The International Monetary Fund (IMF) has advised Botswana to revise its fiscal rule because it has failed to keep government spending on a sustainable path.
The rule, which is legislated as the Stock, Bonds and Treasury Bills Act, places a limit on both the stock of domestic and external debt of 20 percent of GDP – 40 percent in total. This debt limitation rule is complemented by two guiding principles embedded in the national development plans: one
a proportion of GDP limit on total government expenditure (40 percent for NDP 9 and 30 percent for NDP 10) and the other a balanced budget in cash terms over the NDP planning period.
The IMF says that while these rules are meant to keep government spending on a sustainable path, that is not always the case.
“The 40 percent expenditure limit was breached in financial years 2008/09 and 2009/10, and whilst the debt/GDP ratio is within its statutory limits, it places no restriction on the drawdown of government reserves and therefore provides no actual guidance for setting annual and medium-term budget ceilings. The government of Botswana’s net financial assets have fallen markedly from over 60 percent of GDP in 2008 to less than 20 percent of GDP in 2013,” the Fund says in its latest technical report on Botswana.
In 1994, the government introduced the Sustainable Budget Index (SBI) which was to be a framework for managing diamond wealth rather than a formal fiscal rule per se. The SBI monitored whether the mineral revenues the government collected were being used in a manner that promoted sustainable development and for sustainability, it required that no recurrent expenditures (other than health and education) depend on mineral revenues. The latter were considered an investment in human capital which is more appropriately considered part of the development and capital budget. However, there were significant deviations from the SBI and by the early 2000s, it had ceased to play a role in budget policy decisions.
The Mid-Term Review of NDP 10, which has been approved by Parliament, forecasts budget surpluses for 2012/13 through 2015/16. As the IMF notes, while this scenario supports a policy of running surpluses to build up government reserves, the Mid-Term Review forecasts a cumulative deficit over the life of the Plan equivalent to 10 percent of 2013/14 GDP. In practical terms this means that the existing fiscal regime (rule and guiding principles) “is not meaningfully binding, and cannot be practically used in setting aggregate expenditure ceilings as part of a medium-term expenditure framework”.
IMF warns that if used to set expenditure ceilings, the 40 percent expenditure limit rule would allow a large jump in spending.
“The debt limit rule is even less binding and would allow large deficits to be run, financed by running down reserves. In conclusion, it may be necessary in Botswana to review the existing fiscal regime to establish alternative policy measures that would enforce overall fiscal discipline,” it advises.
This will be the second time in four years that the Fund has raised its concerns with the current fiscal rule stipulated in NDP 10. In its 2010 technical mission report, it articulated two major drawbacks of this rule. The first was that a level of government spending of 40 percent of GDP was not consistent with long-term fiscal sustainability which would require a substantially lower level of spending. The second was that this rule did not decouple spending decisions from changes in the international price of diamonds or other cyclical factors. Buttressing the latter, the IMF said that when the price of diamonds increases, GDP also increases, allowing an increase in government spending.
