Minister of Finance and Development Planning Kenneth Matambo
The Minister of Finance and Development Planning Kenneth Matambo pitched an recurrent budget package this week that focused on economic diversification, promoting economic growth, physical structure development and human capital development, however economic experts are of the view that the 2015/16 budget had its ‘hits and misses’.
The budget offered a modest budget surplus of P1.23billion or 0.8 per cent of GDP which will contribute towards rebuilding of the country's net financial assets and provide a cushion to global shocks. The education was the biggest benefactor with a 33% share while the agriculture sector took the smallest share of 3%.
Key issues that the experts anticipated to hear were left out and these included tax issues, employment creation, attracting FDI, issuance of permits to name but just a few.
In an interview with Vijay Kalyanaraman a Partner and Advisory services with Grant Thornton he said the government initiatives as expressed in the budget are excellent the challenge remains as to how to relate the excellent intentions to implementation.
“A roadmap for implementing government’s intentions is critical, what we want to know is what initiatives are there in place to drive implementation” said Kalyanaraman.
He said there is a great deal of challenge on the implementation of the development projects. In his speech Matambo said During NDP 10, the development budget has been underspent by an average of 17.3 percent for the years 2011/2012 through 2013/2014, due to delayed project implementation.
Kalyanaraman added that he would have expected to hear the minister talk about administrative issues regarding approval of licenses. “We expect the one-stop shop in place to work seamlessly and improve on the issuance of permits because it’s really disturbing for an investor to go through a lot of hustles,” he said.
A total of P12.93 billion was proposed for the development budget with the largest share allocated to the Ministry of Minerals, Energy and Water Resources (MMEWR) at P3.32 billion or 25.7 percent of the budget.
Tax Director with Deiloitte & Touche Botswana Terry Brick said the budget allocation was equally good considering the largest allocation went to education. “It does not stop there must be jobs for school leavers to go to,” said Brick. The current unemployment rate of 19.8 percent therefore represents underutilization of one of the country’s important resource, namely our human capital.
Brick said an unemployment rate of 19% is very worrying. “I would have expected the Minister to have addressed job creation in greater detail,” he said. In a bid to spur growth and employment, Matambo said that this year’s development budget would mainly be spent on infrastructure projects such as construction of new schools, new power transmission lines and water pipelines.
Investment analyst with a local brokerage Motswedi Securities Garry Juma said the budget missed key issues like the Value Added Tax (VAT) contribution to the total revenue. “Matambo was silent on this matter of which everybody expected to know how much is the VAT contributing to the total revenue,” said Juma.
He added that it was his expectation that he talk about the modalities in place to implement the clusters as well as the budget allocation. Juma said though not much change has been seen in the budget there is need for government to look into the slow implementation of projects as these constraints the growth process. He said the implementation process requires more focus to ensure that resources allocated are utilized efficiently.
The investment analyst said more focus should be channeled towards the agriculture sector given its importance in the economic diversification.
Research Manager with First National Bank (FNB) Moathlodi Sebabole said the budget puts Botswana in a twin surplus of: current account surplus and fiscal budget surplus. “This is a good as an insurance policy for the country and will ensure we continue to have financial stability,” he said.
However, he said Matambo did not address how government intends to maximize on tax revenues or improving efficiencies on custom collections.
In addition Sebabole highlighted that Matambo failed to reveal the exact role that private sector will play in economic diversification and employment creation be it through private-public-partnership (PPP) or contracting.
Sebabole said though Matambo acknowledged as shortfalls poverty levels, income inequalities and unemployment rates he did not do the expected that is to zoom in terms of how we will reduce these adversities and the rates that we will be comfortable to operate with at country level.
“Minister mentioned the government bond BW003 which is maturing this year, but did not indicate whether, given the surplus, they will be re-issuing or activities they will undertake to stimulate the capital markets further,” said Sebabole.
Furthermore, a local tax expert said he was surprised that the minister did not mention any proposed Tax changes against what the tax practitioners expected.
“We were expecting to hear an update on the proposed exemption on first time home owners which the minister announced in the last year’s budget. The proposal was to provide an exemption to citizens when they purchase their homes for the first time,” he said.
Currently citizens do not enjoy the 100% Transfer duty exemption but only enjoy an exemption on the first 200 000 with the rest being chargeable to transfer duty at 5%.
He added that contrary to expectations the minister never mentioned anything regarding the Income tax bill. An IMF paper recommended that governments must do away with IFSC preferential tax rates of 15% it doesn’t really attract investment. Put in place thin capitalization rules for all tax payers not just mining entities and take away 15% tax rate from manufacturing.
“These are possible changes we expect to through the Income Tax Bill yet to be published,” he added.
Matambo said the economy will slow down in 2015 as compared to previous years though the domestic outlook remains positive.
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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”