Dicey balancing act for new finance minister
Brian Benza | Friday October 31, 2014 14:09
With Kenneth Matambo mostly likely to bounce back after coming in as a specially elected Member of Parliament, analysts concur that new policies that promote inclusive growth should be the minister’s priority.
This will add to the already pending tasks of tackling the stubbornly ever rising wage bill, buffering financial assets as well as improving the quality of spending on capital projects.
Despite economic indicators that have grown over the last decades Botswana still has serious development challenges which include unemployment, poverty and inequality.
“The new minster will need to undertake a baseline assessment and map the way forward because, undoubtedly, current strategies are failing to promote inclusive growth,” said a public finance specialist from the University of Botswana, professor Emmanuel Botlhale.
Income inequality in Botswana is one of the highest in the world with the Gini Coefficient having increased from 0.573 in 2002/03 to 0.645 in 2009/10. Regarding unemployment on the basis of the population aged 18 years and over, this was estimated at 17.6 percent in 2009/10 and youth and women are overrepresented in the army of the unemployed. Poverty figures do show a decrease in the poverty incidence between 2002/03 and 2009/10 and the percentage of the population that lives below the poverty datum line was 19.3 percent in 2009/10 compared to 30.6 percent in 2002/03 according to the latest Botswana Co-welfare Indicator Survey that was based on the 2009/10 data.
Critics however say the figures mask the true extent of poverty in the country, as the absolute numbers for people below the breadline has increased disproportionately to the population growth.
Pockets of extreme poverty such as persists in areas such as Ngamiland West and Ngwaketse West have persisted over the years, while bodies such as the World Bank have questioned the transmission efficacy of existing poverty programmes.
In addition, other observers say the introduction of the state-funded Ipelegeng programme has masked the true state of unemployment.
While the 2015/16 budget strategy paper has already indicated renewed focus on inclusive growth from next year going into NDP11, the efficiency of public spending in poverty eradication or job creation will likely come into question again. Also, there are lots of leakages in the public spending on social safety nets. Some people benefit from the state beneficence while they can fend for themselves. Why should pensioned retirees get the old age retirement allowance? Do they really need it?” added Botlhale.
According to the World Bank, the results of Botswana’s high spending on its safety net are not commensurate with the amount of spending, and there is substantial room to increase the cost-effectiveness of social protection programmes.
During the 2012/13 fiscal years, social protection spending accounted for about 4.4 percent of GDP, or P5.3 billion.
With improvement needed on the quality of spending on social protection programmes, analysts also say the new minister also has to deal with poor quality of spending on capital projects.
The new finance minister is faced with the Herculean task of enlarging the size of the economy and providing protection for disadvantaged and marginalised groups. Correctly executed, the two objectives are complimentary, with a larger economy creating more jobs and reducing the constituency of the disadvantaged and marginalised. However, if incorrectly executed two would wind up competing whereas government continues as the main economic player, with its resources thinly spread between job creation and creating economic opportunities for the poor.
Incorrectly executed and the two will be competing, where government continues as the main economic player, with its resources thinly spread between creating jobs and lifting those left behind.
According to prominent economist Keith Jefferies, the new minster would need to improve the process through which projects are selected for inclusion in the development budget.
“This must entail proper project appraisal to determine the returns on projects, so as to choose the most productive ones. Also, post-implementation monitoring and evaluation to see if projects yield the returns they promised,’ he said.
From next year, government has made a commitment to increase the amount of diamond revenues that will be directed towards capital projects.
As part of a new fiscal rule, the budget strategy paper states that government will, from the next financial year, increase the percentage of mineral revenues allocated to capital projects in each annual budget from 50 to 60 percent.
The revision of the rule aims to improve sustainability of posterity and government operations beyond the diamond era. This would probably be achieved by reducing the amount of diamond revenues allocated to recurrent expenditure.
“The new minister’s immediate challenge will be placing greater emphasis on managing spending on current and future projects required to achieve development objectives. There are several high priority areas such as channeling resources to address electricity and water challenges that have negatively impacted economic activity,” said chief investment officer at Afena Capital, Alphonse Ndzinge.
Whereas Botswana has had fiscal measures in place, the recent financial crisis necessitated the revision of fiscal rule whose main components are revenues, expenditure and budget balance.
On the expenditure side, government will also contain the share of total spending to GDP under 30 percent in NDP11 and beyond. This revision is likely to limit that amount on money at government disposal.
“The Government’s Medium-Term Expenditure Framework that includes a revised Fiscal Rule should be implemented from 2015/16. This revised framework limits the total Gov’t spending to GDP at 30% from the current 40% and requires 40% of all mineral revenue to be saved for future generations. So with a more restricting fiscal rule, we would have to see a strong sustainable increase in economic output to warrant a marked increase in expenditure in the coming years,” added Ndzinge. The implementation of this fiscal rule is also expected to contribute to the rebuilding of the country’s net financial assets, which dipped into negative balances due to the global financial crisis. The net financial assets recorded a deficit of P3.3 billion in 2010/11, before worsening to deficits of P7.0 billion and P7.2 billion in 2011/12 and 2012/13, respectively.
In the last financial year, however, the net financial assets have shown some improvement, recording a much lower deficit of approximately P0.09 billion.
According to Jefferies, the other significant challenges that would face the new minister from next year going into NDP11 would likely include containing the government wage bill, which is too large to be sustainable, as well as diversifying sources of fiscal revenue to counteract and anticipate long-term declines in mineral revenues and SACU revenues. Statistics depict that the numerous efforts to cut the government wage bill or at least restrain its growth, have failed to bear fruit, with the actual wage bill rising by 57 percent to P14.55 billion in the period 2010-2013.