The 2022 Budget Speech: Refocus Reform Restore
Firstly, it was to reassure investors that the government is committed to restoring fiscal balance now that the COVID-19 fog is lifting, which would foster both macroeconomic stability and policy credibility and thus help attract investment and promote real GDP growth.
Secondly, with the economic post-Covid recovery hinging on business investment and the ability of the authorities to improve Botswana’s competitiveness, significant attention was devoted to infrastructure development and service delivery reforms.
These are expected to complement policies that help increase the ease of doing business and accelerate economic diversification.
Real GDP growth in Botswana has been in decline over the past four decades, with each decade bringing successively lower real GDP growth. In fact, the 2020s will probably be our slowest decade of growth yet. The Ministry of Finance & Economic Development forecasts real GDP growth of 4.3 percent and 4.2 percent in 2022 and 2023, respectively. The International Monetary Fund also forecasts trend growth of approximately four percent in the medium term.
Policymakers acknowledge that this level of growth is insufficient to stimulate job creation or help avoid the middle-income trap. While diamonds have been the mainstay of our economic development and continue to play a disproportionately large role in contributing to government revenues, GDP growth and export earnings, the pandemic was a reminder of how vulnerable our economy is to exogenous shocks, and consequently the importance of rebuilding national buffers and resilience.
In a nutshell, for a mono-commodity economy like Botswana, risk management is at the heart of policymaking. The budget deficit hit P16.4 billion or 9.4 percent of GDP in 2020/21 as revenue shortfalls weighed on planned expenditures. In 2021/22, the budget deficit is expected to fall to P10.2 billion or 5.1 percent of GDP. This is largely on the back of buoyant mineral revenues. The medium-term forecast sees a small budget surplus (of P5.5 billion or 2.3 percent of GDP) in 2023/24 as the State curtails expenditure (by mostly reducing development spending). More concerning, we believe government’s revenue forecasts are overly optimistic given the inherent volatility in commodity markets.
The government forecasts the non-traditional primary balance (a better measure of the underlying position of public finances) at a deficit of almost 16% of GDP in 2023/24, compared to a deficit of nearly 24% of GDP in 2020/21. To ensure and signal fiscal sustainability this indicator will be reduced by eight percentage points during the next two years.
A key part of restoring fiscal sustainability and rebuilding our buffers – is to rebuild our savings. Over the medium term, government’s debt to GDP is projected to stabilise at approximately 25% of GDP. Over the past decade, overall debt dynamics have been on an uptrend, rising from the lower teens to around 20% of GDP before jumping to the current level of around 25%. While this is well within the statutory limit of 40% of GDP, the government must resist the temptation to issue bonds to finance expenditures. This is particularly worrisome in the current context where government bond yields are at levels that are close to ‘crowding out’ other market participants. The Government Investment Account (GIA) (the government’s equivalent of a savings account) is forecast to be only 1.4 percent of GDP at the end of FY 2021/22, compared to 17.4% of GDP in 2017/18.
The erosion of this buffer indicates rapid and significant withdrawals which weren’t or couldn’t be replenished timeously. In other words, to finance its spending, the government simply dipped into its savings and these drawdowns have grown and accumulated. The government forecasts that it will replenish the level of its savings account to 3.5 percent of GDP by 2023/24.
While we commend the focus on restoring fiscal sustainability and embracing the green economy to foster longer-term growth, we still have several concerns. Many of the measures outlined to restore budget sustainability from both a revenue collection (e.g. broadening the tax base) and spending management (e.g. reducing the wage bill and weaning SOEs from government) have been touted numerous times in the past without any apparent follow-through.
Little consideration is given to the nature, direction and magnitude of structural reforms that are needed to stimulate economic growth and employment in the private sector.
While Botswana is currently benefitting from a robust recovery in the demand for polished and rough diamonds, longer-term fiscal consolidation is going to be more reliant on spending discipline and economic (and therefore revenue) diversification, to ensure sustainability.
With less than a year in office, all eyes will be on the recently appointed Minister of Finance & Economic Development, Ms Peggy Serame.