Rolling deficits push budget into tricky waters

The golden rule of debt is that you should only borrow what you can afford to pay. One of the country’s financial regulators requires lending institutions to warn clients that “borrowing more than you can afford to repay could lead to severe financial difficulties”.

Vice President and Finance Minister, Ndaba Gaolathe’s inaugural budget speech indicated a forecast deficit this financial year of P24.7 billion and another projected shortfall of P22.1 billion for the 2025-26 financial year.

Both deficits are far beyond the four percent of GDP fiscal rule and limit that government set itself for budget deficits. The figures also represent significantly higher revisions from previous estimates. The original deficit for the 2024-25 financial year was adjusted from the original P8.7 billion forecast last February, to P18.7 billion in December and eventually the P24.7 billion revealed a few weeks ago by Gaolathe.

The prolonged downturn in diamond sales is the primary reason behind the challenges, manifesting across the economy in tightened government spending, rising debt, bank liquidity challenges and postponements of some projects.

Diamonds are however also the reason the revenue projections given recently in the budget speech are precarious, as their recovery this year rests on numerous variables, most of them out of the control of government and far removed from the country’s borders.

Essentially, the deficits projected by Gaolathe, deep as they are, could widen as the revenues they are based upon may not be realised; the only control government would be able to exert is to rein in its spending to avoid falling down a fiscal cliff.

While for 2025-26, government expects mineral revenues – largely diamonds – of about P15.8 billion, up from P8.7 billion in the 2024-25 financial year, De Beers plans to cut production this year as a way of clearing its own inventory and resuscitating demand further down the pipeline.

With government’s own reserves depleted and in need of recovery, the budget deficits will be funded largely by domestic borrowing and external loans – a situation that involves interest rate risks which would raise costs for government and consequently taxpayers.

Voices are growing that government needs to be careful – “borrowing more than you can afford to repay could lead to severe financial difficulties”.

Nlume Modise, senior portfolio manager at 5^th Quarter Investment Managers, says having incurred deficits for seven years, the budget needs to move towards stability and sustainability.

“A deficit budget means growing debt which is not sustainable and right now we are at 25% of GDP with a bill of about P70 billion,” he said at a recent Business Botswana budget review.

“The rule that we have is that debt should not be more than 40% of GDP and there is headway, but we don’t want to do that for reasons that include cost of debt and the sovereign ratings.

“You have to increase your revenue or decrease your spending, but the problem in our budgets has been the spending side which has grown at twice the rate of revenues over the past ten years.

“That’s a lesson we should learn that we should do more with less because such tendencies are not sustainable”.

Prominent economist, Keith Jefferis, speaking at the First National Bank Botswana (FNBB) post-budget review, noted that there’s a threat that the nature of the downturn in diamonds and consequently, the economic slide, is being misdiagnosed.

For Jefferis, the current contraction in the economy, while shallower than the four seen in the past 15 years, may not enjoy the quick recovery others witnessed.

“You could say we had cyclical recessions in the past, but this time we are seeing a structural change.

“A cyclical one, you use your accumulated savings and ride the downturn, but if it’s structural, you have to adjust immediately.

“The worst mistake to make is to treat a structural slump as a cyclical slump and burn through your savings and reserves,” he said.

Diamond industry analysts have noted that while the natural diamond industry traditionally fluctuates through periods of high and low demand, the explosion in synthetic diamonds has taken a permanent bite out of the naturals.

What was initially read as a slump in 2023 could be settling into structurally lower demand, a situation government and producers such as De Beers are tackling through renewed marketing and retail engagement campaigns.

FNBB CEO, Steven Bogatsu, said there was a need to tightly monitor key fiscal and economic indicators, which include the rolling deficits, fiscal rules and others.

He said over the years, the country had seen an “unprecedented slide” towards the breach of some fiscal rules and the new administration had its job cut out for it to address structural issues in economic management, to deliver growth.

“The new administration inherits an economic environment marred by several challenges, especially around the fiscus, caused mainly by slowing diamond revenue, huge recurrent spending because of a large and continually bulging civil service as well as the social safety nets introduced in the past, leaving little for the development budget which is investments.

“There have been challenges in delivering on the development budget mainly due to mismanagement and poor project implementation.

