- Econsult urges reduced spending to avoid accumulation of public debt
GAZETTE REPORTER
Botswana is grappling with severe fiscal challenges following a decline in diamond mining.
According to a review for the third quarter of 2024 by the country’s leading economic think tank, Econsult, the downturn has triggered a cascade of economic concerns, prompting warnings from the International Monetary Fund (IMF) about the nation’s fiscal sustainability.
The IMF’s 2024 Article IV Report emphasised the need for Botswana to curb spending and prioritise development investments with high economic returns.
High return projects
“To avoid a large increase in the budget deficit due to reduced mineral revenues, the government must cut back on spending and focus on high-return projects that boost growth,” the IMF report urged.
While some spending cuts have been announced, they fall short of projections outlined in the 2024 budget and the Annual Borrowing Plan.
“It is likely that the new administration that takes office after the October elections will have to quickly implement further spending cuts to bring the deficit down,” the Econsult report stated.
Long-term stability
It added that Botswana’s long-standing practice of postponing fiscal consolidation – balancing expenditure with revenue – needs to end.
The IMF recommended that the government aim for a budget surplus to rebuild financial buffers and prioritise long-term stability over short-term boosts.
With diminishing balances in the Government Investment Account (GIA) at the Bank of Botswana, the country is increasingly reliant on borrowing to fund its expenditures.
Poor bond sales
Over the six months from April to September, the government raised P6.3 billion through bond sales, out of a projected P9 billion for the financial year.
However, bond sales are proving more challenging, with recent auctions falling short of targets and requiring higher interest rates to attract buyers.
The planned introduction of inflation-linked bonds (ILBs) could provide some relief by tapping into unmet demand from pension funds, but Econsult warns that the fundamental issue remains unaddressed.
Risk of debt crisis
“The underlying problem of an unsustainable fiscal position, worsened by the drop in mineral revenues, must be tackled head-on through a reduction in spending to avoid the rapid accumulation of public debt and the risk of a debt crisis,” it emphasised.
Amid these fiscal concerns, inflation has brought mixed news. The annual inflation rate fell to 1.5 percent in September, driven by lower fuel prices over the past year.
However, Econsult projects a gradual rise in inflation over the next year, though it should stay within the Bank of Botswana’s target range of 3 percent to 6 percent.
Domestic factors are now driving inflation, particularly the cost of tradeable goods, which rose by 4.3 percent over the past year.
Vegetable prices
Vegetable prices, a key contributor, surged by 12.8 percent, reflecting the impact of a domestic import ban. “Domestic production is more expensive than imports, and this has put upward pressure on prices and living standards,” the report noted.
Despite lower inflation, monetary policy interest rates may not decrease further. “As monetary policy is most effective in addressing domestic price rises, it might be wise to hold off on further loosening until domestic inflation is more contained,” said the report.
Additionally, government borrowing has pushed up interest rates for short-term debt and long-term bonds, further straining the economy.