Long-delayed fiscal reforms become unavoidable

Those charged with managing the national purse say the space for delaying reforms which include reducing the civil service wage bill, rationalising parastatals and plugging leakages in public finances, has run out. A possible global slowdown, with effects similar to the 2008 shock, is part of several driving forces. Staff Writers, MBONGENI MGUNI & PAULINE DIKUELO report

The US Federal Reserve on Tuesday evening raised interest rates in that country by another 75 basis points, the fifth such decision this year for the world’s single most important central bank. While the increase was expected, the comments by Federal Reserve chairman, Jerome Powell, were ominous, particularly for countries such as Botswana for whom the health of the US economy is directly tied to the performance of the budget.

“No one knows whether this process will lead to a recession or, if so, how significant that recession would be,” Powell said after announcing the rate increase.

He also said: “We have got to get inflation behind us. I wish there were a painless way to do that. There isn’t.”

The remarks are the closest the US central bank has gotten to admitting that the world’s largest economy could sink into a recession, a debate that has raged amongst that country’s economists due to the paradox of negative growth occurring at the same time as rising job figures.

With Europe facing its own economic troubles due to an energy crisis and the war in Ukraine, a recession in the US would, as has happened before, likely precipitate a global crunch, the effects of which local policymakers are very familiar with.

The country’s budget is largely dependent on mining, particularly diamonds, as well as tourism, both of which are in turn reliant on consumers in the United States and Europe. Another key revenue line, receipts from the Southern African Customs Union (SACU) are prone to weakness in response to global economic turmoil, as is the contribution of the local non-mining sector to the fiscus.

For the budget, which has run deficits for the past six years and seen reserves further decimated by COVID-19, the uncertainties in the global economy could not come at a worse time. At the heart of the problem is that ageing diamond mines and fluctuations in SACU receipts mean the country’s revenues have been gradually declining over the years, while expenditure, including inflation, public service wage increases, the pandemic and other priorities, has been rising.

“The persistent deficits are putting us in a tight corner and there’s a need to finance these one way or another,” the ministry’s director of macro-economic policy, Batane Matekane told a Budget Pitso on Tuesday.

“We cannot continue to draw down on our reserves.”

Continued budget deficits erode the country’s reserves, which are designed to withstand transitory shocks while being held in store for future generations. The deficits also force the government into increasingly costlier debt, while weighing on the value of the Pula.

Between the 2013 and 2019 financial years, public debt as a percentage of GDP averaged 21.5%, but this is due to rise to 24.6% this year, while the effective interest rate over that period is estimated to have moved from 3.6% to 4.6%. GDP, or Gross Domestic Product, is a measure of a country’s economic activity.

Without the option to increase revenues in the short term, the only avenue for fiscal stability is the long-delayed and dreaded fiscal reforms which are required to boost domestic revenue mobilisation and also also reduce spending.

The reforms involve rationalising and reducing support to parastatals, cutting funding to local authorities, cost containment including reviewing subsidies, tighter monitoring of development spending and easing the civil service wage bill.

The latter reform is arguably the most sensitive, involving hundreds of thousands of jobs and livelihoods.

Finance Ministry technocrats estimate that the wage bill averaged 36% of GDP in the last decade and while it declined to 14% of GDP in the last fiscal year, this was still well above the average of 10% of GDP for nations of similar economic size.

Essentially, technocrats argue that the costs of running government are squeezing out other important needs such as spending on projects and maintenance of infrastructure, at a time when threats are looming over the economy.

“With the recent increase in salary adjustments effected during the 2022-23 financial year, including anticipated increments over the next two years, this is expected to add upward pressure in the recurrent budget, compromising government’s fiscal strategy of reducing the wage bill,” reads the Budget Strategy Paper released recently.

“The situation could be exacerbated by the prolonged conflict in Ukraine which could lead to relatively high levels of spending due to increased welfare programmes in order to cushion the most vulnerable groups against rising living costs.

“Unless spending is reduced, the country’s long-term fiscal path is unsustainable, and this may be complicated by the uncertain path in mineral revenue, underscoring the need to re-orient fiscal policy in order to ensure fiscal sustainability.”

Government intends to squeeze the wage bill down to the 10% of GDP threshold over the next three years through job cuts and eliminating allowances among others, but is likely to meet stiff resistance from unions, who have already drawn a line in the sand.

