No room for complacency in 2016 Budget

BG REPORTER
Thursday, 28 January 2016
Dumelang Saleshando Dumelang Saleshando

On the 1st February 2016, The Minister of Finance and Development Planning is scheduled to present a budget for the 2016/17 fiscal year.

As with all national budgets, it is determined by among other things revenue projections which in turn are determined by the performance of the international and national economy, both in the current period and in the future. This pre-budget statement provides our views on national issues and further provides our alternatives to these issues as a government in waiting.

The International Scene
The 2016/17 budget speech is made in an economic environment characterised by marginal recovery from the economic crisis period. The World Economy is projected to grow by 3.5 percent compared to 3.2 percent growth for 2015 with the developed economy markets growing at the same rate of 2 percentage points as in 2015.

The emerging markets are projected to grow at 4.9 percent in 2016 compared to 4.4 percent in 2015. China’s growth rate is expected to slow down to 6.4 percent in 2016 compared to 6.9 percent in 2015 which will affect the demand for Botswana’s major export, diamonds.

Internationally there is general optimism with potential growth above trend and labour markets recovering toward full employment levels in developed economies. The emerging market performance is expected to be a mixed bag with India and Mexico expected to improve while China, Brazil and South Africa are expected to slow down slightly (Goldman Sachs Research, 2016 Macroeconomic Outlook; IMF, World Economic Outlook).

This international performance is likely to affect Botswana’s economic environment for its 2016 budget proposals through their effects on its major exports, SACU revenues and how the country should respond to the major economic challenges such as unemployment and poverty.

Botswana’s Economic Performance in 2015 and 2016
Botswana’s estimated GDP for the third quarter of 2015 at constant 2006 prices is P20670.8 million compared to P21472.5 million recorded in the second quarter of 2015.

This is a decline of 3.7 percent. The decline was much worse than the second quarter which recorded a decrease of 0.1 percentage points in real terms. Year on year, GDP increased by 2.7 per cent in the first quarter, 1.7 percent in the second quarter and declined by 3.5 percent in the third quarter.

Most of the decline is attributable to mining, water and electricity and agricultural sectors which decreased by 40.6, 114.9 and 0.7 percent respectively.  The decline in Water and Electricity of 114.9 percent is largely from the decline in Electricity sector which has been declining since the first quarter of 2012.

All the other sectors contributed positively to growth of at least 2.2 percent during the period (Statistics Botswana, 2015, Gross Domestic Product 2015, Third Quarter). If the economic growth were to decline further in the 4th quarter, which is very likely given the electricity and water crisis among other issues, then the Botswana economy will have plunged into a recession (a recession is identified by a fall in GDP in two successive quarters). 

On the other hand inflation has been stable and within the Bank of Botswana objective of 3-6 percent and reaching a low rate of 2.9 percent in November 2015. Throughout the year the inflation was averaging 3 percent. Monetary policy has also been accommodative of the low inflation as the Bank Rate was reduced from 6.5 percent to 6 percent by the 4th quarter.

The low inflation rate provided some stability to the cost of living even though it could pose a risk for the financial sector in terms of availability of loanable funds due to low real interest rates, thus limiting borrowing to both households and investors.

The economy of Botswana however remained inadequately diversified with the mining sector still dominant in terms of both contribution to GDP and exports. Unemployment also remained relatively high at 20 percent as measured in terms of the international definition which excludes the discouraged unemployed labour force.

The unemployment is skewed towards the youth, which is very risky and if not properly attended, has the potential to destabilise the economy. Poverty also remained significantly high at 19.3 percent even though it is declining. Unfortunately the decline may not be sustainable given that most of the poverty reduction is driven by non-sustainable expenditure in social safety nets. A more sustainable way of reducing poverty is through creation of decent jobs, which is not the case in Botswana.

Botswana also has deficits in terms of governance issues, poor quality of education despite education being prioritised in terms of government budget. The country also still has major challenges with HIV/AIDS which is made worse by the increase in non-communicable diseases such as diabetes, cancer and cardiovascular diseases. Some of these are associated with changing lifestyles and eating habits.

A key challenge currently is the low rainfall in the region due to climate change issues which will have negative impacts on food security and general livelihoods of Batswana. These are some of the major areas that will need to be addressed by the budget for 2016/17 within the limited revenue from the various sources.

