The cash strapped Botswana government has put together an ambitious plan to keep the economy going, but it will require sacrifices from citizens and residents in the form of increased levies, taxes and a reduction in subsidies, suggests a blueprint economic paper from government officials.
The Economic Recovery and Transformation Plan (ERTP) put together by the Economic Advisory Committee, made up of Finance and Economic Development ministry, Bank of Botswana, Investment, Trade and Industry ministry, Botswana Institute for Development Policy Analysis (BIDPA) University of Botswana, says boosting economic performance will require a large capital injection even though the country is not generating enough income.
The ERTP is being implemented at a time when the country is navigating its way through Covid19 outbreak, a disease caused by coronavirus that came to prominence in late January, disrupting global trade as countries moved to curtail the spread of the virus by imposing travel restrictions. Botswana was largely exposed to the disruptions due to its economic reliance on diamond exports and tourism, forcing the country to revaluate its budget.
In addition, challenges posed by Covid19 come at a time when the country was already struggling with myriad challenges, ranging from slow economic growth to rising unemployment amid widening budget deficits. Through ERTP, the government seeks to boost the economy through expenditure and investments across all sectors of the economy.
The plan which will run from 2020/21 to 2022/23 is said to spearhead Botswana’s economic transformation by promoting private sector led economy, anchored by exports and citizen participation. The economic advisors say the ERTP involves accelerated development of facilitative infrastructure, support for increased agriculture and manufacturing
output, growth of the creative industry, improving the business
environment and accelerating regulatory reforms.
However, the plan requires at least P40 billion in government expenditure, a huge sum at a time when the country has been running deficits, with revenues expected to fall in the medium term. In April, Botswana’s finance minister Dr. Thapelo Matsheka revised his initial February budget, cutting projected revenue for the 2020/21 financial year from P62.4 billion to P48.8 billion. The planned P67.6 billion government expenditure was reduced to P59.6 billion.
According to the finance ministry data, the projected budget deficits are expected to grow in size. The budget shortfall for the 2020/21 is now estimated to be P10.8 billion, ballooning from the P7.9 billion deficit registered in 2019/20 financial year, which was a slight reduction from 2018/2019’s massive P8.8 billion budget shortage.
The government has been running budget deficits since 2017/2018, with that year’s deficit recorded at P1.9 billion. Another shortfall of more than P4.4 billion is expected in 2021/22 but will likely be revised too in the coming months.
This has added pressure to the government on how it can boost the economy to grow at a higher rate that is able to create the much-needed jobs in a country plagued by soaring unemployment levels. Now as the country plans jerk the economy, it proposes going beyond the old normal.
“Securing funding for the above initiatives is one of the most difficult components of the process. First, government revenue will be much lower than earlier anticipated, hence there will already be a need for much larger deficit funding in the short to medium term, even before adding ERTP initiatives,” wrote economic advisors in the document released on Monday.
To raise the billions of pula needed for the economic recovery plan, the advisors have proposed drawing money from the government’s portion of the foreign reserves, taking on more external debts and increasing domestic borrowing, while also disposing some government properties, including privatisation of some institutions. The government also plans to raise revenue generation through increased taxes and other levy charges.
“The preferred options are domestic borrowing and revenue mobilisation. However, they are unlikely to be sufficient to meet the entire funding needs over the remainder of the NDP 11 period,” said the authors of the economic recovery plan.
“The estimated total cost of ERTP spending is P20 billion over 2.5 years. In addition, the anticipated budget deficit over the same period is P20 billion, making a total of approximately P40 billion to be funded.”
The government intends to increase its domestic borrowing capacity from P15 billion to P30 billion, issuing government bonds to local and foreign investors. The government’s exposure to debt is just 7.5 percent of the GDP, far below the legal limit on total domestic borrowing of 20 percent of GDP.
Besides borrowing the government says it will be necessary to withdraw P5 billion from the government investment account to cover half of the needed P4o billion, with the remaining half to be funded by collecting more taxes and increasing fees.
“A considerable portion of the remaining financing gap will need to be filled by domestic resource mobilisation, as already noted in the 2020 Budget Speech. In addition to raising user charges and fees for public services, there is need to urgently initiate a programme and timetable with respect to the following measures to raise additional revenues ,” read part of the recovery plan.
The measures include raising value added tax (VAT) from 12 percent to 14 percent in two years, increasing withholding tax rates, introduction of carbon taxes, raising the fuel tax and other levies. The electricity and water tariffs are to be increased as well in three to five years.
According to the document, the government is also considering a cost sharing and cost recovery model which will see the public being charged fees for education and health provisions, services which are largely offered for free by the government.
Furthermore, the government is looking into cutting back on expenditure by reducing subsidies to the agricultural sector and cutting on subventions to parastatals.