In addition, effecting such reforms at a time when most households are still struggling with the pandemic’s impact on their finances and when unemployment remains stubbornly high, will leave a bitter taste in the mouth for many Batswana.

Matekane said there was little choice for the country.

“These things need to be balanced just like in a family where you have certain needs versus the available resources,” he told the Pitso, in response to questions.

“You can only eat up to a certain level, given your resources.

“Even if we propose or dream that we want to go in a certain direction, we have to balance with other factors so that we are all better off at the end of the day.”

The thinking in government is that diverting funds from bulky recurrent spending to projects and maintenance will eventually reap dividends in infrastructure and new industrial enterprise while supporting innovation, creating jobs and sustaining livelihoods.

The macroeconomic policy director separately told Mmegi that the while the reforms were about reducing spending, they were also intended to increase efficiencies in government.

“We are reorganising government to get the right efficiency, kill off duplications of efforts and basically to close the leakages because we have to look at our expenditure management,” he said.

“The economy will be driven by a strong focus on the utilisation of our scarce resources.

“It’s about closer supervision and closer accountability as custodians of the national purse.”

Critics of government’s plans, however, argue that fiscal authorities should refocus their energies on the estimated millions of Pula that go to waste in the public finance sector due to poor oversight, corruption, and gross inefficiencies.

From unreconciled travel imprests, unpaid telephone debts, uncollected arrears to inflated procurement items, bid rigging, delivery of substandard goods and services, to the numerous contractual disputes procuring entities are engaged in, taxpayer funds seep through the fingers of accounting officers each year.

When leakages, corruption and inefficiencies affect big ticket items such as infrastructure projects, the wastage rises to billions of Pula in both direct costs to taxpayers and also the impact on the economy.

By the Finance Ministry’s own estimates as shared in the last budget speech, poor development spending resulted in the country losing out on 37% more infrastructure than could have been achieved in 2017, had efficiencies been in line with the average across the world.

“There are many reasons for this efficiency gap, including poor project appraisal and selection, spending money on projects that generate low returns and not prioritising high return projects, as well as poor project management and implementation,” Finance Minister, Peggy Serame said in February.

Government rarely enforces provisions of the Public Finance Management Act which allows for the surcharge of public officers who cause or permit misuse or loss of public funds.

“It is a question of enforcing the law,” Serame told Mmegi previously.

“The challenge is usually establishing evidence against individual officers to be surcharged, given the nature of the public service.”

As the planning for National Development Plan 12 kicks into high gear, analysts are asking what will be done differently in terms of efficiencies. The plan, more commonly known as NDP12, will govern all development spending between April 2023 and March 2029, but the failure to properly monitor and evaluate previous NDPs has raised criticism that while government is doggedly pursuing painful fiscal reforms, authorities are slow in rectifying their own shortcomings.

“In 2019, government said it was rolling out a national monitoring and evaluation system which was an NDP11 commitment and I haven’t seen an update on that,” Absa Bank economist, Naledi Madala told Tuesday’s Pitso.

The new National Planning Commission, charged with producing the NDPs and other programmes, admits as much.

“For NDP11, the performance monitoring framework was put in place but it came late,” Boitumelo Gofhamodimo, a member of the Commission’s executive management said at a briefing on Wednesday.

“The first review was recently concluded.”

According to Gofhamodimo, NDP11 is the only plan with a prominent chapter on performance monitoring. NDPs have been running since Independence.

The Commission’s interim coordinator, Batho Molomo said government was working on the institutionalisation of a National Monitoring and Evaluation System, which will guide the achievement of both the NDPs and Vision 2036.

The Finance Ministry, meanwhile, says apart from the reforms on the recurrent side, it is kick-starting a new approach to development project management which entails a three-phase appraisal process focussing on confirmation of concept, pre-feasibility study and full feasibility study.

At each stage, only projects that meet the required selection criteria will proceed to the next stage, and hence weaker projects and those that are not ready for implementation will be weeded out. More rigorous and detailed audits of development projects will be done to address waste and corruption.

“What’s going to be done differently (in NDP12) is closer supervision of ministries, departments and agencies on their spending profiles using their past performance to try to negotiate why they should have more or why they should be maintained,” Matekane told Mmegi.

“We will then channel the resources to strategic, clearly focussed beneficial projects.”

With both the NDP12 and the 2023-24 budget in the final stages of development, analysts who have heard the statements of intent before are waiting to see what actual measures government will take to restore fiscal stability.