Tuesday, December 7, 2021

Masisi led economy faces crunch time on budget

Just under six months into office, the government of President Mokgweetsi Masisi has been greeted by a less-than-sanguine picture of underlying economic conditions. The economic-stress however started during the era of Masisi’s predecessor ÔÇô Ian Khama. Domestic economic performance has been mixed over the recent past years, contracting by 1.7 percent in 2015, recovering to reach 4.3 percent in 2016 before declining to 2.4 percent in 2017. The medium term domestic outlook however remains optimistic, with growth forecasts expected to rise moderately to 4.5 percent in 2018 and 4.2 percent in 2019. The headache remains on the government budget side which is the main driver of the domestic economy.

Officials at the government enclave who prepared the 2019 Budget Strategy Paper (BSP) do not shy away from stating that this year’s strategic document has taken into account the elements of Masisi’s economic roadmap.

The 2018 BSP is the first since the ascendency of Masisi to the office of the President who took over from Khama in April 2018.

The Ministry of Finance and Economic Development officials who prepared the BSP and presented it during the annual Budget Pitso held in the capital Gaborone this past week however has both the good and bad news for the Masisi led economy.

BPS, an annual fiscal update document that precedes the national budget states that despite the positive global and domestic outlook, Botswana’s 2019/2020 budget faces a constricted fiscal space.

In economic circles, fiscal space is commonly defined as the budgetary room that allows a government to provide resources for public purposes without undermining fiscal sustainability.

The International Monetary Fund (IMF) ÔÇô one of Botswana’s international funders says fiscal space exists if a government can raise spending or lower taxes without endangering market access and putting debt sustainability at risk.

As it stands, technocrats at Finance Ministry in Gaborone have made it clear that Botswana has opted to step up measures to manage and control government expenditures as opposed to spending more. This also means that the Masisi led government has no option but to intensify efforts to increase collections of revenues from existing sources as well as identifying new sources during the 2019/2020n financial year which kick-start in April ÔÇô a few months before the country’s general elections.

With total revenue and grants estimated at P61.28 billion ÔÇô which is lower than the projected total expenditure of P66.40 Billion, Botswana’s budget deficit is estimated at P5.11 billion or 2.4 percent of the Gross Domestic Product (GDP).

To finance this budget deficit, Botswana will have to borrow ÔÇô both domestically and externally. Already there are new developments in terms of external borrowing as the diamond and coal rich nation climbed down on its earlier official position not to accept soft loans from the Chinese Government. Just last month (August 2018), the government signed an agreement on free interest soft loans from China at an occasion at which it was also announced that the Chinese Government has exempted Botswana from payment of three interest free loans amounting to a total of P80 million.

The powerful east-Asian economic giant did not end there as it has also offered P340 million grant to BotswanaÔÇô which Masisi says will be directed to financing infrastructure development in the country.

Domestically, the Botswana government intends to issue debt securities such as Treasury Bills and Bonds.

The government has also made it clear that external borrowing will be restricted to concessional borrowing from both bilateral and multilateral development partners to finance productive investment in order to avoid excessive debt burden.

For now, the government has indicated that public debt ÔÇô both domestic and external remains modest, and within the statutory limit of 40 percent of GDP.

It has also made it clear that maintaining sustainable levels of debt in the medium term is part of the implementation of its Medium Term Debt Management Strategy (MTDMS) of 2016/17 ÔÇô 2018/19. The MTDMS’S objective is to ensure that the Botswana does not slide into the debt trap, which can further undermine future growth.

Alexander Pick- Fiscal economist at OECD Development Centre says fiscal space is better considered on a forward-looking basis, which is where a medium-term expenditure framework (MTEF) comes in.

MTEFs, Pick said, formalise spending plans over (ideally) a three-year period into the future through provisional allocations to departments or functional groups.

“Fiscal space emerges when, for example, tax revenues exceed expectations or when a particular programme proves unable to spend its allocation. Of course, the opposite can also occur, so it’s useful to have a contingency reserve that gets larger towards the outer years of the MTEF”.

Pick said this contingency reserve becomes an additional source of fiscal space should downside risks not materialise.

The MTEF process is also said to be important to countries such as Botswana because it changes the discussion from being about ‘affordability’ to one of ‘sustainability’.

Botswana’s net financial position (NFP) ÔÇô as a percentage of GDP deteriorated significantly between 2010/11 and 2012/13 before recovering slightly in 2014/15. Since then, the country’s NFP has been very low ÔÇô which could be a worrisome trend to the Masisi presidency. Think-tanks at government enclave believes that the continued low level of the NPF reflects the slow growth in government cash balances, as total debt is said to be stable. The country’s cash balance held with Bank of Botswana have been stable around P30 billion, after falling from over P40 billion prior to the 2009 financial crisis.

This week, architectures of the economy at government enclave admitted that, “the emerging scenario of net financial position call for renewed efforts to fiscal consolidation in the medium term”.  These sentiments and many others from the economic circles could push Masisi and his administration to strive to live within its means by producing a budget that is affordable and sustainable ÔÇô yet responsive to people’s needs.

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