Minister of Finance and Economic Development, Kenneth Matambo has affirmed Botswana’s position on tax incentives saying Botswana will continue offering tax incentives in various arrangements across economic sectors as the country sees fit for its economic transformation agenda.
This is contrary to advice and calls by various international finance & economic institutions. Organization for Economic Cooperation and Development (OEDC) has strongly spoken against Botswana’s tax exemptions and incentives. One of tax arrangements that Botswana is strongly discouraged of is the International Financial Services Centre (IFSC) regime under which IFSC accredited and qualifying firms enjoy a 15% corporate tax rate while other companies face the normal 22 % tax.
The package encompasses amongst others conditional exemptions on Capital Gains Tax, Withholding Tax and other rates. Botswana adopted this predominantly to accelerate economic diversification by encouraging growth of the financial services sector. Local IFSC accredited firms include amongst others retail giant Choppies, Letshego Holdings, Motovac, as well as a number of capital and asset management firms. OEDC is of the view this arrangement does not output significant and desirable results but only cripples the country’s revenue collection vehicles.
“Under pressure to offer internationally-competitive tax environments, developing countries offer generous tax breaks that undermine their domestic resource mobilization efforts with little demonstrable benefit in terms of increased investment,” says OEDC. Botswana has been cited as one good example for such. The underlying concern by OEDC is that low income countries often face acute pressures to attract investment by offering tax incentives, which then erode the countries’ tax bases with little benefit even after running for several years.
Botswana has been labelled by this organization and different countries as a tax haven with globally non-compliant tax regime and arrangements that only benefit the already rich and elite business people. The argument is that Botswana’s tax incentives were also contributing in increasing the gap between the rich and the poor. Statistically Botswana is one of the countries with high levels of wealth and inequality in the world.
However, Minister Matambo boldly stated on Tuesday when addressing the media that Botswana remains committed to attracting investment and growing the financial service centre through different arrangement of tax incentives. He said that government will continue to engage concerned parties to do away with the perception that Botswana was a tax haven.
“Here we were dealing with concerns expressed by others especially Organization for Economic Cooperation and Development countries. The IFSC framework basically provides a lower level of tax to companies under the mandate of the IFSC. For us it is an incentive to grow the financial sector. The purpose of this lower level of tax is to provide an incentive but the OECD countries for their own reasons look at it differently, we disagreed with them that we are not a tax haven. We do tax companies that make an income in this country,” he said.
Matambo however said Botswana was open to reviewing and relooking its system but only when it sees fit. “On the other hand we had to listen to what they were saying and consider it and the extent to which we can make an adjustment to the framework where necessary,” he added. Early last year Botswana was heavily criticized and labelled by France, one of the world’s largest and influential economies as a tax haven, however Botswana reverted and strongly cleansed itself of the tag through different global statements.
It has been underscored that this tax incentives and exceptions were a window for exorbitant tax dodging, money laundering and illicit financial crimes, under this sentiments Botswana was accused of having a secretive tax system with tax haven jurisdictions that bleeds the country’s public funds. Botswana is reported to have lost over 80 billion pula in 10 years, from 2003- 2012 due to corporate tax dodging and money laundering, according to International Finance organization, Oxfam. This it was said is sometimes encouraged by arrangements such as tax exemptions.
The International Monetary Fund (IMF) has also spoken against Botswana weak domestic fund mobilization vehicles. In its report released last month the IMF urged Botswana to reform its entire revenue collection system and framework. “It would be important to remove many tax exemptions, increase property taxation, and consider making the personal income tax more progressive.”
This recommendation by IMF and other organization opposes what Botswana is currently doing. In its investment wooing basket, tax exemption and incentives are underscored as key nectarines in attracting foreign capital to set up business in Botswana. IMF advised Botswana that tax was vital in boosting the country’s administrative, fiscal and institutional capacity adding that tax revenue was very essential for any developing country to function.
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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”