There is therefore no room for complacency in the coming budget as the minister has to walk the tight rope to achieve a properly prioritised investment programme and ensure sustainability and use of mining revenues for the benefit of future generations.

Response of the BDP Government- Stimulus Package
As was presented by His Excellency the President, Dr Ian Seretse Khama in his State of the Nation address in November 2015, the main response to the challenges of an economy moving towards a recession with high unemployment and poverty levels is an initiative that has been dubbed as Economic Stimulus Programme (ESP). This, as presented, is geared towards being a strategy for employment and growth. The goals of ESP are:
•    Stimulate the economy
•    Diversify the economy through EDD and Special Economic Zones; and
•    Accelerate Job creation.

Targeted Sectors/Areas are:
•    Agricultural production
•    Tourism Development;
•    Economic Diversification Drive
•    Manufacturing
•    Buildings and road construction and maintenance
•    Re-skilling of Youth; and
•    The establishment of Special Economic Zones.

As will be recalled, the ESP was announced by the President in October 2015 with scanty details.  The promise was that the details will be provided during the State of the Nation address in November 2015. 

No details were presented in the address and the President promised that the details will be communicated through a brochure. The brochure has been availed but contains no additional details, giving a clear indication that the ESP is not anchored on a well thought out strategy.

As in the past, the BDP appears to be prepared to throw money at problems with the naive hope that the problems will be exterminated by more money, a plan that has not worked with many other BDP projects.
The budget speech for 2016 is now the only hope for details on ESP, notwithstanding the fact that it is said to be a programme driven by Office of the President and not the Ministry of Finance.

While the objectives may seem noble at face value, the programme does not seem to be strategically well thought out in terms of its design. First one does not get a sense of what this whole thing is all about and how it is going to be implemented.

The targeted areas and sectors are mixed in the same and one does not get a sense of why they could not be separated; that is, separating the programmes from the target sectors. This seems to be an outcome of a rushed product. Secondly, all these are not new and one wonders what lends them to be candidates of the ESP.

One wonders what criterion was used to select these sectors or areas. Again this clearly shows a rushed product which is not properly designed. Thirdly, one does not even get a sense of how many decent and sustainable jobs will be created in the short, medium and long term from ESP. Without getting the proper target and indicating numbers of jobs to be created one does not even get a sense of whether these deserve to be candidate for financing from the meagre national resources.

It is also not clear whether these are projects that are in NDP 10 and were lacking funding from the past budgets or are new ones that are meant to address a particular problem, especially unemployment. Because the programme is so badly designed one is left speculating on the key issues. From a project design perspective, the ESP fails the simple test in terms of how much value they are adding, whether they are sustainable and whether they will have the designed impact. Minister Matambo will have to provide details on the targets set for job creation in the short to medium term.

A second issue with ESP is that the government is silent on how it is going to be financed. Initial indications were that the government is going to draw down money from the reserves to finance ESP. But when the booklet came out it was silent on how the programme will be financed.

Generally projects are financed through three main ways: budget from the current resources; borrowing from domestic and international sources; and through utilising of government savings such as from national reserves. All these financing options have consequences in a world of limited resources.

Financing the projects from current resources means you have to forgo other equally important projects that could have added more value in economic terms. You therefore have to be sure that this is the most productive use of your national resources against other alternative uses. Going the borrowing way also has costs for current and future generations in terms of repayment of the loans.

A normal requirement is that you should borrow to finance productive investment rather than non-productive activities. The use of reserves is also costly in that the country forgoes resources that could earn them more returns, and therefore only makes sense when used to finance productive investment. It is not clear whether government will be financing the ESP through debt, reserves or current resources.

Without an injection of more revenue, the expenditure on ESP will lead to a deficit in the government budget which is not prudent in terms of economic management unless if it is absolutely necessary, and is preceded by a well thought out plan, which is not the case at the moment.

A related matter is whether it is lack of finance that is a problem in Botswana’s economy or lack of implementation of programmes. Every year government departments are unable to spend allocated funds due to one reason or the other which is usually summarised under implementation capacity issues. There is also an increase in corruption and projects are not completed on time with no consequences for such behaviour.

These are structural transformation issues that government needs to deal with instead of coming up with new programmes like the ESP. In any case most of these like EDD have been in existence for some time with very little to show in terms of their achievements in creating jobs.

