Botswana walks the tight rope
Country at critical stage of fiscal sustainability Overall budget balance needs to return to surplus Small portion towards public servants, wages and salaries NDP 11 period proved to be extremely challenging - Masisi
Botswana is at a critical juncture with regard to fiscal sustainability, with a long- term structural decline in fiscal revenues ( relative to GDP) as the highly- taxed diamond sector reaches maturity, alongside continued pressure to spend, notably on a large public sector workforce and outstanding development project needs.
Government has come up with a Transitional National Development Plan, 2023/ 24 – 2024/ 25 which is the second in the history of Botswana. The first was in 1966, which was a precursor to the first National Development Plan of 1968– 1973.
The TNDP comes after Minister for State President Kabo Morwaeng early last month during an emergency Parliament sitting moved a motion of adjournment for a definite matter of urgent public importance.
The motion which was passed by Parliament called for the house to resolve to approve the principle that a two year “Transitional National Development Plan” for the period 20223/ 2024 – 2024/ 25 financial years be prepared and tabled before Parliament and that the National Development Plan ( NDP) 12 be implemented effective from 2025/ 26 financial year.
According to the TNDP document seen by Botswana Guardian, the COVID- 19 crisis has exacerbated these long- term trends, leading to the depletion of accumulated savings and increased public borrowing.
Therefore, it will be critical to ensure fiscal sustainability during the TNDP and beyond, as it is a crucial part of the macroeconomic framework. If not attained, the result can be macroeconomic instability, for instance through excessive debt accumulation and debt servicing costs that undermine other objectives. Fiscal sustainability also provides the financial resources to meet spending needs. “Achieving fiscal sustainability has many components. First, the growth rate of spending will need to be controlled, to ensure that it declines, gradually relative to GDP, in line with revenue trends.
“Second, the composition of spending will need to change, with a smaller proportion of spending devoted to public sector wages and salaries, and a greater proportion devoted to needs such as maintenance of existing assets and spending on new development projects. Third, the overall budget balance needs to return to surplus so that the financial buffers that have been depleted during NDP 11 can be rebuilt, and also that a part of the revenue from diamond wealth is converted into longterm financial assets such that income will be generated to replace diamond revenues as mineral deposits are depleted,” the document says.
The implication is that the growth of the public sector wage bill will need to be contained, such that expenditure on wages, salaries and associated benefits grows more slowly than GDP and more slowly than government spending as a whole. The document further states that given the inevitability that the demand for spending on development projects far exceeds available fiscal resources, these projects must be prioritised based on agreed criteria, such that maximum returns and development impact are generated from development spending. Another implication
is that government accounting system will be modernised, with a shift to accrual accounting away from cash accounting, to give a truer perspective of government’s financial position, including a balance sheet. There is also a need for improved transparency, for instance by extending the scope of public finance presentations to include Special Funds and other off- budget items. “The Government Investment Account ( GIA) will be replenished, at the very least to provide a buffer against economic shocks. Ideally, the GIA, and its counterpart the Pula Fund, should be built up sufficiently to provide future income to replace mineral revenues as they decline in the medium to long term. “It will also be essential to diversify revenue sources. This has several components, identifying under- taxed activities, including improving revenue collection efficiency, and plugging gaps. Improving local authority finances, including identifying means of making local authorities more financially self- sufficient, and ensuring that existing revenue sources are properly managed.”
It is reported that in order to ensure longterm fiscal sustainability, it will be necessary to introduce a strong Fiscal Rule that will contain expenditure growth and restore the accumulation of financial savings. Public Private Partnerships ( PPPs) will be utilised to deliver public infrastructure projects. The use of PPPs is expected to be focused on improving delivery, and for financial savings where possible, without creating an undue burden of future fiscal risks or liabilities for government. With repeated budget deficits in recent years, the question of how to finance them is said to have become increasingly important. Historically, deficits have been largely financed by drawdowns from the GIA, with smaller contributions from domestic and external net borrowing.
It is reported that with the GIA largely depleted by the end of 2020, the drawdown of savings is no longer a viable route to finance deficits. “Even if the GIA is replenished, it would not be wise to use it to finance deficits
regularly, as it should be kept for ‘ emergency’ financing needs only. The large recent deficits, combined with the depletion of the GIA, have inevitably led to an increase in both domestic and external borrowing to meet financing needs, although still well within statutory limits.
“There are several fiscal balance objectives during the TNDP period and beyond. The first will be to restore the GIA to a level that is sufficient to absorb possible shocks – estimated at 10- 20 percent of non- mineral GDP. The projected fiscal trajectory will start to achieve some of these objectives as long as the proposed fiscal path is adhered to”.
The GIA is projected to stabilise at around P13.5 billion by March 2025, or five percent of mining GDP, but needs to be at least double this to act as a useful buffer to absorb shocks. The Net Financial Assets ( NFA) should also be stabilised at around minus 14 percent of GDP. While the deterioration of both critical balances should have been halted during the TNDP, further work is expected that it will be necessary beyond the TNDP period to rebuild the GIA and further reduce the negative NFA position. President Mokgweetsi Masisi said the NDP 11 period proved to be extremely challenging, especially in the second half, following the onset of COVID- 19. He pointed out that the TNDP is a major development in the planning history of the country introduced during NDP 11.
On the whole, major reforms are expected in the national planning process, which will require some time to institutionalise. This is the rationale for the development of the Second TNDP, to allow for the introduction of enabling reforms to the national development planning system. According to the president this Plan will also allow for the completion of some NDP 11 projects whose implementation was disrupted by the COVID- 19 pandemic.
Meanwhile, Masisi is expected to shed more light on the status of the economy when he presents the State of the Nation Address ( SONA) in a matter of a week or so.