- Masisi’s political spending recipe for financial disaster
- Debswana revenue declines by 18 percent
- 2019/20 gov’t revenue projections to decline
President Mokgweetsi Masisi has no choice but to borrow more money to finance his politically motivated spending spree to excite the electorate and raise his chances of victory at the general elections, plunging the country into debt in the process.
Two of such populist decisions are the salary increases, which – should they be implemented – could bankrupt the state. Infact, Masisi’s government had promised to effect a 10 percent salary increase on public service Grades A to B and a 6 percent increment for Grades C and D. The two would require a cumulative amount of almost P2 billion. The increments are part of recommendations of Malaysian consulting firm, PEMANDU Associates, that was engaged by government to review public sector salaries.
When finance minister Kenneth Matambo announced the national budget early this year, there was already a budget deficit of P7.15 billion or 3.4 percent of the GDP projected for the financial year 2019/2020. In the announcement, public sector salaries were not included. Post the national budget, Masisi’s administration decided to adjust salaries for disciplined forces, which further hiked the budget deficit to a whopping P7.4 billion. The disciplined forces were given a 20 percent special allowance in what they have come to jubilantly refer to as “Ntlole.”
The deficit will rise by almost P2 billion, should the PEMANDU recommendations be implemented. Masisi has already promised to raise salaries in accordance with the recommendations. As a matter of fact, the salaries could have long been adjusted but for government’s failure to budget for the increments, hence they are now struggling to source money to fund them.
What worries Tshepang Loeto, a financial analyst at Stanlib, is precisely that this increment was not budgeted for because it was never announced in the budget speech of Minister Matambo. In October last year, credit rating agency Moody’s Investor Service warned that in 2019, the year in which Botswana would have general elections, there would be increased national spending, mostly unplanned, geared at accelerating the Botswana Democratic Party’s (BDP) political mileage. Such spending can seen in the “Ntlole” and PEMANDU increments. Moody’s feared that government spending pressures ahead of elections could delay fiscal consolidation plans and see spending pressures increase significantly for political mileage.
In a few months, the BDP will battle it out against the Umbrella for Democratic Change (UDC), the Botswana Movement for Democracy (BMD), Alliance for Progressives (AP), Real Alternative Party (RAP) and the country’s newfangled outfit the Botswana Patriotic Front (BPF) of ex-president Ian Khama. This time around the political parties are expected to spend more since the battle for power Botswana is expected to be tighter than ever before. According to Moody’s, the ruling BDP will find itself tapping more and more into the national purse to finance unplanned national projects to excite the electorate, which will compromise Botswana’s fiscal position.
Unfortunately, while the budget deficit threatens to blow over the roof, government revenues are under pressure, driven by dwindling diamond revenues. According to Econsult Botswana’s 2nd Quarterly Economic Review, sales of rough diamonds in the first quarter of 2019 were weaker than in 2018, and the trend appears to have intensified even further in the second quarter of the year. Former Deputy Governor at Bank of Botswana (BoB) Dr Keith Jefferis is the Managing Director at Econsult.
“Sales of rough diamonds through De Beers Global Sightholder Sales (DBGSS) in Gaborone were 17.5 percent down by value in the same period in 2018,” his research read, adding further that this reflects a number of influences, including weak final demand for diamond jewellery in major markets (the USA and China), overstocking in the midstream (diamond cutters and polishers) and a lack of profitability due to narrow margins between rough and polished prices, a lack of bank liquidity in India to finance diamond stocks, and continued downward pressure on prices of lower-value diamonds due to competition from supplies of lab-grown diamonds.
Econsult says the weak market for rough diamonds will in turn have an impact on the mining sector, hence on economic growth, as major diamond mining companies – including Debswana – adjust production levels in line with demand. Dr. Jefferis’ firm has warned: “It also intensifies the fiscal challenges facing government. Revenues have been in structural decline for several years, relative to GDP, and weak diamond sales will make it difficult to achieve the 2019/20 revenue targets set out in the February 2019 Budget.
“During the second half of NDP 11, budgetary constraints will be a major challenge, especially given the spending commitments made by all political parties in the run-up to this year’s general elections. Government will need to respond to this challenge by prioritising the competing demands on public spending, and cutting back spending on unproductive or low priority programmes, projects and institutions.”
Such budgetary constraints, according to some people, could force Masisi to halt the salary hikes to cushion the economy against rising deficits. However, public servants have warned Masisi that should he not effect the salary increases, he should forget about their vote. They have threatened to revenge by punishing the ruling BDP in the coming general elections, should the government fail to implement what President Masisi has consistently promised.
Political commentator Anthony Morima says should the ongoing negotiations fail to bear fruit, civil servants may revolt against the BDP at the polls in October. “The outcome of the negotiations could influence how civil servants vote, but it would not be by such significant numbers that it could hurt the BDP,” Morima observes.
At Stanlib, Loeto believes that government will seek debt to finance projects in the pipeline, including the public sector salaries. He says Botswana’s debt to GDP ratio still allows for increased borrowing, which he notes will rise if government borrows. However, he says, it would be better if government sought domestic debt. “They have already borrowed more externally,” he explains. “It will be wise to borrow domestically to minimise the dollar debt because if the US Feds hike interest rates, then interest on Botswana loans will also rise.”
Already, as the custodian of the national purse BoB reports that government and government-guaranteed debt for the 2018/19 fiscal year stood a staggering P46 billion. In its 2018 annual report, BoB Governor Moses Pelaelo said government and government-guaranteed debt for the 2018/19 fiscal year is projected at P46 billion, of which P36.1 billion is government’s own debt. The balance is government-guaranteed debt.
Total external debt amounts to P30.5 billion or 15.4 percent of GDP while domestic debt, at 7.8 percent of GDP, amounts to P15.5 billion. Overall, total projected debt as at 31 March 2019 is equivalent to 23.2 percent of forecast GDP and below the statutory ceiling of 40 percent of GDP, with both domestic and external debt being lower than the 20 percent of GDP limit for each category. The debt, however, will significantly rise, driven by increased, yet unplanned government spending this year under Masisi’s governance, according to Moody’s.
To further excite the electorate, the Ministry of Local Government and Rural Development decided to dig deep into public coffers to finance its social security programmes during 2019/2020 financial year. Botswana’s social protection system has three major categories – social insurance, social assistance or safety nets, and active labour market programmes.
In the social safety net category are scholarships and sponsorships which support students in tertiary education, accounting for 1.4 percent of GDP and nearly half (45.3 percent) of total social-assistance spending.
Last year the Ministry of Education announced a P200 increase in student’s allowances, hiking the allowance to just over P1600. In February this year, the local government ministry raised monthly social welfare cash allowances for various community committees by P50. At the same time, old age pension cash allowance was increased by P100 effective April 2019.
Observers like the International Monetary Fund (IMF) and the Botswana Institute of Development Policy Analysis (BIDPA) believe that Botswana’s social security expenditure will grow to undesirable levels. They worry that while expenditure is on the rise, there is no return on investment. Most of that money, however, would be spent as deficit from the national budget that the Moody’s analysts argue would hike government debt or cost of funding, and thus delay fiscal consolidation.
According to finance minister Matambo and his team, such a deficit would be financed through domestic or external debt or even a draw down on foreign reserves which are meant to protect Botswana against future economic shocks. Moody’s worries that should such domestic/external debt be taken to finance deficits motivated by political year spending, efforts for fiscal consolidation would be a challenge.