“The well of diamonds is drying but we continue to consume as if nothing is happening. Are we waiting for the day measures become imposed on us or will we take action now”? The new Finance PS' first public speech was brutally frank and sank a room into silence, writes MBONGENI MGUNI
When Tshokologo Kganetsano speaks, he sounds like the Biblical Noah, exhorting the Israelites to take refuge in the Ark before the flood. The new Finance Ministry Permanent Secretary, however, says he is merely trumpeting a warning. A major threat. And one that he, and his former colleagues at the Bank of Botswana (BoB), have been sounding for years.
The problem doesn't need to be restated and it has been well written about.
Incomes from the country’s main revenue driver have been on a downward slide for many years, while the economy’s developmental aspirations, together with shocks such as COVID-19, have increased expenditure over the same period.
The decline has been starkest in the past two years as the rise of synthetics has added a sinister, negative and permanent-sounding element to the natural up and down demand cycles associated with diamonds.
Associated with this is the economy’s inability over the decades to develop high-output non-diamond sectors fast enough to keep up with the demand for employment, particularly amongst the youth.
At the Bank of Botswana, where he was deputy governor for nearly four years, Kganetsano developed a reputation for speaking bluntly. In December, at a press briefing, he told Mmegi his advice to the new administration on the budget squeeze would be to “immediately cut spending and try to find sources of revenues.”
Last week, in his first public address since being appointed the permanent secretary, Kganetsano was no less blunt.
“We can learn a lot from other countries like Zambia which was thriving with copper and nickel and the big lesson is that in 1975, the market dropped.
“Their mistake was that they continued spending money as if nothing was happening, assuming that the market would improve.
“Do we want to do the same?
“Diamonds have dropped, but do we want to assume they will recover and therefore continue spending the same way?
“For me, the answer is no.”
Kganetsano was addressing a roomful of the heads of local authorities last week, who gathered to provide their input into the upcoming 2025-26 budget. Local authorities are one of the areas government has previously said spending cuts would have to be made in order to restore fiscal stability.
However, local authorities are also the frontline in delivering critical services such as health and education to communities, an important role particularly for those located far away from urban areas. The local authorities at the meeting were eager to push back, justifiably, but Kganetsano’s words stunned the room into silence.
The latest Finance Ministry forecasts indicate that the current financial year could carry a budget deficit greater than P18 billion, which, if realised, would be amongst the steepest on record, higher than even the COVID-19-hit year of 2020-21, which produced a P16.4 billion deficit.
With the recovery in diamond sales this year still uncertain, the new administration is under pressure to restrain spending and find new sources of revenue, while prioritising the little funds available to spur a development pathway that aims at a diversified, transformed economy.
The new administration also has its manifesto and electoral promises to consider, with citizens eager to see how the delivery of certain key pledges will be managed.
Kganetsano, meanwhile, coming from the more politically sanitised central bank, speaks based on the numbers before his technocrats at Finance, as well as the long-term trends and forecasts that have been previously analysed.
“We need to do something (because) the well of diamonds has dried,” he said.
“In a home, the children may be used to eating eggs and bacon, but when the parent is broke, they have to eat motogo.
“Today, when I look around Gaborone and Botswana in general, we are living as if nothing is happening and we continue to consume as if nothing is happening.
“When we talk about national finances, think of them like your personal finances.
“If government said they cannot pay because there’s no money, will you be able to support your family this month or the next and pay your debts?
“Are we waiting for the day measures are imposed on us without us having a choice”?
Part of government’s stated plans, dating back to years before COVID-19, have included reducing the civil service wage bill, cutting grants and subventions to local authorities and parastatals, boosting domestic resource mobilisation efforts, tightening revenue collections, and enhancing public finance management, while also seeking new engines of economic growth.
The central bank has suggested all these reforms repeatedly before and added specifics such as reviewing blanket subsidies and introducing targetted support, as well as broadening the tax base.
In August 2023, weeks before the current diamond slump officially kicked in, the BoB presented its Annual Report to Cabinet again warning that the level of the country’s reserves would not be able to withstand any future COVID-like shock.
Former governor, Moses Pelaelo, told Mmegi at the time that action was needed.
“We have seen the shocks; September 2001 brought us down, the global financial crisis was a major shock.
“In 2015, another commodity drop, then COVID found us.
“If we are found now with our ratios being where they are, we will not have the buffer for the fiscal space or the monetary policy space and the external buffers, to be able to survive.
“We will have serious challenges.
“This challenges all of us, not just government, to say what can we do to reverse this trend that has undermined our economic resilience and introduced structural vulnerability.”
Last week, Kganetsano explained the mechanics of the Government Investment Account (GIA), which houses the country’s reserves. The Government Remittances Account (GRA), which is the government’s main account where all its revenues are deposited and which feeds all other accounts, must maintain a certain balance and when it drops below that figure, withdrawals are made from the GIA.
In good years, the GRA carries a surplus that is taken over to the GIA, but due to the diamond downturn and the fact that other revenue sources are weaker than the precious stones, the GIA has been increasingly feeding the GRA.
This, in turn, has led to lower reserves and, consequently, a reduced ability to handle any fiscal or economic shocks.
As at October, the latest available data, the GIA was at about P2.9 billion, but the figure changes every week mainly due to inflows and outflows from the GRA.
“We survived the global financial crisis (2008 to 2009) because our GIA was at about P20 billion and also because the pandemic was short-lived,” Kganetsano explained.
“We survived COVID because our coffers were fat with the GIA at about P20 billion.
“Today, if we wake up to a similar crisis where in the GIA we have low levels, what will we do?”
Of all the solutions that government is embarking upon, diversification of the economy, with the related diversification of revenue sources for the budget, as well the private sector taking a lead in driving growth, are top of mind for the new administration.
In the short term, difficult decisions around spending are required. Where other administrations had the luxury of postponing reforms, the depletion of the GIA and the uncertainty of a recovery of diamond sales this year, mean the new government has less room to delay.
For Kganetsano, the situation around the fiscus is an emergency.
“We have a bomb and all of us have to work together to defuse it.”