Another issue is whether the ESP is warranted in the current period. After weathering the storm of the major recession in 2008/2009, does Botswana really need this ESP to deal with the current problems of unemployment, poverty and low economic growth? Our view is that we need an economic transformation programme rather than an ESP to deal with these current problems.

There is need to come up with major economic reforms that will transform Botswana’s economy from its current low productivity status, remove all economic bottlenecks such as work permit issues, resolve the water and energy crisis and address rising corruption. Most of these are beyond the BDP’s ability to implement since they are part of the problem.

We hope the 2016/17 budget will be premised on solid macroeconomic principles and not used to finance non-viable programmes that are not well thought of. The 2016/17 Budget Strategy paper that was presented in September 2015 emphasised, among other things, the need to invest in high impact projects.

This requires the application of rigorous project appraisal analysis to ensure that the country gets value for its money. It is important that ESP be subjected to these acceptable standards. Sadly, government has already decided to entrust coordination to an ad hoc structure with no proven capacity, side-lining the MFDP and usurping its mandate.

We would like to see the allocations reflecting the need to transform Botswana’s economy. While Education should still get the lion’s share of the budget to build the required human capital, it is imperative that the budget within the Ministry of Education and Skills Development should reflect the need to deal with quality issues and skills mismatch.

The most recent results from public schools show that the Ministry is becoming a Black Hole on the national coffers.  There is need for a major restructure to save our education sector. Given that this is the final year for the Vision 2016, we would be expecting the budget to clearly articulate the achievements and challenges of Vision 2016.

This is important given that the current national development plan (NDP 10) which is coming to an end in 2016 was framed specifically to drive the achievement of the Vision 2016 and its thematic working groups were based on the Vision 2016 Pillars. It will be important for the government to account for progress or lack of it as we come to the end of the vision and begin a new journey towards Vision 2036.

We also do not expect the budget to reflect an attitude of business as usual given the current economic challenges. We do not believe ESP is the solution to these current challenges given the reasons we made earlier.
There are a number of other key structural and governance issues that need to be dealt with and answers provided to the public especially from MFDP.

• In proposing the ESP, the government tacitly suggests that the problems of slow economic growth and unemployment are problems of demand. There is a surfeit of evidence, from Business Botswana to the World Bank, that the more fundamental challenge is regulatory failure. The business environment is hostile because of, amongst others, the government’s ambiguity on rule of law, cumbersome business licensing procedures, hostile work and resident procedures, and inefficiency in government and rampant deportations of foreign nationals.

• The Minister of Finance and Development is quiet in the face of an unlawful usurpation of his powers and mandate. Per the Finance and Audit Act, the Minister of Finance is responsible for public resources, not only in terms of allocating them but also in accounting for their use. It appears he has surrendered these responsibilities to the office of the President at the latter’s whims. He surrendered the development of NDP 10 to OP, the ESP and more recently significant water and electricity allocations to OP. He must take his obligations under the Finance and Audit Act seriously to defend them even against presidential overreach.

• What is the Minister doing about the labour relations in the country? It appears the government is hell bent on undermining the bargaining council regardless of the cost to the economy. Should we not be doing more to normalise relations so that we may give greater attention to the more urgent structural issues such as inefficiency, especially at the leadership and managerial level and low productivity in the public service. The Bargaining Council stalemate needs to be resolved urgently so as to regain the confidence of the public sector workers.

In conclusion, we wish to restate some of the issues that were articulated by our 2014 manifesto as follows:
• Botswana needs an economic strategy that is premised on delivering inclusive growth and job creation. There is need for government to prioritise investment in infrastructure such as provision of water and power.  Urgent steps need to be taken to resolve the water and power crisis and fast track investment in solar energy.

• We need to Bring Back the jobs we have exported by aggressively setting up state supported companies to beneficiate our mineral products.
• Botswana needs to formulate a law on Citizen Economic Empowerment to ensure that citizens graduate into the mainstream economy.
• Promote the independence of the DCEC and better equip it to deal with the rising levels of corruption by those who are politically well connected.
• Formulate laws that will frustrate corrupt activities such as Freedom of Information, Disclosure of Assets and Liabilities as well as conflict of interest and insider trading. 

In the absence of these laws, ESP is bound to be a get rich quickly scheme for the BDP agents.

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