Botswana’s finance ministry is troubled by the growing budget deficits which are compromising the country’s fiscal rules. Still, government intends to increase spending in a bid to support the economy to recover from the pandemic that affected the country’s key economic sectors.
The budget strategy paper for the financial year 2021/2022, which sets the tone for next year’s budget projections, was released this week, revealing the country’s deteriorating financial position as the national budget is plagued by deficits which have been a constant feature in the last three years. From a budget shortfall of P1.9 billion in the financial year 2017/2018, this swelled to P8.8 billion in 2018/2019 and P9.5 billion in 2019/2020, bringing the cumulative budget deficits to P20.2 billion in the first half of the eleventh national development plan (NDP 11) which began in 2017.
The last half of the NDP 11 will also be plagued by deficits. The current financial year 2020/2021 budget was revised in April following the impact of Covid-19 containment measures. Revenues and grants were revised to P52.31 billion, down from P62.3 billion which was budgeted for at the beginning of the year. Mineral revenue is projected to fall by half to P10.46 billion, well below the original forecast of P20.02 billion. VAT is now estimated P7.82 billion, down from P8.55 billion originally.
Government spending for 2020/2021 is now estimated at P67.52 billion, very close to the original forecast of P67.62 billion, after increased spending to combat COVID-19 and mitigate its impact are being financed by reduced spending in other areas of the budget. Overall, the 2020/2021 budget reflects a deficit of P15.2 billion or 7.98 percent of GDP, compared to initial forecast budget deficit of P5.22 billion or 2.4 percent of GDP.
“This outturn is contrary to one of the NDP 11 fiscal objectives, that of maintaining modest surpluses in the second half of the Plan period,” the finance ministry said.
The officials have projected another double digit deficit for the 2021/2022 financial year that begins next year March, with budget estimates set amid a challenging fiscal environment, combining a long-term structural decline in fiscal revenues with the short-term impact of the coronavirus outbreak, suggested the ministry. The budget estimates for 2021/22 were also revised following the outbreak. Revenues and grants have been reduced from the initial P67.9 billion to P58.7 billion.
“The downward revisions reflect an anticipated deterioration in tax receipts from both mineral and non-mineral sources. Specifically, mineral revenues are forecast to be 27.3 percent lower than the previously estimated figure of P21.6 billion, reflecting an anticipated slow recovery in the global economy in general and the international diamond market in particular.,” the economists from the finance ministry explained in the budget strategy paper.
Southern Africa Customs Union (SACU) receipts in 2021/22 are projected to be 6.3 percent lower than original estimates, mainly due to a slowing of economic activity amongst SACU member states. This has been made worse by the decline in the value of the South African rand – the currency in which SACU distributions are denominated – due to a combination of global risk concerns and structural weaknesses in the South African economy. Consequently, the Pula is appreciating against the rand, which in turn undermines the potential revenues from SACU.
Projected income tax receipts have been reduced by 10.1 percent, while value added tax (VAT) is anticipated to underperform by 9.3 percent.
“However, it is important to note that the projected reduction in tax receipts is indicative at this stage given the rapidly evolving environment, and it will take time for the true scale of the shock to become clear. Nevertheless, it remains the case that the country’s fiscal resource base is highly uncertain, and any budget proposals should be weighed against the economic reality of the country in order to manage expectations across the board,” the officials added.
Despite the falling revenues, the government intends to ramp up on spending to stimulate the economy through the ambitious economic recovery and transformation plan (ERTP), which will require P7.5 billion in spending. Total expenditure and net lending for the financial year 2021/22 is now estimated at P71.35 billion, an increase of 3.1 percent from the initially planned P69.2 billion.
Based on the projections, the budget deficit for 2021/22 is estimated at P12.58 billion, or 5.9 percent of GDP. At this rate, the deficit exceeds the country’s indicative threshold that a budget deficit in any year should not exceed 4 percent of GDP.
“The fall in overall revenue is also exacerbated by underperformance of other traditional revenue items. This is offset to some extent by the implementation of cost recovery measures and tax increases. On the other hand, expenditure commitments have been rising due to the need to cater for recurrent health and related costs, as well as Government’s efforts to mitigate the impact of the Corona pandemic,” read part of the budget strategy paper.