Botswana is sailing into treacherous fiscal waters with sluggish economic growth, declining revenue and a disillusioned workforce. The problems weigh down on choices the Treasury had to make in the P50.1 billion budget that Finance Minister, Kenneth Matambo delivered to parliament on Monday.
His budget speech was delivered against the backdrop of increasing tension between labour unions and government over salary negotiations that led to the suspension of the Public Service Bargaining Council in September 2013 when the government representatives walked away. Matambo’s budget struck a familiar chord on Monday and, as usual, was devoid of major initiatives. The University of Massachusetts educated economist offered neither dramatic saving measures nor austerity cuts, but made it clear that the economic situation is increasingly squeezing the government. But Matambo’s budget was also cunningly enticing, albeit modestly to those who favour commercial and subsistence farming thanks to zero-rating of farming equipment. This was a fitting farewell for a man whose political career appears to be ending in roughly five months.
Consumers also sighed with relief when he threw them a lifeline by zero-rating some basic foodstuff such as milk, rice and vegetables. Of course during an election year, a little populist stunt - such as increasing Value Added Tax threshold for SMMEs with a turnover of about P1 million – goes a long way.
This will leave more SMMEs with income to reinvest and flourish. The minister delivered a projected P1.32 billion budget surplus - up by 43.8 percent when compared to an overall budget surplus of P922 million recorded in the previous financial year - much to the fanfare from some economists and analysts. But one economist believes that Botswana is in a “completely unsustainable fiscal position” and is not obliged to run a zero-deficit budget. Instead, the economist (who could not be named for fear of victimisation as he is employed by the ministry of finance) said fiscal authorities should direct their efforts to providing cushion to the foreign reserves as opposed to announcing surpluses. His argument is not without merit.
Fourteen years into relocation, the big diamond-is-forever dream will eventually come to an end. In 2027 to be precise, huge craters will dot the Jwaneng and Boteti areas while lavish Diamond Trading Company (DTC) head offices along the airport road will become another white elephant. Sounds scary? That has always been an open secret, even Debswana, a 50/50 partnership between Botswana and De Beers has been clutching at straws over this reality. Prospects for bigger kimberlites in the Kgalagadi basin are increasingly elusive and the “big diamond party will come to an end at the end of 2027.” Add to that South Africa’s relentless fight to have a bigger share of the Southern African Customs Union (SACU) cake is increasingly creating tension. Matambo lamented the dragging revenue sharing formula negotiation on Monday.
The SACU revenue sharing formula has been the bell-weather in the history of Southern Africa and has been negotiated several times since the inception of the customs union. However, not everyone has been impressed by the revenue sharing formula and Africa’s biggest economy has signaled at providing a ‘no compromise’ offer in a few weeks' time to SACU members. Botswana gets billions of Pula from transfers from Pretoria. A senior research fellow at Botswana Institute for Development Policy Analysis (Bidpa) observed about the SACU revenue: “There is a serious risk that South Africa will not continue with this unsustainable revenue sharing formula and may propose a take-it-or-leave it offer,” mused Professor Roman Grynberg, a macro-economist at the government policy think tank. Diamonds and SACU revenue contribute two-thirds of total revenue and Matambo is well aware of the consequences of the end of a diamond and SACU dream. He warned legislators on Monday.
“Any shock to any of these sources would have a bearing on the level of available revenues and likely expenditure for the next financial year.” Frankly, South Africa has not been benefiting much (in monetary terms) from the SACU cake and a new knife will hurt Botswana’s purse. SACU receipts for 2013/2014 financial year exceeded P8 billion, representing over half of the Customs and Excise revenue. This is about to change if South Africa brings a new knife to cut the SACU cake.“We are living in a fool’s paradise. The problem is, they are excited about balancing the budget, we are living on borrowed times,” the economist said referring to Matambo’s P1.3 billion surplus that many economists accepted uncritically on Wednesday. However, Secretary of economic Affairs in the Ministry of Finance, Dr. Taufila Nyamadzabo pooh poohed suggestions that Botswana is obsessed with a surplus budget. “We take our surplus into investment account in foreign reserves. It is what we have always been doing. He is not saying anything new,” said Dr. Nyamadzabo.
