Tuesday, December 7, 2021

ESP a response to economic challenges

The national economy continues to face major challenges emanating from constrained domestic and global growth. As a result, the medium term fiscal outlook remains weak as major revenue earners have been severely affected, particularly minerals and revenues from the Southern African Customs Union (SACU), which have been declining over time.

Speaking at a budget review session hosted by First National Bank Botswana (FNBB), Secretary for Economic and Financial Policy at the Ministry of Finance, Dr Taufila Nyamadzabo said these challenges have left government with limited resources at its disposal.

“A slow-down in both global and domestic economy implies less revenue for government,” he said.

He added that it is not advisable to significantly draw down on government savings in order to finance budget deficits. However, Dr Nyamadzabo said government has come up with an Economic Stimulus Package (ESP) meant to boost economic growth, promote economic diversification and create jobs.

“But this should not be at the expense of fiscal sustainability,” he warned.

For its revenue, government depends on domestic sources like VAT and income tax; as well as external sources such as minerals and SACU. Nyamadzabo explained that external sources are highly vulnerable to global shocks, while domestic sources are affected by a slow-down in the domestic economy.

“The biggest two sources, minerals and SACU revenue are mostly affected by external shocks,” said Nyamadzabo.

Given the volatility of the SACU revenue, all member states are affected and the exchange rate plays a major role in the case of Botswana.

“The appreciation of the Botswana Pula implies less revenue for Botswana. The SACU revenue pool will always remain a function of GDP of individual member states and intra-SACU imports. Therefore slowing GDP implies lower imports, which affect customs and excise receipts,” explained Nyamadzabo.

More uncertainty will also be bred by ongoing negotiations on the revenue sharing formula.

ESP

Faced with these challenges, government had an option of either cutting down on expenditure in pursuit of a balanced budget or running a deficit budget. Cutting government expenditure was not viable as it would worsen the already sluggish economic growth. A deficit budget would compel government to finance the deficit through a combination of domestic and external borrowing, coupled with drawing down on government savings.

Therefore the only option was for government to come up with an economic stimulus programme, which will be implemented over a period of three (3) years, but not at the expense of fiscal sustainability in the medium term. The ESP started during the 2015/16 financial year, aimed at supporting domestic economic activities in the short term, while providing a foundation for a sustainable growth path for the economy in the long term. The ESP budget was estimated at P1, 430 million in 2015/16 and a further P2, 206 million has been proposed for 2016/17.

RELATED STORIES

Read this week's paper