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Matsheka maiden Briefcase Affair packed with fiscal consolidation headache

When many take their thoughts off this weekend, the next thing that should come in mind is an iconic black briefcase which is synonymous with the biggest annual national event in this country, where it seems fashion meets serious fiscal business action, slated after the next 48 hours -the Budget Speech.

Thoughts right now move to the legendary Parliament building corridors with a lot of anticipations to see the Oscar Awards-esque figure of a black-suited Dr Thapelo Matsheka, strutting on a much photographed red carpet while clenching onto the symbolic black briefcase. The next step will be for Matsheka to take on the altar inside the Parliament chambers where he will give audience to political figures inside the building, which might also include President Mokgweetsi Masisi.

For legislators across the political divide, it will be business as usual inside, but for the business community it will be the most attentive affair, economists will be listening  in coming with a lot of burden of expertise on their shoulders. As for the nation; those at vendor markets, some at drinking spots, others holding slashers clearing out long summer grass along the roadsides, and folks who will be inside their cars as radio sound systems broadcast the Budget Speech.

Some will be sitting under shades with pulled out radio antennas at some village corner while others will have their eyes fixated on Matsheka through their television sets or some viewing livestream broadcast pop ups on their mobile phones trying to make sense out of the thick fiscal language which will come out of the minister’s debut fiscal speech.

The political figure with the briefcase and his audience

More than 95 percent interacted with Matsheka on his personal Facebook page this week, of those more than 50 commentators, were all positive on that he will deliver their promises through the Speech. In an announcement where he stated that he will tour all the five national radio stations before and after the Budget Speech is read, he received more than 300 positive reactions from followers with some “hoping for more enlightenment, considering your past as a lecture”, some reminding him that “public servants and Vocational Training Colleges and brigades are waiting patiently.”

Some were fixated at an apparent democratic or a political gesture of having a Minister addressing the public on the national budge. While one advised the Minister to “be careful of negative voices….this is your first as Minister.” Some, a minority of the interactors, “don’t want to hear politicians talk…we want to see tangible developments….you probably want to lie to us”, someone expects “talk talk but no action, an all-time song put on repeat always”.

Speaking from legislators’ Budget Speech retreat this week at Selibe Phikwe, Matsheka said he would not mind any economic or fiscal issues discussion with the media, but this publication could not engage him further since he was held up at a cabinet retreat.

But Matsheka’s suitcase could be containing a negative budget


During one of Matsheka’s first task in the treasury, the draft mid-term review of National Development Plan (NDP) 11, which covers government’s planned project expenditure for the years running from 2017 to 2023, the Minister painted a gloomy picture of this country’s purse, something which might also reflect on his briefcase this coming Monday.

This year is the halfway year bridging government plans towards the end of NDP 11, to 2023, but according to Matsheka last year, government continues to tackle simmering and growing budget deficits which needs to be tackled amid diamond revenue failing to square up with the ever increasing government revenue.

It was like a good dream when the government foresaw a minor six year budget surplus of just over P1 billion for NDP 11. But a contradicting projection shows that this country will have a budget deficit of over P18 billion over the six year period, which is now on its fourth year. A disturbing trend of budget deficits has been traced back to NDP 10 or the budget of 2013/14, where a shortfall of P7.2 billion was recorded, crossing over to the next financial year where it fell down but only at P -4.8 billion. 

Towards the current NDP, in the 2016 financial period, government had a budget surplus of P8.3 billion before a meagre surplus of P27 million during the beginning period of NDP 11, then a promising P2.7 billion in 2017/2018. After that, government budget has been appearing on a negative, P7.3 billion in 2018/19 and P7.79 billion in 2019/20.

It is not over until the fat lady sings with government budget deficits as they are expected to run over the whole of NDP 11. A notable deficit is expected to record P6.94 billion in 2020/21 financial year, but a revival by a surplus in the year before the end of NDP 11 is projected at P4 billion 2021/22.  

Public wages hike to also weigh in on Matsheka‘s briefcase

In a brief interview with BusinessPost this week, economist Othata Batsetswe said an expected budget deficit will come mostly as a result of planned salary increment which was made by President Masisi last year to run for two financial years. Government should now feel the pinch of public service salary hike, according to Batsetswe.