He explained that government takes its modest surplus and builds on existing foreign reserves, which currently stand at P67.6 billion at the end of December 2013. While DTC relocation to Gaborone in 2013 is expected to breathe a new lease of life into the economy, there are underlying fears that global demand for diamonds will remain subdued due to weaknesses in the appetite for diamonds in the US and China. At 7.7 percent, China is slowing down to 1999 lows and is poised to reduce demand for luxury goods. The US, the largest consumer of diamonds, is also growing – albeit at a slower rate of 2.4 percent. The big question now is how serious are those consequences likely to be? The impact on health will be big as donors withdraw HIV/AIDS funding. Critics go to an extreme of likening the situation to that of Zimbabwe in the 2000s, when the economic system crushed under heavy strain of poor management. “My friend let me be honest with you. We are going to be like Zimbabwe with nothing in our reserves.
Nobody cares, these old men at finance will have long gone. We are not prepared for 2027 when the diamonds will be gone,” the economist said. But Dr. Nyamadzabo remained unfazed: “It is a reasonable argument, but that is what we have been doing all along. We cushion our reserves.” He said government will in future endeavour to reduce under expenditure on its development budget. “On the recurrent side it is OK, but we are working on reducing under expenditure on development budget.” The tourism sector is the third largest contributor to the national kitty but observers say the sector, which contributed P4.7 billion in the third quarter of 2013 up by 12 percent from P4.2 billion recorded in the third quarter of 2012, is not vibrant. “We are currently depending on repeat visitors and those who have heard about us. Botswana Tourism Organisation is not doing enough when it comes to marketing the country,” said a source with inside knowledge on tourism. The sector contributes around 15 percent to the national output and observers say criticism by pressure groups such as Survival International has potential to harm the sector.
But a recent study on coal reserves and other minerals has renewed optimism in relying on alternative sources of revenue in future. Botswana is reported to have over 200 billion tonnes of unearthed coal, which will help drive the economy when diamonds get depleted. If it were not overly reliant on government budget for growth, construction sector would have been the only source of hope for employment creation, according to Matambo. The sector expanded at the fastest pace in recent times despite volatility in other sectors and water restrictions. But there are other underlying challenges. Botswana has a “wrong strategy” for dealing with future generation, according to a University of Botswana social work lecturer, Mooketsi Ntirang. While over three quarters of the population is under the age of 40, Botswana lacks the ability to create real jobs for the youth. “Ipelegeng distorts poverty and unemployment figures. The middle class has always been ignored by government,” he argues and explains that what disturbs him most is government’s reluctance to commit to sustainable job creation alternatives.
“We can not continue doing this.” Matambo received a lone standing ovation from Bonnington North legislator, Robert Masitara when he indicated that Ipelegeng – a temporary job creation programme would continue. There are other pressing issues. Five years after recession and a declining disposable income, civil service, some 140 000 of them cannot take another dose of bad news. So Matambo’s news on Monday that he will not be in a position to make announcement on salary increases was not greeted with the usual indifference. Comprising of eight representatives from government and eight from public sector unions, the Bargaining Council met yesterday to continue its bickering. The civil service is disenchanted and invariably demotivated.
Those closer to the cutthroat negotiations say government team led by Ruth Maphorisa has been given strict orders. On Monday, Matambo also provided a hint that public service salary negotiations will not be easy. “… [Take] into account budgetary constraints imposed by uncertainties in the economic outlook…” Botswana has created her own problems that impede employment creation. Toxic corporate governance and poor project implementation are just a start. The Shanghai Fengyui Project and BMC also provide a glimpse into how corruption and mismanagement hurts the economy.
These shortcomings have ruthlessly laid bare the repeated failure to diversify the economy away from minerals. This has also exposed the country’s waning competitiveness, currently trailing behind new democracies such as Angola and Rwanda. At the end, of his delivery, it was easy to understand why Matambo, had to emphasise the importance of fiscal discipline. “Our two main sources of revenue, namely minerals and SACU revenues are volatile and will ultimately decline as a share of GDP,” he said with a profound sense of despair.