Inside the plan to balance the budget in two years
Mbongeni Mguni - Pauline Dikuelo | Thursday July 22, 2021 09:53
The country’s budget, or government’s financial statement of how much it receives and how much it spends, has been running shortfalls since 2017-2018. Essentially this means since that time, the government has been spending more than it receives or makes, a situation that has meant a need for more withdrawals from its reserves housed in the Government Investment Account (GIA), as well as higher borrowings from the local capital market.
Government had originally anticipated that the first three years of National Development Plan 11, from 2017-2018 to April 2019-2020, would carry deficits and the last three would first balance, then carry surpluses, helping restore the fiscal stability necessary to continue the country’s sustainable development aspirations and associated indicators such as high credit ratings.
That has not happened and the deficits have continued to the current financial year, which is forecast to suffer a P6 billion shortfall. Fiscal stability is critical to sustainable growth and development, particularly as the country attempts to lift more citizens out of poverty and transform from its reliance on mining and diamonds in particular. Prolonged deficits, such as have been occurring in recent years, drain government’s reserves, force it into more and costlier borrowing, while making measures such as tax increases inevitable. Ratings agencies, whose assessments determine the interest Botswana will have to pay on any external loans it seeks, have been expressing concern about fiscal stability.
“Fiscal consolidation challenges persist, suggesting that the erosion of the fiscal strength will be long-lasting,” Moody’s said in April, downgrading the country’s credit rating. “The adjustment envisaged under the 2021 budget relies on a significant increase in revenue rather than on reducing expenditure given limited flexibility.”
For a range of reasons, NDP11 carried budget deficits of P22 billion for the first three years and by 2020, COVID-19 hit, creating the biggest ever deficit hole the country has to dig out of. For 2020-2021, thanks largely to COVID-19, the budget incurred a record shortfall of P14.5 billion, wiping away the GIA and in 2021, another deficit is forecast, which the government is covering by expanding its domestic borrowing and approaching external financiers such as the World Bank.
In the midst of this doom and gloom, the new finance minister, Peggy Serame, hopes to return the budget to a balance by 2023-2024. In two years’ time, Mma Serame, as she is popularly known, plans to return the budget to a balance last seen in 2016-2017.
Serame took over the finance ministry in April coming from being Trade Minister. The career civil servant began at the Finance Ministry as an assistant economist in 1994 and her return there earlier this year, marks in many ways the coming full circle of a fast-rising path. But unlike the Biblical prodigal son who went back home to ‘fatted calves’ and celebrations, Serame returns to the finance ministry to find coffers threadbare, plans are thrown into chaos thanks to Covid and a sceptical, even cynical citizenry, hardened by the pandemic restrictions and hardships, intolerant of excuses and exceptions and wary of new ‘measures’, ‘initiatives’, ‘policies’ and others.
Besides inheriting a tough task from her predecessor Thapelo Matsheka, in the fight to return to fiscal stability, Serame faces the even tougher job of actually effecting the zero-based budgeting model he promised Batswana would help alleviate the budget issues in his speech last year. What is zero-based budgeting you rightly ask of this new ‘thing’ never before used in Botswana and only done in precious few countries in Africa? The answer depends, as with all things, on who you talk to. Analysts such as Deloitte say zero-based budgeting can produce ‘radical savings’ but is also costly, complex, time-consuming and can harm organisational culture.
According to Deloitte, zero-based budgeting is a budgeting process that allocates funding based on programme efficiency and necessity rather than budget history. “As opposed to traditional budgeting, no item is automatically included in the next budget.
“In zero-based budgeting, budgeters review every programme and expenditure at the beginning of each budget cycle and must justify each line item in order to receive funding,” the global advisory says, in a research note that also called zero-based budgeting an “extreme method of budgeting”.
Matsheka, in his 2020 budget statement, issued a month before the onset of Covid in Botswana said zero-based budgeting would be introduced in the 2021 budget and focus on eliminating wastage by targeting the ‘other charges’ item of the national budget.
