Time to stitch up a tattered fiscus
Lewanika Timothy | Monday July 22, 2024 06:00
A recent country report from the International Monetary Fund (IMF) forecasts that Botswana’s economy will face a growth deceleration this year, growing by only one percent compared to a previous estimate of 3.6 percent. This is mainly due to declining mineral revenues, particularly in the diamond sector.
“Botswana’s economic growth decelerated from 5.5 percent in 2022 to 2.7 percent in 2023, below the long-run potential growth of four percent,” said an IMF team in a report after a visit to the country.
“A sharp decline in diamond trading and mining activities was the main contributor to the slowdown, as global demand for rough diamonds decreased.
‘Despite the weak diamond market, the external position improved last year because of strong customs union revenues.”
In the early months of the year, the economy appeared to have shaken off the dust of the COVID-19 pandemic, with inflation falling into the three to six percent objective range of the central bank. The financial sector was proving to be robust, national reserves were strengthening, and it appeared there were all the right reasons to launch an expansionary budget to put the economy back on track to achieve its long-paused high-income status dreams.
With these facts at hand, the Minister of Finance, Peggy Serame, announced record spending of P102 billion in development and recurrent spending into the economy for this financial year, a financial boost that was expected to bring the economy back to life. The plan was to pump money into infrastructural development, create jobs and have as many people participating in the economy as possible.
“To this end, a substantial amount of the budget has been allocated to infrastructure development given its role in promoting economic growth and facilitating participation of the private sector,” she said in her February budget speech.
Even by that time, an immediate risk was that the impact of the audacious spending would most likely be felt in subsequent years, as projects and investments start bearing fruit. The creation of initiatives and funds for small to medium enterprises will definitely bear no fruit this year, thus threatening the sustainability of the budget for this year.
The IMF, meanwhile, expects the fiscal position to worsen to a wider than projected-deficit. Government will either be forced to withdraw from its buffers or try to raise more debt to cover the lower revenues.
“The fiscal deficit is projected to widen further to six percent of GDP in FY2024, reflecting a further decline in mineral revenues and higher capital expenditure.
“Medium-term consolidation, in line with the authorities’ plan to achieve a fiscal surplus by FY2026, is critical to stop the depletion of financial buffers, build resilience against shocks, and preserve fiscal sustainability,” IMF officials revealed.
Stitching a shrinking fiscus forces the government to consolidate its fiscal position. Fiscal consolidation refers to policies undertaken by governments to reduce their deficits and accumulation of debt stock.
Fiscal consolidation is a complex undertaking and often entails difficult policy choices to achieve policy objectives. The fiscal consolidation debate is not new and has initially focused on the short-term output impact. Over time, however, it has evolved to include more specific aspects of consolidation design.
In this case, policymakers have to decide how much they need to reduce the fiscal deficit, whether the deficit reduction should come from raising additional revenue or cutting expenditure or from both. They also need to decide when the best time is to start the consolidation process, how long and how fast the consolidation effort should be, whether to frontload or backload the policy measures, as well as what role, if any, to give to fiscal institutional reform. In making these choices, policymakers will also need to consider political and social feasibility as well as ramifications in addition to their economic impact.
The need for fiscal consolidation has been further raised by researchers at economic consultancy firm, Econsult Botswana, who point out that government’s continuing tendency to spend more than it has, and perennially run deficits, is draining its savings and putting the country on an unsustainable economic trajectory.
Generally, Botswana is known for its prudent fiscal policy, with excess government earnings being saved or invested in offshore accounts to shield the mineral-dependent economy from rainy days. Despite this track record, the government has, in recent years, been withdrawing significantly from these savings to finance national budget gaps.
The situation has decreased the economy’s resilience in the face of future shocks. In a first quarter 2024 economic review, Econsult economists, Keith Jefferis and Sethunya Kegakgametse, said the country was headed down a path of fiscal unsustainability, adding that the continued tendency to finance deficits through savings may harm the economy in the long run. “One of the major concerns in recent years has been long-term budget sustainability,” the researchers stated. “This follows the switch from structural budget surpluses in the period up to the late 2000s to structural deficits since that time. “This is in turn because fiscal expenditure has not been reduced in line with declining revenues, making the current fiscal trajectory unsustainable.” The researchers further added that current levels of national fund accounts are not particularly worrying, as public debt is still relatively low, but it is the overspending trend that is unsustainable. This is particularly so because the impact has been disguised by the fact that deficits have mainly been financed by running down savings rather than borrowing. “But if cumulative deficits had been financed by borrowing, this would have been equivalent to a rise in public debt from 10% to 70% of GDP, which would have set alarm bells ringing,” the researchers stated.
Financial consolidation in the case of Botswana will mean re-thinking current goals and objectives, re-streamlining spending levels, and redirecting the economy towards a sustainable spending path.