Botswana‘s domestic resource mobilization has been labeled weak and behind times, inefficient and unable to fully finance the country‘s developmental and transformative agenda. This is according to Keith Jefferis, a renowned economist, Founder and Director at Ecosult Botswana.
Jefferis who is former Bank of Botswana Deputy Governor was speaking at the Budget Review seminar for the 2020/21 financial year organized by First National Bank Botswana in Gaborone last night. The Economist noted that over the years Botswana‘s tax base has not been expanding at a broadening rate enough to finance the country‘s much needed infrastructure development and increasing government spending.
“On a long term assessment government revenue have been declining while on the other side expenditure ballooned, and the contribution of resources gathered domestically has been flat or even reducing,” he said. Jefferis warned that in the wake of vulnerable diamond market which is affected by global economic uncertainties Botswana might find itself in serious fiscal imbalance. “In that situation then we will need to expand our domestic resource mobilization, if not government spending will have to shrink significantly, the latter will then negatively affect our basic services such as health and education,” he said.
Citing that currently the country’s revenue profile is by in large dependent on Mineral income predominantly diamond export, the Macroeconomic expert says Botswana’s domestic revenue is very low when compared to other developing countries. Jefferis is of the view that in the midterm to long term there will be inevitable and un avoidable need for new and higher taxes “Our domestic revenue are relatively low, that is your VAT, income tax, corporate tax and others, they only account for about 35 % of total government expenditure, this is because Batswana we are under taxed,” he said.
According to Jefferis to realize exponential growth while maintaining fiscal stability, Batswana consumers, business people, companies and multi nationals should finance the country’s budget more than any other revenue channel. On his part Botswana Unified Revenue Service (BURS) Acting Commissioner General Segolo Lekau noted that Botswana’s domestic revenue collection is currently faced with inefficiencies s of which some are a result of lack of resources for BURS, lack of technical capacity and personnel.
“ We do acknowledge that there are instances where we run short as the country ‘s tax body ,however we plead for every citizen’s support , paying and complying to tax obligation is a patriotic responsibility and requirement for everyone staying in Botswana or doing business in Botswana,” he said. Lekau added into Jefferis’ views noting that if diamond revenue continues on an unstable wave heighted by global markets volatilities government will have to increase and or further broaden the country’s tax base.
The International Monetary Fund (IMF) has also spoken against Botswana weak domestic resources mobilization vehicles. In its 2018 report on Sub Saharan Africa 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 regime more progressive,” reads the report which was released in June 2018.
This recommendation by IMF and many other organizations 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.
Highlighting some of the country‘s tax exemptions extended to the business community and private sector, Lekau explained that Botswana will have to revisit some of the incentives to asses and see if they still benefit the country. It has been underscored that some tax incentives and exceptions were a window for exorbitant tax dodging, money laundering and illicit financial flows, under this sentiments Botswana was accused of having a secretive tax system with tax haven jurisdictions that bleeds the country’s public funds.
Botswana was reported to loss over 80 billion pula in 10 years , citing from 2003- 2012 due to corporate tax dodging and money laundering , that is according to Oxfam which noted that this was sometimes encouraged by arrangements such as tax exemptions. One of tax arrangements that Botswana was previously strongly discouraged for 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 of 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 assert management firms. Other tax exemptions in Botswana are the SPEDU revitalization incentives, and Special Economic Zones packages. Some of the incentives under SPEDU are 5 % corporate tax for the first five years and 10 % thereafter.
Organization for Economic Cooperation & Development (OECD) has strongly spoken against some of Botswana‘s tax exemptions and incentives. OECD is of the view these arrangement do not output significant and desirable results but only cripple 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 OECD.
Botswana has been cited as one good example for such. The underlying concern by OECD 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. However after blacklisting Botswana as a tax haven OECD countries led by France last month lifted the tag after the country put up some reforms and improved efficiency and transparency in its tax system.
Marcian Concepts have been contracted by Selibe Phikwe Economic Unit (SPEDU) in a P230 million project to raise the town from its ghost status. The project is in the design and building phase of building an industrial hub for Phikwe; putting together an infrastructure in Bolelanoto and Senwelo industrial sites.
This project comes as a life-raft for Selibe Phikwe, a town which was turned into a ghost town when the area’s economic mainstay, BCL mine, closed four years ago. In that catastrophe, 5000 people lost their livelihoods as the town’s life sunk into a gloomy horizon. Businesses were closed and some migrated to better places as industrial places and malls became almost empty.
However, SPEDU has now started plans to breathe life into the town. Information reaching this publication is that Marcian Concepts is now on the ground at Bolelanoto and Senwelo and works have commenced. Marcian as a contractor already promises to hire Phikwe locals only, even subcontract only companies from the area as a way to empower the place’s economy.
The procurement method for the tender is Open Domestic bidding which means Joint Ventures with foreign companies is not allowed. According to Marcian Concepts General Manager, Andre Strydom, in an interview with this publication, the project will come with 150 to 200 jobs. The project is expected to take 15 months at a tune of P230 531 402. 76. Marcian will put together construction of roadworks, storm-water drains, water reticulation, street lighting and telecommunication infrastructure. This tender was flouted last year August, but was awarded in June this year. This project is seen as the beginning of Phikwe’s revival and investors will be targeted to the area after the town has worn the ghost city status for almost half a decade.
