New economic instruments not as fruitful as hoped
Chilo Ketlhoafetse | Monday August 8, 2022 06:00
One remains quite wary as to spending habits and prospects of many different endeavours, including business creation and business sustainability.
The Minister of Finance, Peggy Serame, recently announced new policy instruments within her ministry in an effort to provide a cushion to the people of Botswana and their businesses against the rising costs of goods and services.
Do remember that the role of the Ministry of Finance is to formulate, institutionalised, and administer economic development, fiscal, and tax policies for the promotion of sound and efficient management of the financial resources of government.
Bearing this in mind, it would be prudent to refer to the February budget speech by the minister, which already projected a deficit of approximately P7 billion and expected to finance this from the issuance of Treasury bills and bonds as well as external borrowings.
This becomes worrisome since the bulk of government revenues are susceptible to economic shocks (i.e. COVID-19, the Russia-Ukraine war, monkey-pox outbreak) and hence since they are volatile, this may bring concerns over the Government Investment Account whose depletion already worries many leaders. The budget is such a delicate instrument; it’s a pure reflection of other subsets, one of which is the Reset Agenda by the President, the Economic Recovery and Transformation Plan which already has brought up our debt levels with hopes of economic recovery, and finally, the National Development Plan 11 which did not particularly serve much as during its first few years, even the minister acknowledged that it had been "business as usual". The NDP 11’s latter years were trampled on by COVID-19, thereby adding to the current budget deficits.
In any case, let’s bring context to the address by the minister. The Value Added Tax (VAT) Amendment Bill has imposed a zero rating on liquid petroleum gas and cooking oil, while normal VAT has been reduced from 14% to 12%, for a short span of six months.
While many are celebrating, this might prove to be a short-term remedy with terrible effects in the future while we've always known even from wisdom that it's better to suffer now and enjoy tomorrow.
Some economists have likened this to placing a Band-Aid on a wound without antiseptic, only to realise that the wound has worsened later on. Unfortunately, we cannot use textbook economics to manage an economy in an effort to curb inflation and as such, monetary and fiscal policies should be used as instruments with specifically designed mechanisms that address each type of economic pressure to attain a long-term benefit therein.
One typical way we can look at this, for instance, is to reduce the burden of supply pressure on the economy by the provision of policies that promote investment in production sectors, particularly manufacturing as we've had several importation bans and sadly the local market is just not keeping up with current demands.
While the sentiment to promote Batswana-led businesses holds in spirit, it needs to be spearheaded and since the government has already taken the lead on this through SEZA (Special Economic Zones Authority), SPEDU (Selebi-Phikwe Economic Diversification Unit), BITC (Botswana Investment and Trade Centre), NDB (National Development Bank), BDC (Botswana Development Corporation), CEDA (Citizen Entrepreneurial Development Agency), and LEA, (Local Enterprise Authority) there needs to be thorough accountability and intentional measures to ensure a return on investment. Seeing this aspect through will yield long-term returns and will hopefully address other national issues such as unemployment and capacity building.
At the end of April this year, the Monetary Policy Rate was increased by 51 basis points from a 1.14 percent yield on the seven-day Bank of Botswana Certificates to 1.65 percent in an effort to reduce money supply among consumers by making debt facilities more expensive and less attractive to attain. This becomes a bit self-defeating if we’re to promote local investments and also forge foreign partnerships that seek investment opportunities in Botswana that may not be adequately provided for under the aforementioned parastatals.
Coming back to principles, consumers’ cost of living is dependent on the cost of goods and services versus their household budget. The downside that we do not realise in this relationship is that, since the cost of commodities is rising faster than the increase in household income as wages have been stagnant for several years, pressure needs to be released from the opposite end if the government is not willing to foot in a revised wage bill.
The same can be said of other African nations as well as we’ve seen in Zimbabwe with levels that were not fathomable to an extent of even giving up their currencies. Not saying this is likely to happen, but a good economist would know to consider “what could go wrong?”
Policymakers need to appreciate that inflation today is driven primarily by global factors than our local developments and as such calls for the need to realign some aspects of the national budget itself.
For example, the 2022 Budget Speech saw the largest share of the total ministerial recurrent budget being proposed to the Ministry of Health to the tune of P2 billion specifically for COVID-19. It would not make sense anymore to still hold the same notion while many nations have moved on from the pandemic and are focusing efforts on transforming their economies. Botswana should follow suit, especially now that we are easing restrictions and legislations locally. This is an instance of an opportunity cost, where government could create subsidy bills in an effort of controlling the prices of the ordinary baskets (daily household needs) to compensate producers for lost income and ease the burden on the consumer’s pocket. This is one measure that many major economies took in the 2008 global economic recession.
For what it’s worth, this could be proposed for six-month tenure as well.
While some of the major economies are wary today of slow growth amid gloomy and uncertain outlooks, several downside risks have already come to materialise according to the International Monetary Fund (IMF) including this higher-than-expected inflation worsened by China’s slow output for production.
In summary, disinflation measures may prove to be more costly than expected and inflation could remain stubbornly high if labour markets are overly tight and we continue on the levels of debt distress among our local markets since we are just a developing economy. Remedies to manage it while capacitating the local market seem like the more viable options. *Chilo Ketlhoafetse is a chartered accountant and seasoned finance specialist focusing on economic issues affecting the local business environment.
He is also the founder of The Capital Media Botswana. Feedback can be sent to ctketlhoafetse@gmail.com.