The economist explained that the last 10 percent salary increase on public service Grades A to B and a 6 percent increment for Grades C and D which would eat away P2 billion from the national bill will be felt even in this financial year. Government has further increased disciplined forces’ special allowance by 20 percent.

Government revenues failing to go up against the ever stubborn expenditure

Diamonds revenue continue to fall with the unreliable rough diamond sales always going down and the production being restricted by the slowing of demands.  The downward revision of P24.1 billion for extension of the lives of mines dubbed Cut 9 and 3 projects will also hold down Botswana’s dividends.

Latest released statistics from Statistics Botswana, shows Botswana choking at a trade deficit of more than P3 billion. And this current drift is contributed mostly by the dwindling diamond exports, a red flag for the diamond dependent economy. Latest released International Merchandise Trade Statistics which covers the last quarter of 2019 until now for a period running from October 2019, shows Botswana registered a trade deficit of P3, 425.1 million.

Matsheka’s gamble on fiscal consolidation and increase of revenue

Last year Matsheka revealed before Parliament that government plans to increase revenue by increasing taxes. This country‘s tax to GDP is at 22.3 percent and remains below the benchmark of emerging economies. Botswana’s tax to Gross Domestic Product ratio is still below the benchmark for emerging market economies such as South Africa, whose ratio currently sits at 26 per cent compared to Botswana’s 22.3percent for the 2017/18 financial year. Botswana Unified Revenue Service (BURS) in its recent Strategic Plan 2019 to 2024, requires the improvement in the tax to GDP ratio to reach by March 2024.


Increase on taxes in the coming Budget Speech

In the 2017 Budget Presentation, former Finance Minister Kenneth Matambo, hinted that government should increase its revenue base by hiking taxes. Matsheka echoed his predecessor’s words suggesting that government is not ruling out the possibility of increasing tax anytime soon. He is quoted by newspapers saying that Botswana has one of the lowest VAT rates in the world and that government is mulling at extending its tax base to informal or cash-based activities or considering new taxes, increasing tax rates or reducing exemptions.

Tax consultant Jonathan Hore told this publication that it is apparent from the above quotes that there is pressure on government to find ways of increasing tax revenues. He contrasted this country’s VAT with its SADC counterparts and said it is lower and should be from the current 12 percent to 14 percent or 15 percent.

“Economists have pointed out that the Botswana VAT rate is too low and this would be unsustainable in the long run. It is a well-known fact that Botswana has the lowest VAT rate in SADC (12 percent), whilst the average VAT rate in the region is 15.3 percent,” Hore said. The Tax consultant said considering that an increase in the VAT rate automatically increases the prices of goods and services, such a move will be technically correct but it will cut everyone’s purchasing power and significantly hurt the lowly paid and the poor.

“Inflation shot up in 2010 after the VAT rate was increased effective 1 April 2010 from 10 percent to 12 percent and this is expected to also happen should the authorities up the VAT rate. As an alternative, the authorities could consider introducing a Financial Transactions Tax (FTT) at a minimal amount on financial transactions such as bank deposits and withdrawals (both electronic, physical and at ATMs), swiping for purchases with a bank card, the purchase of shares (listed and unlisted), conversion of currencies, international money transfers through designated agents and money transactions facilitated by telecommunications giants, among others,” said the tax consultant.

He said the magnitude of these transactions is so huge and a minimal tax of say P3.50/transaction could raise around P1bn/annum, based on the author’s assumed transactions of 700 000/day. A 3 percent increase in VAT, according to Hore will only yield around P180m/annum, based on BURS records that it collected about P6bn in 2016/2017 year. He further said: “The beauty about FTTs is that they only target the ‘haves’ and they are not inflationary. Other countries which have introduced FTTs or some form/s of FTTs are South Africa, Egypt, UK, Colombia, Zimbabwe and USA.”

Hore also expects the Budget Speech to come with corporate tax hike. It will not be surprising to get a corporate tax hike from the current 22 percent to +/-25 percent, based on previous indications by authorities for the need to increase revenue. Botswana has the second lowest corporate tax rate in SADC as the average corporate tax rate in the region is 28.03 percent.


