Botswana government is likely to breach the fiscal covenant through its wheel free spending exercise in the current financial year should the impact of the recession last longer than expected, a leading economist said.
Keith Jefferis, former Bank of Botswana governor, said in his quarterly review in Bifm news letter that government spending is likely to over shoot the internationally recognized standards by as much as ten percentÔÇöpartly fueled by the populists’ pursuits during an election year.
“Beyond this, our baseline forecast assumes that spending will be gradually brought down to conform to the Fiscal Rule, which requires spending of 40 percent of GDP (Gross Domestic Products). However, even while complying with the Fiscal Rule, it is unlikely that this would be a sustainable fiscal position.
“The deficit would stay high, because medium term revenues are projected to be around 30 percent of GDP, due to lower diamond prices and SACU (Southern African Customs Union) revenues, not the 40 percent Fiscal Rule.
“As a result, all of government accumulated savings would be exhausted within a couple of years, borrowing will be necessary, public debt would rise rapidly and unsustainably, and the foreign reserves would be severely depleted,” Jefferis said.
During the February annual spending speech, Finance Minister, Baledzi Gaolathe announced a five percent increase on government spending, which will dig a P 13.5 billion hole in government’s pockets. A substantial part of it went into public worksÔÇöto keep idling people busy in an election yearÔÇöwhile some of the money went to rural electrification and water reticulation. All these things will not bring immediate benefits to the economy.
The situation of a deficit is being brought about by the global economic crisis that has impacted negatively on the mineral sector, especially the diamond industry which is the main driver of the economy.
Debswana, the main contributor to the GDP announced the closure of two mines at the beginning of the year and further scaled-down operations in Jwaneng and Orapa mines, while DTC Botswana was forced to close for some weeks and only to re-open by offering some of the employees a separation package.
The diamond industry account for 33 percent of the GDP and over 50 percent of government revenue and this year its contribution is slated to fall by as much as 50 percent.
“In short, this scenario will turn government from being a net saver to a net borrower; the result is an unsustainable fiscal position, which will demolish the reputation for fiscal prudence that has been built over many years,” Jefferis said.
“Alternative scenario involves adjusting spending so as to bring it in line with the medium term revenue forecast at a speed which does not exhaust all the government accumulated savings.
“This will require some major cuts in government spending; various different combinations are possible, but one way or another, spending needs to be brought down from around 50 percent of GDP in 2009/10 to under 30 percent of GDP in a short period of time, which in turn involves cuts of around 25 percent in real terms from projected spending level for 2009/10 in the 2009 budget,” he added.