It is crucial that Botswana undertakes revenue and expenditure reforms alongside policies review to reduce income inequality, the International Monetary Fund (IMF) has recommended through a report released last Friday.
The report came on the back of thorough engagements with stakeholders, authorities, economic and financial entities and key policy makers, amongst them Finance Minister, Kenneth Matambo and Bank of Botswana Governor, Moses Pelaelo. The Washington Based Global organization team, led by renowned economic researcher and International Finance analyst, Enrique Gelbard, held discussions on the country’s recent developments and prospects that predominately focused on policies aimed at increasing economic growth and job creation while preserving monetary and financial stability.
The IMF states in the report released on Friday June 8th that tax exemptions amongst other issues have to be relooked into. “On the revenue side, 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 presents a contrary view to the current path as the country has in its investment wooing basket tax exemption incentives aimed at attracting foreign capital to set up business in Botswana. However IMF advises that tax is vital in boosting the country’s administrative, fiscal and institutional capacity adding that tax revenue is very essential for any developing country to function.
Further, it recommends that Botswana restrains the growth of recurrent spending, improve the efficiency of social programs, and protect public investment while prioritizing projects with the highest payoffs. There have been concerns that government expenditure at times deviates from key priorities such as job creation, industrialization and economic diversification.
The report also underscores that the financial sector can be further developed to intermediate additional savings and lend to productive sectors by strengthening creditors’ rights, improving information on borrowers’ creditworthiness, increasing the issuance of government bonds to develop a reliable yield curve, and promoting mobile payments.
According to Gelbard’s team, the slow pace of economic diversification is worrisome and that depending on a single commodity to finance most of the country budget was highly risky. Market trends, the team observed, evolve with time posing more global economic uncertainties. “The diamond and government-led development model has been showing limitations with lower average GDP growth and slow job creation in recent years, thus Botswana needs an accelerated approach focused on private sector development to enable growth in selected sectors in turn lowering unemployment and diversifying exports.”
The report continues to state that diversification and job creation efforts require focus on prompt and bold market friendly reforms that can reduce the costs of doing business, improve skills in the labour force, make the public sector more efficient, privatize key enterprises, and enable competition and entry of firms in sectors with latent comparative advantage.
IMF however commended Botswana‘s recent announcements on the intention to liberalize visa and work permits’ policies, reduce bureaucratic requirements, and privatize inefficient enterprises. It suggested that to realize successful implementation of the reform however, will require speed and determination including an accelerated passage of supporting legislation, together with accountability among government entities and enhanced monitoring and evaluation of results.“Delivering on the above policies and reforms will be essential to enable private sector-led growth and employment creation in Botswana.”
On the 2018 economic outlook the IMF noted that Botswana’s medium-term prospects were favourable, assuming a decisive and prompt implementation of key fiscal policy measures and market-friendly reforms that enable private sector development, lowers unemployment, reduces income inequality, and diversifies exports into selected sectors. “Real GDP growth decelerated to 2.4 percent in 2017 owing to declines in copper and nickel production and lower activity in construction and trade, while the fiscal and external accounts were nearly balanced, inflation was about 3 percent, the exchange rate was stable, the financial sector remained sound and well capitalized, and public debt continued to be low at about 19 percent of GDP.”
The organization further noted that Botswana’s economic growth was expected to rebound supported by higher diamond sales, a stable macroeconomic environment, and higher government spending. “While the government balance is expected to deteriorate owing to lower revenues from the Southern Africa Customs Union and higher fiscal outlays, the deficit should be manageable given high levels of savings and foreign exchange reserves. In the medium-term, and in line with their track record of prudent policies, the authorities aim at achieving a fiscal surplus.”
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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”