entire value chain.
The Upstream, where Botswana gathers much of its diamond revenue was adversely impacted by muted demand in the Midstream. The situation was exacerbated by zero appetite of polished goods by jewelry manufacturers and retail outlets due to lowered tail end consumer demand.
This resulted in sharp decline of Government revenue, ballooned budget deficits and suspension of some developmental projects. To finance the deficit and some prioritized national development projects, government had to dip into cash balances, foreign reserves and borrow both externally and locally.
Much of drawing was from Government Investment Account as opposed to drawing from foreign reserve component of the Pula Fund; the latter was spared as a fiscal buffer for the worst rainy days.
Consequently this resulted in significant decline in funds held in the Government Investment Account (GIA). The account serves as Government’s main savings depository and fund for national policy objectives.
However as the world emerged from the 2009 recession government revenue graph picked up to pre recession levels before going down again around 2016/17 owing to challenges in the diamond industry.
Due to a number of budget surpluses from 2012/13 financial year the Government Investment Account started expanding back to P30 billion levels before a series of budget deficits in the National Development Plan 11 pushed it back to decline a decline wave.
When the National Development Plan 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at budget deficits.
This as explained by Minister of Finance in 2017 would be occasioned by decline in diamond revenue mainly due to government forfeiting some of its dividend from Debswana to fund mine expansion projects.
Cumulatively since 2017/18 to 2019/20 financial year the budget deficit totaled to over P16 billion, of which was financed by both external and domestic borrowing and drawing down from government cash balances. Drawing down from government cash balances meant significant withdrawals from the Government Investment Account.
The Government Investment Account (GIA) was established in accordance with Section 35 of the Bank of Botswana Act Cap. 55:01. The Account represents Government’s share of the Botswana‘s foreign exchange reserves, its investment and management strategies are aligned to the Bank of Botswana’s foreign exchange reserves management and investment guidelines.
Government Investment Account, comprises of Pula denominated deposits at the Bank of Botswana and held in the Pula Fund, which is the long-term investment tranche of the foreign exchange reserves.
In June 2017 while answering a question from Bogolo Kenewendo, the then Minister of Finance & Economic Development Kenneth Mathambo told parliament that as of June 30, 2017, the total assets in the Pula Fund was P56.818 billion, of which the balance in the GIA was P30.832 billion.
Kenewendo was still a back bench specially elected Member of Parliament before ascending to cabinet post in 2018. Last week Minister of Finance & Economic Development, Dr Thapelo Matsheka, when presenting a motion to raise government local borrowing ceiling from P15 billion to P30 Billion told parliament that as of December 2019 Government Investment Account amounted to P18.3 billion.
Dr Matsheka further told parliament that prior to financial crisis of 2008/9 the account amounted to P30.5 billion (41 % of GDP) in December of 2008 while as at December 2019 it stood at P18.3 billion (only 9 % of GDP) mirroring a total decline by P11 billion in the entire 11 years.
Back in 2017 Parliament was also told that the Government Investment Account may be drawn-down or added to, in line with actuations in the Government’s expenditure and revenue outturns. “This is intended to provide the Government with appropriate funds to execute its functions and responsibilities effectively and efficiently” said Mathambo, then Minister of Finance.
Acknowledging the need to draw down from GIA no more, current Minister of Finance Dr Matsheka said “It is under this background that it would be advisable to avoid excessive draw down from this account to preserve it as a financial buffer”
He further cautioned “The danger with substantially reduced financial buffers is that when an economic shock occurs or a disaster descends upon us and adversely affects our economy it becomes very difficult for the country to manage such a shock”