Matambo's budget: some lessons from the bible

*PROFESSOR ROMAN GRYNBERG | Wednesday May 8, 2013 00:00

The seven fat cows meant harvests would be good for seven years and that this would be followed by seven years of bad harvests. Joseph advised pharaoh that what needed to be done was to preserve a 20% share of the nation's grain in preparation for the bad times. Pharaoh appointed Joseph to oversee what was the world's first documented sovereign wealth fund, where wealth from today is stored for the future. Non-economists joke that in over 3,000 years since Joseph, economists have still not developed more scientific or accurate methods of prediction than Joseph's reading of pharaoh's dream.

The biblical parallel to Botswana's budget and its current situation could not be more pointed. The Minister of Finance, Kenneth Matambo presented a budget this week that few could possibly challenge - the budget was balanced, there was a small surplus and there were no tax increases. What more could one reasonably ask?Botswana remains with a public debt of just 23% of GDP, the envy of many heavily indebted countries in Europe or North America where debt as a percentage of GDP is in many cases well over 100%.  The only tax measure introduced by Matambo was in effect a decrease in taxes with taxes on interest income earned from savings was set at a final rate of 10%. Of course this is cold solace for savers as commercial bank deposit rates are so low in Botswana, well below the rate of inflation and anyone who saves their money in a bank gets poorer, in real terms, every year. It would of course have been better had Governor Linah Mohohlo used her considerable powers of persuasion on the commercial banks to raise deposit rates so that savers have some incentives to save rather than buy cars and more consumer goods.

The government is guided in its budget by certain rules, some of which are  legal rules like the limit of 40% of GDP as the ceiling on the public debt. Others, are essentially customary  rules  where we have managed our expenditure in a reasonable manner and have insisted that our mineral revenues be invested in  areas such as education, health and physical infrastructure. We have over many years had a very sane and sensible policy towards the way in which we have used our mineral resources. It has certainly been the envy of many of our neighbours and for whatever else might be said about the country's microeconomic management, the management of the budget has been very good. But is good, good enough? As I sat outside parliament watching the great turn up in their expensive cars I wondered what Joseph would have made of it all? Matambo said something that really scared me - our biggest source of revenue is no longer diamonds, it is money from the SACU revenues sharing fund at slightly under 31% of revenue.  A further 30% of revenue comes from mining.This is the second year in a row that diamond revenues are no longer our biggest source of income. My cause for fear was that these two main sources of government revenue are completely unsustainable. Diamond revenues will go into serious decline, if current projections are correct, somewhere around 2025 and the South Africans would dearly love to cut their massive transfers to the smaller SACU members including Botswana. The SACU revenue sharing formula is currently being renegotiated. There is simply nothing on the economic horizon in Botswana that will replace the losses of revenue that are expected to occur in the coming years from the decline of Jwaneng made worse by a renegotiation of the SACU revenue sharing formula. Nor will the revenues from potential coal, copper and uranium mines replace this loss of diamond revenue and the loss of SACU transfers. Put in biblical terms Botswana is still living in the 'seven fat years'. This may be a bit hard to swallow given that in 2007, the last 'normal year' before the onset of the international economic crisis we were exporting some 35 million carats of diamonds and we exported only 22 million in 2011. But export prices of our diamond have risen sharply over the period, which has stabilised government revenues.

What would the biblical Joseph have advised Matambo? He would have certainly almost have said that a balanced budget is simply not good enough because it is not providing a sufficient surplus for the seven lean years that Matambo and most honest commentators  know are coming. In theory Matambo could point to Botswana's own 'sovereign wealth fund'- the Government Investment Account (GIA) held at the Bank of Botswana. But the GIA is not a real sovereign wealth fund guided by strict financial rules on what can be put in and taken out. It simply goes up and down depending on whether the government runs a budget surplus or deficit. What will happen when mineral revenues decline or the South Africans decide they have had enough of SACU? We will use the GIA and there will be great pressure on government to use it unsustainably in order to maintain living standards. The fund will provide no real buffer against a possible future Finance Minister determined to drain it. The experience of the global financial crisis of 2007-9 shows how quickly such financial assets can be drawn down once the budget moves into deficit.

In the coming decade, as Botswana's 'seven fat years' come to an end, the country will face truly hard times and there will be great pressure on  leaders to spend unsustainably. The cries to raise salaries, which have been declining in real terms since the onset of the economic crisis in 2008 will become even stronger even though there will be no money left to pay. Then the true meaning of economic discipline will be tested. But the difference is of course that neither Joseph and certainly not pharaoh, were concerned with issues of popular support.

*These are the views of Prof Grynberg and not necessarily those of the Botswana Institute for Development Policy Analysis where he is employed.