The International Monetary Fund (IMF) says government should push to balance the budget next year through expenditure and revenue measures “beyond those considered by the authorities”.
Balancing the budget would of necessity mean curtailing expenditure and raising revenues and in a year with declining diamond earnings, analysts believe the latter may point to higher taxes and tighter collections. The advice comes as government faces a P7.8 billion deficit in the current fiscal year, with another budget shortfall of P6.9 billion forecast for the coming year, 2020-2021.
The country has incurred running fiscal deficits since the start of NDP 11 in 2017-2018, which have cumulatively totalled P16.1 billion, excluding the shortfall forecast for the current fiscal year.
The deficits have been funded through drawdowns on reserves and domestic debt, under government’s P15 billion note issuance programme. In a brief release issued on Wednesday at the conclusion of a two-week review headed by IMF Botswana mission chief, Papa N’Diaye, the international funding group said while consolidation was important, Botswana should also take care of how it is achieved.
“The consolidation needs to be carefully calibrated to minimise the impact on growth, competitiveness, and the most vulnerable,” the IMF stated. According to government’s own forecasts, as published in last month’s Budget Strategy Paper, fiscal consolidation is expected in 2022-2023 via a P489.4 million surplus. Fiscal year 2021-2022 should incur another P4.4 billion deficit, bringing total deficits under NDP 11 to P27 billion. The IMF’s advice that fiscal authorities implement “expenditure and revenue measures beyond those currently being considered” will sound ominous in the wake of finance ministry hints that a period of belt-tightening is looming. The ministry has said the development budget would remain depressed for the rest of NDP 11 being capped at P12 billion and below as part of correcting the “unsustainable fiscal trajectory”. Government has also committed to a moratorium on new parastatals, refraining from building new offices, privatising parastatals, rationalising the civil service and freezing recruitment from 2020-2021. Recently, the ministry’s deputy
“We need to see more efficient government spending focusing on urgent needs, as well as higher revenue collection,” he told last month’s budget pitso.
“We also need to see other options of raising revenues including raising taxes, which are the lowest in the region.
“We are not saying we are looking at raising them now, but it’s an option that we may look at when it comes to that.
“Also the fees and levies for public services will have to be looked at, especially for greater cost recovery in services such as health and education.
“We need to be discussing these things to see how far we can go in terms of cost recovery.”
While the IMF did not state what ‘measures’ were required for fiscal consolidation, the team urged government to consider broadening the tax base, enhancing public finance management, reforming parastatals and revamping the debt management framework.
Running deficits are associated with weaker reserves, rising public debt and adverse macro-economic events and trends. In fact, the IMF team recommended that Botswana adjust its fiscal rules to prevent “further erosions in buffers and achieve Botswana’s intergenerational equity objectives”. The recommendation speaks directly to government drawing down on reserves, particularly the Pula Fund, to finance deficits.
Noting that low mineral revenues and “higher-than-expected public service wage increase” had contributed to the wider deficit expected this fiscal year, the IMF said the focus should still be on fiscal consolidation.
“Fiscal consolidation will gradually reduce the deficit and would contribute to a gradual rebuilding of buffers over the medium term,” the IMF stated.
“In advancing consolidation, the composition of the adjustment needs to be carefully calibrated to minimise the impact on competitiveness, growth, and the most vulnerable.”