Matambo Faces Mammoth Budget Quandary

Staff Writer | Monday January 25, 2010 00:00

 

After a year characterised by a drop in government revenues, strong government spending and an estimated deficit of P14 billion, Matambo's debut budget presentation is a task he is unlikely to be relishing. While experts believe actual government revenues for the 2009/10 financial year will be higher than the projected P24.4 billion, budgeted expenditure is also likely to be higher than the projected P37.8 billion. This is largely due to government's decision to 'spend its way out of the recession,' or rather maintain spending levels in order to support economic activity.

The minister is expected to announce the budget in early February.
Matambo is also likely keeping a wary eye on foreign reserves, which took a knock last year as government dipped into them to finance the deficit. He will also be keeping an ear to the ground in terms of mineral prices, which traditionally are the second largest source of government revenue.

However, most analysts agree that government will and must run another substantial deficit this year. The analysts said Matambo would struggle to keep the deficit within the 10 percent of Gross Domestic Product (GDP) rule set by government. He will also have to confine government spending to within 40 percent of GDP according to another fiscal rule set by parliament in 2005.

On one hand, Matambo has to maintain the fiscal stimulus in order to provide a boost to economic demand and growth and on the other he needs to maintain sound sustainable public finances by keeping spending and deficits at manageable levels and avoiding the accumulation of unsustainable debt.

This last view is held by leading economist and BIFM Investment Committee Chair, Dr Keith Jefferis. The former central bank Deputy Governor believes the forthcoming budget will present a stern test to government, particularly in the area of expenditure.

'Total revenues are likely to be similar to those in 2009/10, with a fall in SACU revenues offsetting any improvements in revenues from other sources. Meeting the 2009 Budget commitment to keep a deficit averaging 10 percent of GDP over two years, would therefore require very large cuts in spending.

'We consider this to be unlikely. However, it will be important for government to show that it is acting so as to achieve medium-term fiscal sustainability, and some spending cuts will be needed,' he said.

Jefferis said the budget deficit in the 2010/11 budget needed to be reduced for the sake of fiscal sustainability. He cautioned that the present trends in public spending would be impossible to maintain going forward as the country's mineral and SACU revenues are expected to fall.

'Achieving a sustainable fiscal outlook will require cuts in recurrent spending, a zero (or very low) pay rise for civil servants, possible tax increases and the deferral or cancellation of development projects.

'Borrowing now, or running down savings, to maintain spending in the short-term makes the longer term adjustment to lower spending levels much more difficult to achieve. The challenge facing the government is not just getting through the current crisis, but putting government expenditure onto a path that is sustainable in the medium to long term,' he said.Jefferis also cautioned that the system of National Development Plans was outdated and the planning process needed to be replaced with international best practice and reform.

Chief Investment Officer at FinCraft Investment Management, Gao Seleka-Sekonopo, said it was likely government would work to enforce very tight cost/expenditure controls across all ministries, particularly those expenses of a recurrent nature. She said this was in light of the dip in government revenues and the fiscal rule limiting government spending to 40 percent of GDP. 'So far as the development budget goes, we anticipate a major focus on prioritising key projects that offer better enhancement of value to the nature, with non-prioritised development projects deferred to the future when the global and local economy swings back on an uptick.'That is just the only way to ride the low economic wave - development projects will have to compete for the available resources. I believe we are going to hear a lot about cost control and operating efficiencies in the upcoming budget,' she said.

Centre for Research, Enterprise and Project Management (CREPM) economist, Oscar Chiwira, said the deficit should be directed at the development budget and specifically at import substitution, economic diversification and human development. He said the 2010/11 Budget should fund an Import Substitution Industrialisation Strategy.

'The benefits of an Import Substitution Strategy and a focus on economic diversification and human development, will be felt in the medium to long term and are critical for the economy. 'Instead of worrying about carrying a deficit, more concern should be paid to what this deficit is being directed to,' said Chiwira. Botswana's GDP was estimated at P80.1 billion in 2007/08, but has subsequently declined due to the effects of the global recession on the domestic economy.