Gov’t expects bumpy road ahead for the economy
Mbongeni Mguni | Monday September 12, 2022 06:00
From a brisk start to the fiscal year in which mining, particularly diamonds, helped produce an P838 million surplus in the first quarter, the war in Ukraine, rising inflation and interest rates as well as interventions such as the inflation relief measures announced in August, have introduced uncertainties into the country’s economic outlook.
The rebound in mining helped ease the 2021–22 budget deficit from an original forecast of P10.2 billion, to a shortfall of just P8.1 million, supported by a surge in diamond exports as well as underspending in the development budget.
The budget’s performance in 2021–22 is the best outturn seen since the last surplus which was recorded in the 2016–2017 fiscal year.
This week, however, Finance ministry technocrats told BusinessWeek the budget deficit for the 2022–23 fiscal year is expected to rise to P7.7 billion, from the original forecast of P6.98 billion.
“This is on account of a decline in some revenue items as well as higher levels of expenditure over and above what was projected in the budget,” ministry officials stated in emailed responses to BusinessWeek. “For example, projected VAT revenue has been revised downward, mainly reflecting government’s decision to temporarily reduce the VAT rate from 14% to 12% and zero rating of some commodities for a period of six months, as part of government’s measures to alleviate the population against rising living costs. “Fortunately, mineral revenues are coming in ahead of the budget due to the strong performance of diamond exports. “On the other hand, projected expenditure went up on account of the five percent increase in public officers’ salaries and an increase in tertiary students’ allowances.”
Rolling budget deficits over the past six years have drained government savings and forced authorities to raise more debt from the local capital market and international financiers. This year, however, higher domestic inflation and rising interest rates have put pressure on government’s cost of borrowing from the local capital market.
While the yields on government’s longest maturing bond have risen nominally this year, the shorter end of the curve has seen yields on notes such as the three-month Treasury Bill rise from 1.43 percent in April to 3.3 percent in August.
“From a policy perspective, rising interest rates compromise the ability to conduct fiscal policy in a sustainable manner,” officials stated. “This is because higher interest rates increase borrowing costs, particularly on variable rate debt or short-term debt that is regularly rolled over. “While for Botswana the ratio of debt to GDP remains well below the statutory debt limit of 40%, and as such may present not much of a risk, public debt has steadily been rising over the past years. “In this regard, higher borrowing costs from rising interest rates will add to government spending and increase fiscal pressures, at a time when there is an urgent need to replenish the financial buffers.”
The higher borrowing costs are also associated with the expected downturn in the global economy, where supply constraints dating back to the onset of COVID-19 have been exacerbated by the war in Ukraine. Finance ministry officials said the tensions continue to have a negative impact on living standards, particularly through rising food and energy prices.
“These have resulted in a rise in the cost of living, consequently reducing household disposable incomes and constraining consumer spending, both globally and domestically. “For example, growth in the major market of the US fell during the second quarter of 2022, reflecting reduced consumer demand. “This could have negative implications on demand for rough diamonds, with implications for domestic growth. “To this end, the ministry forecasts the domestic economy to grow by 4.2 percent in 2022, slightly below the 4.3 percent announced in the 2022 budget speech.”
While mining, particularly diamonds, is expected to continue supporting economic growth this year, a prolonged war in Ukraine, combined with a sharp slowdown in major economies due to rising interest rates, could result in a negative outlook for the local economy.
“This could lead to current growth projections being further revised downwards, reflecting reduced demand and lower diamond trading activity due to slower growth in trading partner countries,” the officials said. “The lower projections also take into account subdued performance in the tourism sector due to weak real income growth in source markets.”
Finance ministry technocrats are finalising their budget processes ahead of the start of the next fiscal year. A budget strategy paper containing detailed outlook projections and focus areas is due to be published this month for stakeholder input.