Conundrums of Botswana’s rising deficit

  • Deficit grows to P17 billion
  • Foreign reserves taken to fund deficits
  • Increasing deficits could hike Debt to GDP ratio

Gazette Reporter

For the past four financial years running from 2016/17 up to 2019/20, Botswana’s fiscal deficit has grown to P17.1 billion. Economic pundits believe that any deficit is bad for an economy, and argue that Botswana should widen its source of state revenues, especially by broadening its Tax base.

The 2016/2017 financial year, was a tough one for Kenneth Matambo, the Minister of Finance and Economic Development. His numbers failed to balance. They were so bad that he had to face the nation and announce that there is a P6.05 billion budget deficit. A budget deficit occurs when government budgets more spending than there is revenue available to pay for that spending, over a specific financial period. Matambo’s deficits would then become consecutive.

During the 2017/18 financial year, P2.35 billion was recorded further as deficit. Another P3.59 billion was recorded as deficit in 2018/19. This year, a further P5.11 billion was recorded in deficit, piling up the total deficit to P17.1 billion for the past four years.

At a stockbroking firm Motswedi Securities, Head of Research Garry Juma believes that Botswana’s deficits are not necessarily bad to the economy, also given the fact that the current debt to GDP ratio is around 20 percent. “Botswana still has a wide scope to seek debt, because by global standards healthy debt can go as high as 40 percent of GDP,” he said. Further, he takes pride in the fact that Botswana’s credit rating also remains in good standing which will make it easy for Botswana to attract lenders, who, because of a credible credit rating, can give Botswana loans at cheaper interest rates because of the country’s ability to repay its debt. “It is less risky to lend Botswana money than most counties in Africa,” the economic pundit said.
While Tshepang Loeto, another economic financial doyen agrees that Botswana has a good credit rating and a low debt to GDP ratio, he stresses that any deficit is bad for an economy, regardless of the country’s ability to fund that deficit.

While Loeto acknowledges that a deficit has to be funded, he says that funding a deficit can result in increasing a country’s debt to GDP, which, should it be unreasonably high, could affect the country’s credit rating and its ability to borrow further. Matambo said government will fund the deficit by drawing down from foreign reserves and as well as borrowing locally and externally. Botswana’s foreign reserves were supposed to be, especially the Pula Fund, a sovereign wealth fund, which is kept use in future when diamonds are depleted. By funding deficits, government reduces the value of the fund and disrupts the fund’s growth.

At the end of December 2017, BOB’s annual reports shows that foreign exchange reserves amounted to P73.7 billion, a decrease of 4 percent from P76.8 billion in 2016. “It’s a call to act and widen our revenue base because reliance on mineral revenue means vulnerability to the volatile commodity prices economic headwinds especially in China and the US, biggest consumers of commodities,” he said. Customs duties and Mineral revenue, Botswana’s two main sources revenue remain vulnerable to exchange rate fluctuations and international market swings.

A sustained weakness of the diamond market in the past few years has seen diamond prices softening while output targets have also been trimmed. Sluggish sentiment in the market has seen global mining giant, De Beers and Botswana’s Okavango Diamond Company (ODC) sales falling previously by over 20 percent. De Beers owns a joint venture – Debswana Mining Company with the government of Botswana. The improvement in state revenue is highly dependent on a rebound in diamond prices. During the 2018/19 fiscal period mineral revenue is projected to contribute the largest share of revenue at P21.09 billion or 34.4 per cent, followed by Southern African Customs Union (SACU) customs and exercise at P14.97 billion or 24.4 per cent. Non-mineral income tax is the third largest revenue contributor.

Interestingly, The World Bank recently cautioned against reliance on extractive commodities, saying that because of their volatility, countries that depend on them will always have fiscal shortfalls in cases of global economic challenges. World Bank Chief Economist for Africa Albert Zeufack said Botswana, like any other country dependent on extractive commodities should think about deriving increased value from its commodities before export, diversifying away from that commodity and reviewing frameworks that could broaden fiscal gain.

Further, the World Bank Chief Economist for Africa said, Botswana together with most African countries should seriously embark on Domestic Resource Mobilisation (DRM), which simply means increasing the flow of taxes and other income into government treasuries. To Zeufack, it is key to achieving the ambitious Sustainable Development Goals (SDGs), as well as boosting fiscal consolidation for most countries. He believes the tax base should be expanded, because the percentage share of people paying taxes in Botswana and other African countries is extremely low, and thus denying government a significant portion of revenues due to Botswana Unified Revenue Service (BURS) which could be used to finance annual budgets.

He said, Botswana and other African countries should develop a tax code that allows government to capture tax from areas like land, property and real-estate, which is a high-end yet untaxed sector that will generate billions of Pula in tax revenue. The informal sector, according to Zeufack should also be taxed.

Further, because Botswana makes most of its money in minerals and Zeufack believes that government should come up with ways to exploit most of the taxes in minerals. One of the ways he mentioned was to review the structure of corporate tax and ensure its efficiency is increased to avoid loopholes that minimize tax efficiency. Fortunately, Botswana Unified Revenue Service (BURS) is in the process of effecting a legal instrument targeted at tax-mis invoicing as well as transfer pricing, which economic pundits believe could result in the recovery on increased taxes.

“By offering more tax friendly conditions to huge investments in these significant sectors, governments will benefit by increased Foreign Direct Investment (FDI), and increased employment which will in turn increase Pay As You Earn (PAYE) and stimulate economy,” he advised.

During the presentation of the Budget Strategy Paper, Minister Matambo advised against misuse of resources and reckless spending by government departments, encouraging the citizenry and civil service to efficiently and effectively deploy limited resources to provide the necessary economic infrastructure needed for growth and basic social services. His comment struck a familiar chord with that of Zeufack, who believes that there should be a serious review of Public Investment Efficiency. The World Bank economic expert said that while most of African countries invest a lot in fiscal expenditure, the investment is not efficient, and thus does not completely benefit the economy.

“We need to review our procurement procedures, project implementation as well as the quality of projects to ensure that we spend efficiently and get quality projects,” he said.

World Bank Lead Economist Punam Chuhan-Pole says domestic output in Botswana is projected to grow at around 4.5 percent in 2017, almost double the 2.9 percent in 2016, driven by a rebound in commodity prices. She said Botswana will benefit from the recovery in the global economy which is slowly increasing its appetite for extractive commodities, hence an upward trajectory in commodity prices like diamonds, copper and other minerals. The non-mining sectors, mostly services and finance are also expected to significantly contribute to growth.