Finance Minister Peggy Serame presented transformative which some wonder if it’s a break from Botswana’s old style of mineral and government-led growth model. However, a respected economist advised that in dealing with economic headwinds, Botswana shouldn’t be dealing with the budget. As the nation charts its economic course, concerns arise regarding the long-term viability of its fiscal strategies amidst a changing global landscape.
Botswana’s Finance Minister Peggy conveyed her 2024/2025 budget speech by underscoring the pivotal areas of emphasis: agriculture, youth empowerment, the burgeoning creative sector, bolstering the informal economy, critical infrastructure enhancements, seamless digital integration, fostering research and innovation, strategic asset investments, and fortifying resilience against the specter of climate change.
But what distinguished this budgetary roadmap, as Minister Serame conveyed, was its unmistakable character as a stimulus. She announced an overall budget increase of 23.5% for a year ripe with the fervor of impending elections. Economists nodded knowingly at this move, recognising its intrinsic alignment with the pulse of the political calendar. Economists didn’t find this surprising given that it’s an election year. Surprise would have been found not in the stimulus designation, but rather in its absence, especially given the introduction of the political funding.
Spending by category
A deep dive into spending trends by major category shows that the budget is still “relatively undiversified”, Gomolemo Basele, the Economist at the First National Bank Botswana (FNBB) observed during the bank’s budget review seminar. Personal emoluments take up a huge chunk of government spending.
“Given that we saw salaries also being increased by a further 5%, we expect this to continue to take a significant chunk of government spending coupled with the increased contributions to pensions as a result of higher salaries,” Basele said, cautioning of a “double whammy effect in terms of that salary increase on government spending”.
A significant development budget of P17.0 billion has been proposed for 2024/2025. But with a 42% increase this year after a similar amount last year, Dr. Keith Jefferis expressed concern about trying to double development spending. Jefferis, a respected economist and Managing Director (MD) was also speaking at the FNBB Budget Review.
He witnessed this before in 1990. The result was a lot of waste and a lot of inflation. Development spending on projects is projected to double in two years.
A big pie goes to land management, water sanitation and services, which then will be allocated towards ensuring that various water projects are delivered on time as well as other sanitation projects.
While infrastructure will benefit from this stimuli Jefferis argued that “a lot of expensive infrastructure is social infrastructure, not economic infrastructure: sewage, water in major villages.
“These are social and will not generate economic returns.”
Grants and subventions, mostly to state-owned enterprises and local authorities are to be broadly contained or slightly reduced. Interest on public debt is small, about 2% of the total. Many other countries’ public debt interest can be the largest single expenditure in countries with debt crisis.
“In Botswana, it is small but has been rising given that we have been borrowing more,” Jefferis said.
Spending by Function
Government spending is divided by the IMF classification of functions which have nine categories. These are general public services, Defence, Education, Health, Food and Social Welfare, Housing, urban, and regional development, Community and social Services, Economic services and Unallocated.
The overall level of increase for these in the budget between this year and last year is 15%. The sectors with above-average increases in spending are general administration, food and social welfare, housing, urban and regional development, community and social services, general economic administration, roads, promotion of commerce, industry and local authorities. They all got larger than the 15%, which is the average figure across all sectors, according to Jefferis. “In some sense those are priorities.”
The cost of running a government
General public services include general administration and public order and safety (the prisons, police). General administration is all the things that the government does that are not functional like health or education. The category has quite a big increase, according to Jefferis’ analysis.
A large part of that is the strategic investments that Minister Serame mentioned during the speech. One is the purchase of shares in HB Antwerp at P890 million, another is the purchase of land from Tati Company & SAM Estates at P1 billion and a medical project (CTL AMEDICA) funded partnership at P750 million.
While a part of the increase toward public services is due to strategic investments, Jefferis observed that this increase is a longer-term trend, meaning more and more is being taken up with the cost of running the government.
“That may or may not be a good thing. If the government was efficient, we shouldn’t really see it taking out more and more money. It should be a concern that more and more money is going to cost of running government.”
Defense has a larger-than-average increase and is the second largest allocation, amounting to P10.65 billion, an increase of 8.4% over the current year’s approved budget of P9.84 billion. This also aligned with Vision 2036.
Are we giving attention to education?
Education has a small increase of P500 million to P15.54 billion. Education has traditionally been the largest single share of spending. It received 20%-25% of the budget (now only 18%), which has been a reflection of prioritisation.
Jefferis’s slides showed that education is no longer the largest share but the cost of running government with 24.2% of the total in 2024/25. “That’s something to bear in mind. Are we actually giving attention to education?”
Health has had a decrease to P9.46 billion which is a decline of P850 million. Health has lost out, with a decline in both relative and absolute terms (down to 9.9% of the budget, from a recent peak of 15.7%)
This reduction in health is a winding down of the earlier expenditure on COVID-related matters.