The International Monetary Fund (IMF) has slashed its outlook the world economy projecting a significantly deeper recession and slower recovery than it anticipated just two months ago.
On Wednesday when delivering its World Economic Outlook report titled “A long difficult Ascent” the Washington Based global lender said it now expects global gross domestic product to shrink 4.9% this year, more than the 3% predicted in April. For 2021, IMF experts have projected growth of 5.4%, down from 5.8%. “We are projecting a somewhat less severe though still deep recession in 2020, relative to our June forecast,” said Gita Gopinath Economic Counsellor and Director of Research.
The struggle of humanity is now how to dribble past the ‘Great Pandemic’ in order to salvage a lean economic score. Botswana is already working on dwindling fiscal accounts, budget deficit, threatened foreign reserves and the GDP data that is screaming recession.
Latest data by think tank and renowned rating agency, Moody’s Investor Service, is that Botswana’s fiscal status is on the red and it is mostly because of its mineral-dependency garment and tourism-related taxation. Botswana decided to close borders as one of the containment measures of Covid-19; trade and travellers have been locked out of the country. Moody’s also acknowledges that closing borders by countries like Botswana results in the collapse of tourism which will also indirectly weigh on revenue through lower import duties, VAT receipts and other taxes.
Latest economic data shows that Gross Domestic Product (GDP) for the second quarter of 2020 with a decrease of 27 percent. One of the factors that led to contraction of the local economy is the suspension of air travel occasioned by COVID-19 containment measures impacted on the number of tourists entering through the country’s borders and hence affecting the output of the hotels and restaurants industry. This will also be weighed down by, according to Moody’s, emerging markets which will see government losing average revenue worth 2.1 percentage points (pps) of GDP in 2020, exceeding the 1.0 pps loss in advanced economies (AEs).
“Fiscal revenue in emerging markets is particularly vulnerable to this current crisis because of concentrated revenue structures and less sophisticated tax administrations than those in AEs. Oil exporters will see the largest falls but revenue volatility is a common feature of their credit profiles historically,” says Moody’s. The domino effects of containment measures could be seen cracking all sectors of the local economy as taxes from outside were locked out by the closure of borders hence dwindling tax revenue.
Moody’s has placed Botswana among oil importers, small, tourism-reliant economies which will see the largest fall in revenue. Botswana is in the top 10 of that pecking order where Moody’s pointed out recently that other resource-rich countries like Botswana (A2 negative) will also face a large drop in fiscal revenue.
This situation of countries’ revenue on the red is going to stay stubborn for a long run. Moody’s predicts that the spending pressures faced by governments across the globe are unlikely to ease in the short term, particularly because this crisis has emphasized the social role governments perform in areas like healthcare and labour markets.
For countries like Botswana, these spending pressures are generally exacerbated by a range of other factors like a higher interest burden, infrastructure deficiencies, weaker broader public sector, higher subsidies, lower incomes and more precarious employment. As a result, most of the burden for any fiscal consolidation is likely to fall on the revenue side, says Moody’s.
Moody’s then moves to the revenue spin of taxation. The rating agency looked at the likelihood and probability of sovereigns to raise up revenue by increasing tax to offset what was lost in mineral revenue and tourism-related tax revenue. Moody’s said the capacity to raise tax revenue distinguishes governments from other debt issuers. “In theory, governments can change a given tax system as they wish, subject to the relevant legislative process and within the constraints of international law. In practice, however, there are material constraints,” says Moody’s.
‘‘The coronavirus crisis will lead to long-lasting revenue losses for emerging market sovereigns because their ability to implement and enforce effective revenue-raising measures in response will be an important credit driver over the next few years because of their sizeable spending pressures and the subdued recovery in the global economy we expect next year.’’
According to Moody’s, together with a rise in stimulus and healthcare spending related to the crisis, the think tank expects this drop in revenue will trigger a sizeable fiscal deterioration across emerging market sovereigns. Most countries, including Botswana, are under pressure of widening their tax bases, Moody’s says that this will be challenging. “Even if governments reversed or do not extend tax-easing measures implemented in 2020 to support the economy through the coronavirus shock, which would be politically challenging, this would only provide a modest boost to revenue, especially as these measures were relatively modest in most emerging markets,” says Moody’s.
Botswana has been seen internationally as a ‘tax ease’ country and its taxes are seen as lower when compared to its regional counterparts. This country’s name has also been mentioned in various international investigative journalism tax evasion reports. In recent years there was a division of opinions over whether this country can stretch its tax base. But like other sovereigns who have tried but struggled to increase or even maintain their tax intake before the crisis, Botswana will face additional challenges, according to Moody’s.
“Additional measures to reduce tax evasion and cutting tax expenditure should support the recovery in government revenue, albeit from low levels,” advised Moody’s. Botswana’s tax revenue to the percentage of the GDP was 27 percent in 2008, dropped to 23 percent in 2010 to 23 percent before rising to 27 percent again in 2012. In years 2013 and 2014 the percentage went to 25 percent before it took a slip to decline in respective years of 2015 up to now where it is at 19.8 percent.