The ‘other charges’ expense item in the budget includes costs such as utilities, maintenance of the government fleet and even legal costs, and in the 2021/22 budget ‘other charges’ were allocated P10.4 billion, nearly a fifth of the recurrent budget.
Mmegi sent Serame 11 wide-ranging questions recently on the broad portfolio she is now handling. In the period waiting for her responses, Mmegi also researched and discovered from its website, that the Finance Ministry, as pledged by Matsheka last year, intends to introduce zero-based budgeting in the upcoming budget, whose process across ministries, departments and agencies has started.
According to the finance ministry’s published budget timelines, ministries, departments and agencies, were to have submitted their zero-budgeting plans by July 9. The entire process is scheduled to end with meetings between the finance ministry, ministries, departments and agencies by the end of this month, before a Cabinet memo on the 2022-2023 budget is considered in August.
Serame is committed to the new budgeting method.
“Some of the strategic initiatives we have embarked on since the beginning of the 2021-2022 financial year include adopting the zero-based budgeting approach as this will ensure that resources are allocated efficiently and appropriately,” she told Mmegi.Zero-based budgeting, therefore, or according to the Finance Ministry, is one of the spearheads of balancing the budget and returning to that much-desired fiscal stability. However, Serame has other plans, many of them continuing measures that will not be met by wild applause by the ordinary Motswana.
Already this year Batswana had to handle several tax increases, in the midst of a pandemic-induced shrinking of disposal income, while inflation, or the price increases of goods and services, has been sharply rising since April. In fact, the Bank of Botswana expects inflation to reach 8.5 percent before the end of the year, a nine-year high. On Thursday, Statistics Botswana reported that June inflation reached 8.2 percent.
Besides rising prices and weightier tax, Batswana have been asked to adjust to a new normal in terms of the support from government, with subsidies being tightened across the board and public service fees being increased. Times indeed are tough and Serame is now the figurehead of the difficult road to the new normal Batswana are being asked to adapt to. “The initiatives we have started in 2021-2022 also include prioritising expenditures and improving the process for the selection of development projects for funding. This is to ensure that government spending is productive and efficient. “We are reviewing subventions to state-owned enterprises, parastatals and related agencies, with a view to promoting efficiency in their spending.
“We are also maintaining sustainable borrowing to finance the budget deficits, ensuring that public debt remains well within the statutory limit of 40% of GDP,” she said. But are there any more tax ‘surprises’ looming for Batswana? Serame explained that government’s historical revenue sources such as diamond earnings and the SACU receipts were not expected to grow significantly going forward and hence, more revenues would need to be raised from domestic sources.
“At the same time, to keep the budget sustainable, government spending will have to be strictly managed to ensure that it remains within the resource envelope,” she said. “A priority will be to improve the efficiency of domestic revenue collection, before raising taxes further. “However, as noted in the 2021 Budget Speech, there is an ongoing initiative to review the fees and charges levied for the provision of public services, which may lead to some cost-recovery adjustments.
“It must be emphasised that it is not sustainable to continue to provide most services at no or minimal cost to the public.” Serame said government would also aim to enhance the efficiency of its subsidy programmes, which have been criticised by organisations such as the IMF as being a ‘blanket approach’ where those who can afford to pay their way end up benefiting unnecessarily at the expense of the programmes’ sustainability.
Nothing is exempt in the belt-tightening. The country’s renowned ‘first borns’ that is, farmers and agriculture, have already been warned that they will no longer be treated as sacred cows (if the reader may excuse the pun). According to the Ministry of Agriculture and Food Security permanent secretary, Letlhogile Madisa, a new agriculture support scheme is coming into place this season.
Each season since 2008, the Integrated Support Programme for Arable Agricultural Development (ISPAAD) has provided inputs to subsistence farmers such as seeds, fertilisers and tillage at a cost of about P500 million. This season, which starts in November and stretches to harvest in April, represents the new normal everyone has to become accustomed to.
“This one will benefit people who are serious about farming and the more you produce the more you benefit,” Madisa told a recent meeting of Parliament’s Public Accounts Committee. “We should encourage and attract more end product based assistance.”
