Monday, December 6, 2021

Matsheka’s new mathematics

Revenues and grants are projected to reach P64.5 billion in the coming 2021/2022 financial year, helped in part by the expected increase in value added tax (VAT) and improvements in the mining  industry, suggests data released this week.

Finance and Economic Development officials estimate a 16 percent increase in tax revenue to P44.1 billion, with VAT revenue growing from P7 billion to P10.6 billion as government raises the tax rate from 12 percent to 14 percent in April.

Mineral tax is projected to bring in P5.5 billion, up from the previous year’s P1.8 billion. The tax revenue is further boosted by non-mineral tax which is expected to rake in P13.7 billion, up by 16 percent from the past year. The custom and exercise revenue, which is collected through the Southern African Custom Union revenue pool, is projected to drop from P16.5 billion to P13.5 billion.

Non-tax revenue is also anticipated to increase significantly subject to the diamond industry quickly recovering this year. The officials project the non-tax revenue to jump from the previous year’s P9.9 billion to P20.2 billion, fuelled by mineral royalties and dividend that is estimated to bring in P17.6 billion, up from the past year’s P4.7 billion. The government which plans to hike fees and charges in April is eyeing a bigger pay, with fees and charges revenue increasing from P865 million to P1.5 billion.

Though the officials have projected a 33 percent increase in revenues and grants for the 2021/2022 financial year, the P64.5 billion will be dwarfed by government spending which is tipped to grow from P69.3 billion to P70 billion, resulting in a P6 billion budget deficit in the 2021/2022 financial year.

The P70 billion expenditure has been split between the recurrent budget, which gets P56 billion, down by 2 percent from the prior year, and the development budget which has increased by 20 percent to P14.7 billion. About half of the current budget will go to the government wage bill which has grown to P28.7 billion, while grants and subventions to the state agencies add up to P14.9 billion or 26.6 percent of the recurrent budget.

The finance ministry officials have budgeted P10.7 billion for other charges, while domestic debt interest payments are expected to increase by 40 percent following the government’s decision to increase its borrowing locally.

The usual cash flush Botswana has been on the race to the bottom in the last four years as it continued to spend more than it was earning, and eventually using a large chunk of its savings to finance the budget shortfalls. Between 2017 and 2019, budget shortfalls have added to P21.8 billion, while projections for 2020/2021 financial year points to an all-time high budget deficit of P21 billion.

In the past, budget deficits were largely financed by drawing down on accumulated savings held in the Government Investment Account (GIA), which is the government’s portion of the foreign exchange reserves held at the Bank of Botswana.

“This option is no longer available, as the GIA has been depleted by past drawdowns and the revenue shortfall in the 2020/2021 fiscal year. The level of the GIA has drastically declined from an opening balance of P18.5 billion at the end of 2019/20 financial year to P5.6 billion as at November 2020, a decline of 72 percent,” said finance minister Dr Thapelo Matsheka when delivering the 2021/2022 budget speech.

The former economics lecturer added that the projected P6 billion deficit for the 2021/2022 financial year will need to be financed through debt. Some of this will be sourced from the domestic capital market, following the increase in the bond issuance limit from P15 billion to P30 billion.

While this will give the government a breathing room as to build up savings in the depleted reserves, Matsheka says financing the budget through borrowing should be undertaken with due care, as it creates future payments obligations on the nation.

“This also takes us into uncharted territory of managing the debt burden as, in the past, Botswana has always depended on having large financial reserves, which have now been significantly reduced,” he said.

The country’s domestic debt is expected to grow from P22 billion to P23 billion, while medium- and long-term external debt obligations will reduce from P14.1 billion to P11.9 billion.

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