PAYE is also lower, with South Africa PAYE rate said to be higher at 45 percent. While Botswana’s PAYE is at 25 percent the average PAYE rate in SADC at the highest bracket is 32.6 percent. Hore expects both PAYE and VAT to be increased on Monday, but that will result reduced purchasing power for the public, as increased PAYE takes away part of disposable income and so does a VAT increase. The tax consultant said this may further contract the economy due to reduced disposable income.
Hore also expects government to also introduce presumptive taxes for the first time and this will mean taxing even the informal sector.

But tax experts believe there will rather be reduction of tax exemptions than increase of tax rates by government. This is because some see increment of taxes to be an economic impediment while minimizing exemptions would be more efficient.
Economist Batsetswe is of a strong view that government should rather maximize its collection of taxes than to jump at the decision of increasing tax rates. He believes when government increases taxes they will have far reaching consequences on the working population and the poor. He also said minimizing exemptions and increase of taxes may also scare away investors.  

Advice

Batsetswe expects Matsheka to mention reinforcement of moratorium on new parastatals; rationalization of parastatals and some being privatized. He also advised that government should refrain on building new offices or buildings and give the task to the private sector or a PPP arrangement takes over, something which should start with the Monday Speech. As it was said in last year budget planning paper and the State of the Nation Address, Batsetswe also agrees the public service should be rationalized and a freeze of new jobs is needed as Botswana wage bill is high.

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Botswana’s development agenda in jeopardy

21st September 2020
Botswana’s-development-agenda-in-jeopardy--water-construction

Stanbic Bank Botswana Quarterly Economic Review indicates that Botswana will fail to meet some of its Vision 2036 targets, particularly unemployment reduction and reaching high-income status.

The report says this is mainly due to the slow economic growth that the country is currently experiencing. This Quarterly Economic Review focuses on the 2020 Budget Speech.

The first paper reviews the entire budget with its key observations being that this budget is prepared as prescribed by the Public Finance Management Act; the priorities it seeks to address are drawn from Vision 2036 and the eleventh

The 2020 budget Speech, which was the maiden speech by the Minister of Finance and Economic Development, Dr. Thapelo Matsheka, and the first after the 2019 general elections, was delivered to Parliament on the 4th of February 2020.

It has been well received by the labour unions, business community, and the public at large as well as international organisations such as the International Monetary Fund (IMF).

It mainly derived its support from key facets including, emphasis on changing the business-as-usual approach to development; outlining the transformation agenda; fiscal reform that minimizes the negative impact on economic development and human welfare, competiveness and the decision to implement the 2019 negotiated and agreed public sector.

The budget’s progress review shows that economic growth was consistent with the NDP 11 projections, with growth of around 4 percent. At this growth rate, the country would neither ascend to a high-income status nor reduce unemployment towards the Vision 2036 target of a single digit.

Simple calculations of this review confirm that the economy will need to grow the Vision 2036’s target of 6 percent over the next 16 years for per capita income to increase from around USD 8,000.00 to above USD 12,000.00 in current prices.

Further, the population is anticipated to grow by only 2 percent per annum.

For this reason, the focal areas for the forthcoming FY’s budget include measures to increase economic growth towards an average of 6 percent per annum.

Economic diversification is reportedly progressing fairly well. The report says, the share of the non-mining private sector in value added has risen to 66 percent in 2018 from to 63 percent in 2015.

The sectoral pattern of growth showed that the performance of services sector (particularly transport & communications, trade, hotels & restaurants, and finance & business services) has been the silver lining and that of mining sector was subdued whilst the utility sector disappointed.

The drive towards the service sector of the economy, especially to low-productivity activities (tourism, public administration, wholesaling and retailing) does not bode well for the country’s development aspirations.

In the previous versions of this Quarterly Review, it was noted that there is need for the rethinking of economic diversification. Since the country’s domestic market is small, it is inevitable that economic diversification not only focus on broadening the product mix, but also the composition of exports and markets.

This understanding of economic diversification has not been embraced by this year’s budget. Consequently, Botswana’s exports are still overwhelmingly diamonds, which means that the rest of economic sectors are still highly dependent on foreign-exchange earnings from diamonds. Thus, “the transformation programme requires a review of the country’s entire ecosystem”.

The budget review of the economic context also depicts that an economy with positive medium-term prospects, with growth expected to recover to 4.4 percent in 2020 from the expected growth of 36 percent in 2019 largely due to faster growth of services sectors and, thereafter, to slow-down to 4 percent in 2021.