Agriculture development has also come up quite strong. Various programmes have been discarded such as ESPAAD in favor of Temo Thuo and Thua Letlotlo to try and enhance Botswana’s agricultural output. Agriculture contributes 2% on average to GDP. Basele believes this is intended to push “us past and also help absorb a portion of the unemployed population”.
But he cautions this will face headwinds over the medium term given the current drought status the region is currently under.
“In our view, we expect that the current weather sentiments around El Nino will be mild and will persist over a 12-month period. So we expect to see earnest progress in terms of agriculture development, over the medium term.”
Tourism Development has also been highlighted as a key priority area with various tourism sites being highlighted for Batswana participation. Coupled with the intention from a government standpoint to push forward the Meetings, Incentives, Conferences and Exhibitions (MICE) strategy of trying to attract more meetings, incentives, conferences, as well as exhibitions to Botswana’s borders, Basele said this will have spillover effects across other industries, especially within the services sector.
Services have been increasing their contribution to overall growth. During her speech. Minister Serame said the non-mining sector is estimated to grow, on average by 5.7%, and this has the potential to generate new jobs across both the formal and informal sectors during this period.
But in terms of economic activity, Botswana remains relatively undiversified, relying heavily on mining and quarry activity, a big source of revenue for the country.
Revenue
There’s a big increase projected in revenues. The government projects total revenues and grants for the 2024/2025 financial year at P93.58 billion, with the largest contributor being customs and excise receipts which is estimated at P26.46 billion due to the increase in Botswana’s share of the Southern African Customs Union (SACU) revenues.
Basele said the two years following COVID-19 saw a compression in terms of SACU receipts levels as the country had to repay some of these funds into the pool. Over the medium term, he expects these to be more stable, with downside risks being presented by South Africa as well as its potential growth prospects.
“But we do not expect them to reach levels that we saw during the crisis that the pandemic created.”
The second largest contributor is mineral revenue which is estimated at P25.05 billion or 26.77 percent of total revenues, a reduction of 5.3%. But Jefferis is skeptical against the background of the current diamond trade.
Diamonds account for the highest export revenue for Botswana.
“If we only had a 5% reduction, that would be a good outcome.”
Rapaport projects a 20% decline in Botswana’s diamond revenue this year.
At FNBB, Basele expects mineral revenue to remain relatively stable over the medium term outside of the challenges that “we’re currently experiencing in terms of low diamonds sales as well as diamond prices”.
In the bank’s view, “diamond demand should pick up over the second half of the year, in line with global growth prospects”.
Over the second half of the year, FNBB expects that global central banks should cut policy rates. With inflation also coming down, this means that consumers in some of Botswana’s key export markets will have the capacity to purchase luxury items such as diamonds and jewellery.
There are also huge increases projected for domestic revenue. Non-mineral income tax and VAT are estimated at P22.0 billion or 23.5% and P15.24 billion or 16.28% of total revenues and grants, respectively.
This is quite ambitious, Jefferis argued, given that Botswana has no new taxes or tax increases. Jonathan Hore, a tax expert agrees that the “amounts are high, but they should be achievable”. “BURS has yet utilised all avenues of collecting taxes. The potential is huge all they need is more skilled personnel,” he said to this publication.
Jefferis still cautioned about some sustainability risks; a huge increase in spending when the economic outlook is highly uncertain. He wants to see faster fiscal consolidation. Sustainability has to compare spending with revenues.
Fiscal Balance Trends
There has been a long-term downward trend in both revenue and spending as a share of GDP for Botswana. A faster decline trend in revenues resulted in the emergence of structural budget deficits. In the last few years budget balance has been negative.
Jefferis explained that this is because the revenue line has been trending down faster than expenditure. “There has been a problem with containing expenditure at a level consistent with revenues,” Jefferis said.
There is a modest deficit anticipated for 2023/24 and 2024/25. What is interesting is that both revenue and spending are projected to increase. Its long-term trends and Jefferis questions whether the budgeted revenue and spending figures are going to be achievable this year. “What we have seen with the continuation of planned deficits is that the achievement of fiscal sustainability which one might define as a balanced budget, has been pushed further into the future.”
Breaking the mold of diamonds
Although Serame’s budget is meant to be transformative, Jefferis wonders whether it’s a break from Botswana’s old style of mineral and government-led growth model.
One common theme amongst economists is that creating and sustaining economic growth is the defining challenge of Botswana’s time. Botswana has 12 years to get to 2036 as it seeks to assume high-income status.
Absa Bank Botswana’s economist Naledi Madala argued that a high-income economy cannot be sustained by a diamond-dependent model. Madala shared this at a recent Absa Economic Forum where she indicated that from a sectoral perspective, contribution to GDP is diversified.
