Wednesday, June 19, 2024

Buffer-less Botswana journeys towards high income economy

Botswana’s economic model continues to be excessively reliant on minerals revenue, specifically that from diamond mining. This, combined with the rising unemployment figures as well as undiversified tax base, contributes to anemic potential growth that undermines the country’s aspiration to become a high income status economy within the next 13 years.

As such, to defend and protect the country’s macroeconomic stability, it’s given that the minister responsible for finance, Peggy Serame will have to work hard to reverse the structural fiscal imbalance recorded during the entire National Development Plan (NDP) 11. The imbalance also made its way into the Transitional National Development Plan (TNDP) which kick-started in April 2023 and will end in March 2025. 

TNDP is in part, a strategy by Serame to put Botswana on a path to a balanced budget and ultimately achieve a high income status by the year 2036.

Serame’s resolve to return the national budget to surplus, a feat that can easily be likened to a song that refuses to sell, is also a result of the pressure to return the country to fiscal prudence. Official fiscus data shows that the national treasury battled with deficits the entire NDP11 (2017 – 2023) and is projecting to dance to the same chorus throughout the TNDP.

At the same time, on the growth front, while the treasury had projected an average GDP growth of 4.2 percent over the five years from 2017 to 2021, the actual growth averaged only 2.7 percent.

In February 2023 Serame linked the below-par economic performance to amongst other things COVID-19-induced recession in 2020 and the impact of the ongoing Russia-Ukraine war.

This week, the central bank sang from the same hymn book with Innocent Molalapata Director, Research and Financial Stability Department at the Bank saying that during 2022 risks to global economic activity skewed to the downside and includes the supply disruptions caused by the prolonged Russia-Ukraine war.

“Given the downside risks to global economic activity, the growth trajectory remains uncertain”, Molalapata told journalists at an economic briefing hosted by the central bank at its head office on Wednesday.

He cautioned that, “The attainment of high-income by 2036 requires average annual growth of 6 percent”.

Molalapata’s caution is in line with what Serame also said when delivering the national budget speech early this year. She stated that for Botswana to stay on track towards achieving high-income status by 2036, reduce unemployment and eradicate abject poverty, the economy needs to grow at an average of 5.7 percent during TNDP and NDP 12 which is planned to kick start in 2025.

To date, the Ministry that Serame leads, projects that Botswana’s GDP will grow by four percent and 5.1 percent in 2023 and 2024, respectively. This means that the economy will grow at a less desired rate during those two years which are also part of the TNDP. Given this projected low economic activity, the government is likely to reach a less desired level on the revenue side thus affecting the fiscal reserves.

This happens when Botswana’s fiscal reserve has over the years shrunk to a point where the current financial year’s (2023/24) budget deficit is expected to be financed through a combination of debt. The Treasury has said that for the 2023/24 financial year, financing options will include the issuance of domestic Government securities, in the form of bonds and Treasury Bills to the tune of P3 billion. The P3 billion raised is set to finance the P7.6 billion budget deficit forecast for the financial year 2023/2024.

Still, in February, Serame said that another budget financing option for Botswana will be net external financing, from official multilateral and bilateral lenders which is projected at around two billion Pula.

Building resilience…

With the country’s main revenue streams failing to keep pace with the ever-increasing expenditures, the country’s treasury has embarked on a mission to borrow more, a move that comes with risks to the future fiscal position.

In recognition of the fact that the local economy continues to be plagued with persistent structural weaknesses, the Bank of Botswana, for its 2022 Annual Report theme extensively covered the ‘economic resilience’ topic leaning more towards, ‘fiscal sustainability, external sector sustainability and climate change and adaptation for resilience’.

The central Bank governor, Moses Pelaelo on Wednesday emphasised the need to build ‘buffers’ that could cushion the nation should another global financial, economic or let alone health crisis come our way.

Pelaelo explained that while the central bank recognises that the subject of economic resilience and sustainability is multi-faceted in nature, covering a broad range of socioeconomic and environmental issues, “the Bank decided to focus on three key aspects”.

“In the context of the current challenges and stage of development, these are considered to be some of the key aspects in fostering overall economic resilience for Botswana as well as transition to high-income status by 2036, and realisation of the Vision 2036 aspirations”, said Pelaelo at an economic briefing at the Central Bank’s head office on Wednesday.

Pelaelo and his team now advocates for a rebalance in the policy mix in order to rebuild buffers and increase resilience to external shocks. The central bankers suggest that such could be achieved through optimising domestic resource mobilisation including tax coverage and more targeted subsidies, as well as rationalisation of expenditure and accelerating privatisation of state-owned enterprises amongst other things.

Buffers in short supply but opportunities remain…

One of Pelaelo’s right hand men, Dr. Leonard Setshegetso, the Deputy Director at the bank’s Research and Financial Stability Department describes economic resilience as the capacity to withstand economic shocks and still deliver durable growth, generate employment and adapt in addressing any emerging vulnerabilities.

Dr Setshegetso says Botswana’s opportunities for maintaining fiscal resilience lies in targeted subsidies, rationalisation of state owned enterprises as well as private sector participation.

“Indiscriminate social support burdens fiscus, therefore, the government should do a means test to determine eligibility for social protection. The government should also accelerate adoption of the Privatisation Policy to limit administrative and fiscal burden from state. Lastly shared responsibilities under the Public Private Partnerships (PPPs) could drive economic growth and accelerate infrastructure development with limited fiscal burden”, says Dr Setshegetso.

Dr Setshegetso says while at that, “Climate change solutions present opportunities that can support attainment of vision 2036 goals”.

He says as such there is need to develop adaptive policies that support the necessary mitigation and green transitioning activities.


Read this week's paper