These projected growth rates are comparable to those of the IMF staff’s baseline scenario of 4.2 percent in 2020 and 4 percent in 2021. Thus, the business-as-usual scenario produces growth rates that are still too low to achieve Botswana’s development objectives and create enough jobs to absorb the new entrants into the labour market.

Trade tensions between the two major markets for diamond exports, viz., the United States of America and China, is one of the factors that are cited as contributing to, indeed, undermining not only the domestic growth, but also the fiscal position.

Another notable downside risk to both global and domestic growth is outbreak of the coronavirus in China around January 2020. This has been declared as a global health emergency. In an attempt to contain the spread of the novel coronavirus pneumonia, the Chinese authorities have ordered city lockdowns and extended holidays, of course, at the expense of near- term economic growth, according to the new Stanbic Bank Botswana report.

According to Nomura Holdings Inc., fewer migrant workers returned for work than in previous years and business activities have been slow to pick up. The havoc wreaked by the virus on the world’s second largest economy is likely to spill over to the global economy. In fact, it has resulted in a glut in crude oil and, thereby placed oil markets into a contango, i.e., a market structure where near-term prices trade at a discount to future contracts.

It also presents significant risks one of Botswana’s main drivers of economic growth, diversification and foreign exchange earnings. According to the Financial Times (February 13, 2020), Chinese tourists spent $130 billion overseas in 2018. Regardless of whether the growth materializes, the projected domestic growth rate would not transform the economy to a high-income one.

Progress towards reduction of unemployment, to a target of single digit, and poverty and achieving inclusive growth has also been relatively slow, the Stanbic Bank Botswana Review says.

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OP leases Orapa House

21st September 2020
Orapa House

Ministry of Presidential Affairs, Governance and Public Administration (MOPAGPA) has through the Office of the President (OP) proposed to avail Orapa House for use by private training institutions as well as research institutions involved in the area of technology development.

For a very long time the monumental building located in the heart of the city has been a white elephant, despite government purchasing it for nearly P80 million from De Beers in 2012.

However, government has now identified a productive use for the iconic building. “The overall vision is for the building to be transformed into a hub for digital technology research and development to be carried-out by institutions, such as; Limkokwing University, BIUST, BITRI and other relevant stakeholders.”

The decision was taken as government traverse a new path of transforming the economy from a mineral led economy to a knowledge based economy through the promotion of research and innovation. However, the facility will need major maintenance to be carried-out in order to meet the requirements of the proposed change in use.

“The work will include provision of laboratories, work stations, production areas and seminar rooms; audio visual centre, high speed internet connectivity, exhibition areas and offices,” reads the proposal note for the development.

These developments will be done through the refurbishment and maintenance of the main building, workshop, and ablution block, gate house, parking area, grounds, and access control and security service.

“There will be minimal modifications to the structure as it stands. The project is estimated to cost approximately P50, 000, 000,” says the report. In this regard, it is said, the initial scope of the OP facility will be modified to accommodate the envisaged digital technology research and development hub.

With funds needed to improve the building, OP has requested that; “the 2020/21 annual budget provision for Orapa House will need to be increased by P37,500,000 from P2,500,000 to P40,000,000 to kick start the maintenance works.” Funds will be sourced from the projects that have been delayed due to Covid-19 protocols during the 2020/21 financial year.

The building has been a thorny issue for government for years. Initially, OP was expected to move there but the move never materialised. At one point it was a question of whether the Office of the President and the Ministry of Finance and Economic Development were planning to override a decision by Parliament which rejected the proposal to buy Orapa House under the belief that government may be buying its own property. The building was to be bought at a negotiated cost of P79 million.

Again in 2012, Government had wanted to buy Orapa House for a negotiated P79m but the Finance and Estimates Committee of Parliament had rejected the request because of the inconsistencies realised in the supporting documents of the proposed procurement. The valuation of the building was put at P74 million.

The Ministry of Lands and Housing had initially offered De Beers P73, 000,000 as the purchase price. However, De Beers countered with P85, 000,000. On negotiation and converging of the minds, the selling price was finally agreed at P79, 000,000.

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Sad state of Brigades: dumped and ignored!

21st September 2020
Brigades

Auditor General, Pulane Letebele, has expressed discontentment at the worrying and deteriorating state of brigades in the country.