But from an export perspective, which has a direct implication on Botswana’s balance of payments, “this is where the problem is”.
“Our export composition in 2011 is exactly almost where we are today. So that is where the challenge is,” Madala said.
One of the national key priorities at the moment is driving or becoming an export-led growth. Over time there has been an evolution of policies where the government made efforts with daunting challenges. This is a common occurrence for mineral resource-rich countries. They always face the challenge of remaining dependent on one resource that is driving their economies. Different researches and theories have been put forward to try and explain why it is difficult for mineral-rich economies to change the situation.
One school of thought cited by Madala is that of Ricardo Haussmann and his team at the Harvard Kennedy School. They developed the Atlas Economic of Complexity which attempts to measure the amount of productive knowledge countries hold and how they can move to accumulate more of it by making more complex products.
They explain that as economies grow and change, they tend to evolve from industries of competitive advantage to the next close one. E.g Israel used to export oranges but now they export IPOs of high-tech companies. Turkey used to export Olive Oil, but now they export cars and electronics.
Madala said the explanation is they are able to acquire new productive capabilities, the know-how and the technology that allows them to do more diverse and valuable things.
Put differently, the kind of industries in which they have a competitive advantage on, allows them to prepare for the next thing.
“It’s easier to move from textiles to garments to electronics. That kind of line becomes much easier than when you’re trying to move from mineral extraction, diamond extraction to cars,” Madala said adding that “the gap in terms of the sectors being close to each other and the knowledge from the experience being able to be taken from one sector to the other becomes very large”.
“So this is why they are saying for mineral-rich countries, the kind of industries that we’re excelling on or that we have a competitive advantage on, we cannot easily deploy that towards other industries.”
Lessons from Chile
The case for export diversification is much more difficult for resource-rich countries. But there are some mineral-rich countries which have actually done very well. An example Madala used is Chile, the largest producer and exporter of copper. Just like for Botswana where diamonds are so important for Botswana’s economy, copper is like the heart of everything else for Chile.
Madala noted that it has not been a straightforward path to its success. The industrial policy has gone through very different phases. At some point, they have gone through import substitution which did not work. Resource nationalisation also failed them, falling into a serious balance of payment crisis which triggered social and political unrest and a military coup.
Chili then adopted the method of trade liberalisation and open market reforms. In the 1990s they returned to democracy policies based on social and economic development.
Because of this diversified export basket, Madala said they are also able to attract FDI into the different sectors.
“The picture is totally different when you look at Botswana. For Botswana, FDI is flowing to the extractive industries.” She estimates that more than 70% of FDI that comes into this economy goes to the extractives.
What Madala said worked for Chile is that they took very deliberate steps to grow the mineral industry. “They brought venture capitalists, by the kind of packages they were offering to bring in the required technology.”
Today, she said they are the second largest exporter of Salmon. “That is an industry that they created with the kind of initiatives, the kind of reforms, the kind of investor attractions that they put in place for that to happen.”
“So they became really aggressive in terms of their liberalisation to integrate their economy to the world,” Madala said adding that “they negotiated a lot of free trade agreements moving from aggressive import substitution to aggressive free trade liberalisation.
International Trade Administration reports that Chile has negotiated 33 trade agreements, covering 65 economies, representing 88 percent of the world’s GDP.
“So what you realise right now, is that they are connected to very big markets despite their distance from some of those key markets.”
During the FNBB budget review, Jefferis said in dealing with economic headwinds, Botswana shouldn’t be dealing with the budget. In his view, policies need reforming rather than the budget. Jefferis cited the African Continental Free Trade Area (ACFTA).
“We must make it easier to get things across the border, not difficult which is what we have been doing (problems of bans, permits, etc.),” Jefferis said.
A typical example is the vegetable ban on selected horticulture goods, which has caused a stir in South Africa, Botswana’s key import partner. The ramification of this protectionism was a shortage of vegetable products in Botswana and a role played in increased inflation. But President Mokgweetsi Masisi announced during his State of Nation Address (SONA) that the intervention resulted in the decline of the fresh produce import bill from P634 million in 2018 to P182 million in 2023.
“Generally watch how we make too many regulations. We have a new meat industry regulator which is to liberalise the industry. But actually regulators like to regulate which can be the opposite of liberalization,” Jefferis said recommending that new regulations can only be introduced if they clearly have more benefits than costs.
He called for proper appraisal and prioritisation of public sector projects (and not investing in projects with low or negative returns), avoiding the creation of new (state) monopolies, accelerating Climate Change adaptation and mitigation and sticking to the principles of an open, market-orientated, competitive economy.
“We need to encourage FDI rather than discourage it.”
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