Projected hard times call for reduced public spending-WB

Brian Benza
Staff Writer | Wednesday August 25, 2010 00:00

 

At a workshop held to discuss a Botswana Public Expenditure Review Report in Gaborone yesterday, it emerged that with a less accommodating economic outlook on the horizon due to dwindling diamond and Sacu revenues, which constitute the government's two main sources of income, the country is heading towards fiscal unsustainability if corrective measures are not taken.

The report - whose key findings were that the government should significantly cut public spending and simultaneously look for alternative sources of income - was drafted by the World Bank under the auspices of the Ministry of Finance.

The World Bank says because the diamond revenue-propelled period of rapid growth of the 1970s and '80s has been over for some time now, a period of declining revenues is ahead.  Said Ruth Kagia, the World Bank's Regional Director for BNLS and South Africa:

'It might be a difficult task to convince people that there is a problem with the budgeting process and diamonds revenues at this stage because this is more of a medium- to-long-term problem.

A lot of people have this 'if it's not broken, why fix it?' fallacy.  But the truth is the country needs to improve its quality of spending through striking a balance between effective and efficient resource allocation.'

Although diamond production in Botswana is expected to continue at fairly high levels for another decade, revenues accruing to the government are projected to stop growing beginning 2016.

As a corrective measure, the World Bank is proposing a two-pronged approach, which will result in reduced expenditure on one hand and improved revenues on the other.

While NDP10 calls for a substantial reduction of the Public Expenditure-to-GDP ratio from 46 percent in 2009/10 to about 35 percent over the plan period, World Bank projections indicate that this may not be sufficient to bring the fiscal accounts to a sustainable long-term path as revenues are likely to fall to as low as 25 percent of GDP in the medium- to-long-term.

The World Bank says while revenue enhancement measures are needed, it is not possible to conceive of another source of revenue as generous as diamonds. 

'The high profitability of diamonds simply cannot be matched by other sources of revenue,' it said, 'but Botswana can improve fiscal prospects significantly by expanding domestic revenue sources through higher taxes. Speaking at the same workshop, the Permanent Secretary in the Ministry of Finance, Solomon Sekwakwa, said although Botswana is where it is now because of its prudent planning and budgeting systems, time is ripe for a change of direction because fundamentals are also changing.

'The Ministry should not be too rigid,' he said. 'We have to be open-minded so that we consider what is beneficial to us in the long-term.'