The repercussions of an undiversified economy will show their ugly side into the budget in the medium to long term, a situation which will affect all and sundry, economic observers have pointed out. The 2019/2020 budget, presented by finance and economic development minister, Kenneth Matambo this week will - as it has been the case over the years -be funded in majority by revenue from minerals and Southern African Customs Union.
According to the budget speech, total revenue and grants are estimated at P60, 20 billion, a notable increase of P4 billion when compared to the 2018/9 budget which ends this March. Once more, mineral revenue dominates contribution, standing at P21, 09 billion which is 35, 62 percent of the total estimates. Customs and Excise revenue which mainly comes from SACU revenue pool is expected to add P14, 02 billion which is about 23 percent to the total budget. This means the two components contribute two thirds to the national budget.
A seemingly concerned First National Bank of Botswana Chief Economist, Moatlhodi Sebabole told Botswana Guardian on Wednesday afternoon that the current composition in revenue for Botswana ‘leaves the country very exposed’. This is made worse by the fact that SACU and mineral revenues depend on trading conditions which the country does not have control over. This means that the country’s budget is left helpless in the event that market conditions get worse.
Most minerals revenues are received from diamonds exports to major markets such as the United States, China and India. Botswana does not have any control on these markets. Sebabole, who was also part of the FNBB budget review session on Tuesday night said the current trade tensions between US and China who are among the biggest consumers of diamonds, do not bode well for the country’s revenue prospects. This situation once more calls for authorities to up the ante when it comes to economic diversification. For example, De Beers, which sells Botswana’s diamonds to the international markets, experienced its slowest sales in three years last month (January 2019) – indicating possibilities of a turbulent economic climate ahead.
The provisional rough diamond sales for the first sight, also known as sales cycle, came to about $505 million (P5 billion) - a decline of 25 percent from 2018’s first sale of $672 million and a 30 percent drop from 2017’s corresponding period which netted $720 million. Traditionally, the first sight of the year has always been the largest of the year as traders and manufacturers return to the market after working down their inventories over the festive selling period.
This clearly has sent early red flag signals to the sector, which Botswana depends dearly upon for funding of expenditure. Responding to this newspaper, Barclays Bank Botswana economist, Naledi Madala said the economy will be in for a challenge this year due to slower diamond demand. “We highlight that growth may falter in 2019 as global demand for diamonds is likely to be challenged by ongoing trade disputes (the US and China are the largest consumers of diamonds). A De Beers report also forecasts lower diamond production in 2019,” stated Madala. Based on this expected poor show by diamonds, Barclays has downgraded the country’s economic growth to 3, 9 percent, a bit less than the ambitious growth of 4, 2 percent projected by Matambo earlier this week.
For Botswana, the budget cannot be without diamonds or mineral revenues. This has been the case since the early 1970s when diamonds were first mined. By depending on SACU revenues for budget funding, Botswana is stuck in a precarious situation. SACU which is made up of Botswana, Lesotho, Namibia, South Africa and Swaziland depends on trading conditions between the five countries and external markets. South Africa, the trading bloc’s biggest contributor is currently under economic pressure and this will also affect revenue going forward, unless something dramatic happens.
According to the World Bank, South Africa’s economy will grow by 1, 3 percent this year, a downgrade when compared to the ambitious 1, 7 percent forecast made by Finance minister Tito Mboweni in November 2018. Botswana Guardian has been made aware that South Africa, Africa’s second biggest economy by GDP, continues to push for the revision of the SACU revenue sharing formula, which will ultimately affect Botswana and other countries negatively.
“It becomes even more worrisome, with South Africa intent on seeing a revision to the SACU revenue sharing formula, which could fundamentally result in declining government revenues,” stressed Jonathan Paledi, a Portfolio Manager at Inkunzi Investments.
Nonetheless, contributing to the FNBB budget review on Tuesday, Botswana Unified Revenue Services’s Acting Commissioner General, Segolo Lekau stressed that eligible taxpayers should ‘pay (domestic taxes) for the country to move forward’. In addition, he said tax exemptions as determined by government are also another factor that can boost development. BURS, is the government agency which implements tax and related tax laws in the country.
Related to this, Matambo said there is need to mobilise domestic resources for development. “To this end, efforts will continue to be made to expand our tax base through review of tax legislation and regulations, to enable the revenue authority to effectively discharge its mandate,” said Matambo.
All commentators agree that government is under pressure to diversify revenue base in its bid to move way from mining and SACU revenues. Matambo also agrees that dominance by two components to national budget is not ideal. “The country’s dependency on one commodity for exports, and two major sources of revenues, poses a systemic risk, hence, this Government pledges to continue with efforts to diversify the economy in general, and its exports and government revenues, in particular,” stated Matambo in a prepared speech.
One of the strategic initiatives identified to promote economic diversification, according to Matambo is the Economic Diversification Drive (EDD), which was established in April 2010. The EDD is based on the approach of Government using its purchasing power to support local production of goods and services. To this end, P17.2 billion or 53 percent of the total cumulative amount of P32.5 billion worth of goods and services purchased by Government since the inception of the programme was from local manufacturers and service providers. “In an effort to further enhance economic diversification, the Special Economic Zones (SEZ) policy was adopted in 2011.
The main objective of this Policy is to diversify the economic and export base of the country,” added Matambo. Another initiative aimed at promoting economic diversification is the implementation of the cluster development initiative. The Initiative aims at improving business productivity, value chains and competitiveness.