“We have also had unfavourable policies making us extremely uncompetitive, fragmented state-owned entities with clashing mandates leading to inefficiencies and a banking sector plunged into liquidity problems, impacting the ability for us to support business growth.”

Bogatsu added that the new administration was inheriting challenges such as lack of economic diversification and youth unemployment.

As with diamonds, where they are both a cause and cure of deficits and broader economic performance, the efficiency or inefficiency of public finance management is both the poison and antidote.

Gaolathe, in his budget speech, succinctly leaned into this policy posture, repeating commitments of political will towards optimising the performance of public finance – a principle that has been known over the years as “squeezing more from each Pula spent”.

In fact, the new Finance Minister appeared to lay a bet that the billions more in spending he is proposing and the resultant widening of deficits, will pay out via enhanced government efficiencies. Essentially, the higher spending will achieve its goal of economic stabilisation and growth through a commitment to enhanced public finance efficiencies.

Economic stabilisation and growth is how to afford to repay what you are borrowing in order to avoid “severe financial difficulties”, Gaolathe appeared to say.

Modise believes there is merit to the approach.

“If you make efficiency gains that are material, even with the increases in taxes and spending, it could be effective for the GDP,” he said.

“The efficiency gains can bring us to the Promised Land.

“This has always been our challenge in the economy for a long time; the ‘what’ has always been known and perhaps a new energy can help us put that together.

“Perhaps someone who has not been involved in putting together the systems that are in place for government may be better placed to deliver because they are not married to those processes.

“It may be easier than someone who has been involved in developing that infrastructure.”

The reforms required to address trim back the deficits as well as restore broader economic stability with an eye to growth, are well documented. They include biting the bullet on key expense items such as the civil service, parastatals and others as well as addressing “ease of doing business” bottlenecks, including legislative constraints to the private sector.

One area being highlighted with increasing frequency due to the widening deficits, is the urgency of initiating more Public Private Partnerships (PPPs) which would allow the private sector and its commerce-driven efficiencies and capital to lead the country’s infrastructural aspirations.

Despite government having launched the PPP policy in 2000 and establishing a dedicated unit in 2010, only two projects have thus far been developed involving direct funding from the private sector, largely because healthy government savings have papered over delays in implementing the policy.

PPPs involve a contractual arrangement between a governmental institution and the private sector, where the private sector party provides public infrastructure and/or infrastructure-related services.

Jefferis recalls that during his three-year term at the Finance Ministry a few years ago, those projects considered for PPP were “bottom of the barrel” ones.

“You have to have the right projects, not the bottom of the barrel,” he said.

“When I was at the Ministry, they put in the worst ones, but they have to put in the right ones.

“Public investment must be structured so that pension funds can be accommodated.

“There’s a lot of money sitting in pension funds, but projects have to be structured for them.”

All eyes are on the upcoming Public Private Partnership Bill which government believes will give more “comfort” to investors, as it opens up public infrastructure funding to private capital.

“The biggest problem has generally been around the ecosystem and the absence of collaboration to understand what investors need and then taking steps to remove these bottlenecks,” Modise said.

“Some of these things you have to be thick-skinned and approach them from a point of view of solutions.

“With the PPP Bill, hopefully it will address some of those bottlenecks and many will be around systems and structures.

“However, it must also look at oversight and governance which are required for investors.

“There are low-hanging fruits such as those not associated with security or those which are not strategic for government to own.”

PPPs, by reducing government’s direct financial commitment, together with the potential of raising funds through strategic disposals, could ease the deficits currently persisting.

Together with other fiscal and structural economic reforms, these measures could deliver better outcomes for government and Batswana in the medium to long term, analysts say.

At the moment, however, according to government’s own figures, the rolling deficits are expected to persist until the 2027-28 financial year.

Those who have monitored public spending and the trajectory of the economy over the years, say the central challenge is implementation, or putting the right action to the right words.

“There’s a body of knowledge about what we need to do to move the economy forward and the reports have been there from as far back as 1988 – the challenge has been implementation,” said Business Botswana CEO, Norman Moleele recently.

According to Gaolathe, the new government has the political will and commitment to make the necessary changes.