In an audit inspection which was carried out at Tshwaragano Brigade in Gabane, a number of observations showed weaknesses and shortcomings in the conduct of the financial affairs of the institution.

According to Letebele’s report, former students of the brigade had been engaged to carry out maintenance works on the school premises, comprising of painting, tiling, plumbing and electrical works, which covered the period from July 2017 to June 2018.

Although the agreed maintenance period had elapsed, the works had not been completed because of unavailability of funds and this situation had persisted up till the time of inspection in November 2019.

Auditor General says arrangements should have been made in time for funds to be available to complete these relatively minor works even before the works commenced.

Various contractors had been engaged for clearing the bush and for the supply of concrete stones, pit and river sand and hiring equipment for digging the trench towards the construction of an auto mechanics workshop, the report said.

It stated that the cost of services and supplies provided totalled P117 949.80. However, despite the services and the supplies having been paid for, the construction works had not commenced for a long period afterwards, resulting in the trench filling back in.

The audit inquiries had not elicited satisfactory responses as both the institution and the Ministry had not accepted the responsibility for the project, although orders for the provision for the supplies had been made. For their part, the Ministry had stated that they had sub warranted funds for the purchase of porta cabins.

Letebele indicated that it is therefore confusing that a project which is critical to the functioning of an institution such as this one would commence without a well-defined plan.

Furthermore, the accounting and maintenance of records for the supplies items were not of the standard prescribed by the Supplies Regulations and Procedures in that the supplies ledger cards, the main accounting records for Government assets, were not properly maintained for the recording of receipts and issues.

This had resulted in significant discrepancies between physical and ledger balances, while in other instances the supplies items had not been recorded at all.

The report says 24 of the 91 new computers found in the computer laboratory at Kumakwane ABC campus were not recorded anywhere, as were the other computers in the storeroom which could not be counted due to the disorderly storage conditions.

The institution had entered into a contract agreement with a security company for the provision of security services at Tshwaragano Brigade, ABC and Horticulture campuses at Kumakwane for a 2-year period which ended in June 2018, WeekendPost learnt.

After the contract expired in June 2018, an extension was granted till the 30th September 2018. Since then, there has been no security service coverage for the institution to-date. According to Auditor General, in the face of prevailing crimes, it is of paramount importance that government properties be protected by provision of security services at all times.

At Tlokweng Brigade, it was noted that the kitchen staff were working under difficult conditions as the kitchen facilities and equipment, such as the cold room, tilting pot, food warmers and solar power for hot water were dysfunctional. The kitchen roof was leaking and men’s restrooms was not working. All these need to be brought to a reasonable and functional state of repair.

The kitchen staff should use a purpose-designed Rations Ledger for the recording of receipts and issues of foodstuffs to reflect the usage of those items. As far back as 2014 the Department of Buildings and Engineering Services had found that the house occupied by the bursar was uninhabitable on account of structural defects, the report said.

A site visit during the audit had established that the house was indeed unfit for occupation as there were cracks on the walls, power switches were not working and the roof was leaking. On a sadder note, there were a number of finished items of clothing, such as dresses, shirts, and jackets from students’ practical exercises from the Fashion Design Textiles Workshop.

Auditor General shared her take on this, saying: “I have not been able to ascertain the policy on the disposal of products from these practicals. A trace of 103 green acid-proof overalls which had been purchased in August 2018 had indicated that there was no record of these items having been recorded or issued, nor were they available in stock. I was not able to obtain any explanation for this situation.”

Kgatleng brigade was also audited and inspected by Auditor General who observed that the brigade has 26 institutional houses at Bokaa, both old campus and new campus. Some of these houses are very old and dilapidated, with two declared uninhabitable. The condition of the houses is a clear indication of lack of care and maintenance of these properties.

At the time of the audit, there was no contractor engaged for the provision of security guard services at the new campus, after expiry of the previous one in July 2019.  It is hoped that steps would be taken to safeguard the security of the premises and government properties against any acts of hooliganism.

In August 2019, there was a break-in at the electrical and at the plumbing maintenance workshops and a number of high value items, such as drilling machines, bolt cutters, spanners and cables, were stolen. The break-in and theft were reported to the police.

“However, at the time of writing this report I was not aware of the outcome of the police investigation, nor of any loss report submitted in terms of the Supplies Regulations and Procedures,” Letebele said.

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