The agriculture ministry has said its assessments have revealed that many times, farmers do not plant that many seeds and return them, or these remain with farmers and sometimes get spoilt. Even fertilisers are returned or improperly used because of the same reason.
Last year the ministry exclusively revealed to Mmegi that the budget for ISPAAD would be cut to P400 million from P684 million, while the revision of the guidelines would be accelerated. The revised guidelines were said to be a stop-gap measure before the full overhaul of ISPAAD this year. For her part, Serame said in order to enhance efficiency in government spending, the ministry was evaluating some social protection programmes, such as the Livestock Management and Infrastructure Development initiative and the poverty eradication programme.
“The evaluation is expected to be completed by the beginning of the next financial year, and government will be advised on the appropriate measures to be implemented,” she said.
With all the belt-tightening and the push to more efficient spending, Serame hopes the recurrent problem of wastage in public finance will become a thing of the past.
Successive Auditor General’s reports have indicated that wastage is not only associated with the big-ticket items but is rampant in the smaller, recurrent spending such as travel allowances, collection of arrears, repayment of telephone bills and others.
One classic example, unveiled by Mmegi last year, involved a technical officer at Central District Council who earned a salary overpayment of P643,000 between 2010 and 2019, thanks to double payments from his former department and his current one. By last year, only P94,960 had been recovered.
“In line with the NDP 11 Mid-Term Review policy, the priority of improving the effectiveness of government spending, the allocation of resources for development projects, will in future be based on a more rigorous process of project appraisal or evaluation, especially for large projects of P250 million and over, proposed for inclusion in NDP 12,” Serame said. In addition, there’s a warning for public servants who contribute to the wastage. “The Public Finance Management Act provides for the surcharge of public officers who cause or permit misuse or loss of public funds,” she told Mmegi. “Therefore, it is a question of enforcing the law.
“The challenge is usually establishing evidence against individual officers to be surcharged, given the nature of the public service.” Public servants also form a major part of the return to fiscal stability, with an ongoing exercise to trim their numbers and reduce the recurrent budget. For 2021-2022, civil service wages and pensions are expected to reach about P27 billion, nearly half of the recurrent budget.
Some of the organisations that have urged government to streamline the civil service are the same ones the government is approaching for external funding. The World Bank, which recently approved a loan to Botswana, said it saw the assistance as an opportunity to open ‘policy dialogue’ with government, a window the organisation has not had before as Botswana had never directly borrowed.
Is a balanced budget possible by 2023-2024, just two years from now and three fiscal years from a record P14.5 billion deficit? Much depends on the resurgent diamond sector and the new mines coming up around the country which will contribute significantly to the fiscus.
Analysts believe, spurred on by mining, the rest of the economy can begin to warm up, improving domestic resource mobilisation. More rapid vaccination against COVID-19 will also allow more sectors such as tourism to open up, enhancing economic activity.
In the push for budget balancing, one area that Serame plans to clamp down on is inflated costs associated with projects in the development budget. These, she said, are making government pay more than it has to in delivering projects for development.
“The ministry is concerned about the high construction costs, which are mainly due to inadequate preparation and failure to thoroughly interrogate the cost of projects by implementing agencies, and the frequency and magnitude of claims from contractors,” she said.
“This state of affairs will not be allowed to continue as it is a drain on resources. “The enhanced project selection process will help to ensure that projects that are finally approved for implementation will have been properly costed.”
The current financial year is seen as pivotal in the plan to return to fiscal stability. Analysts say should the range of tax and levy increases, as well as public finance efficiency measures such as zero-based budgeting, fail to deliver, Serame will have few other options.
“If spending cannot be made more efficient or tightened especially around the recurrent budget, government may have to start looking at selling the family jewels.“Some state-owned assets may have to be put up for sale to help the budget, which is the last resort associated with desperate financial times.
“No one wants the situation to come to that,” a top economic analyst told Mmegi, requesting anonymity as they are a consultant to government. Only time will tell.