Dr Keith Jefferis, economist
Economist advocates for robust legal framework
An economist and former deputy governor of the Bank of Botswana (BoB) has highlighted a significant weakness in the government's budgeting system.
This comes as revenue forecasts fall short due to the poor performance of the diamond industry, which is a key part of the economy.
Dr. Keith Jefferis, also a former senior advisor at the Ministry of Finance, spoke in a recent local podcast interview about the government's revenue outlook, which has become less optimistic. He emphasised that, ideally, the government should seek parliamentary approval for adjustments to the budget mid-way to cut back on spending.
However, with nothing forcing the government to adjust spending, legally approved expenditures remain unchanged. If the government spends as initially planned, Jefferis warned that it could face a deficit of around 8%, compared to the 2.8% that was originally projected. He expressed concern that this could lead to increased borrowing and a potentially unsustainable trajectory for the country’s finances. The government had planned to borrow around P13 billion in the local capital market for the 2024/25 financial year.
How He Says The System Works
Currently, Jefferis said the system operates on a model where Parliament approves budgets based on certain assumptions about revenue and expected deficits.
“Legally, what Parliament is approving is expenditure,” he said adding that “the assumptions are about the revenue, what the resulting deficit will be and about how that deficit is going to be financed”.
As revenue forecasts and projections can fluctuate for various reasons, the government is generally required to adjust spending accordingly. Jefferis stated that the Ministry of Finance can approach Parliament for adjustments, but they are not obligated to do so, as there is no legal requirement compelling them.
“Ministry of Finance can do something but it is not required by law.”
What he said this is showing is “a weakness in our legal framework”.
“Because if you look at some other countries like the UK and South Africa, they have a mid-term or mid-year budget review.”
Lessons from the UK, SA
To address this vulnerability, he believes Botswana should consider adopting a more robust legal framework akin to those in other countries. This mechanism promotes accountability and allows Parliament to reassess and realign expenditures with actual revenue flows.
“Parliament has to say yes or no, we agree, or we don't agree," Jefferis said adding that “that's something we should be thinking about; Building that into the system.”
He worries that if this issue isn’t addressed, the government may end up borrowing much more than originally planned to fund expenditure.
If the government spends according to the approved budget, Jefferis expects Botswana could be running a deficit of 8% of GDP, which is about a similar size to the US.
“What everybody is saying is the US is on an unsustainable budget because their debt is rising very fast”.
It's not just about the level of debt, it's the trajectory that worries him. Unless there are some cutbacks in spending to reflect the reduced revenues, he said debt will rise rapidly.
Initial Revenue Projections
Initial projections indicate that total revenues and grants for the 2024/2025 financial year are expected to reach P93.58 billion, according to Serame’s budget speech.
The largest contributor is projected to be customs and excise receipts, estimated at P26.46 billion due to the increase in Botswana’s share of the Southern African Customs Union revenues. The second largest contributor is mineral revenue which is estimated at P25.05 billion or 26.77% of total revenues. 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.
Serame revealed that the total expenditure and net lending for the financial year 2024/2025 is P102.28 billion. Against this background, a budget deficit of P8.69 billion, or 2.8% of GDP is projected for the 2024/2025 financial year.
“Due to the current fiscal policy priority to allow accumulation of Government cash balances, drawing on the Government Investment Account will be moderated as part of financing the budget,” Serame said during the budget speech in February, promising that “Government will have to mobilise additional resources including using part of the fiscal savings, special funds proceeds and domestic borrowing through the issuance of new instruments such as inflation-linked bonds and green bonds, among others”.
As at June 2024, actual total revenue and grants were P18.2 billion against the expected collection of P23.4 billion, according to Serame. “In the first half of 2024, diamond sales were US$1, 949 million, when compared to US$ 2, 428 million in 2023, representing a decline by 46.1%,” she said.
Increased Spending
Meanwhile, government spending substantially increased due to, among others, payment of personal emoluments of P5.75 billion, expenditure on Botswana Public Officers Pension Fund (BPOPF) of P1.5 billion for pension augmentation, tariff subsidy to Botswana Power Corporation of P1.5 billion, payment for the acquisition of land from Tati Limited Company of P939.3 million (which was a final instalment), P623.1 million for water projects, Chema Chema Funds of P200 million, Air Botswana (P123.5 million for purchase of additional fleet), Subvention to State-Owned Entities (SOEs) and Revenue Support Grant (RSG) to Local Authorities, amongst others.
“The economic landscape has substantially changed compared to the time when I delivered the 2024/2025 Budget Speech in February 2024,” she said adding that “the weak performance in the diamond market experienced in 2023 continued into the second half of 2024”.
“The subdued economic activity is expected to have implications on the budget, particularly mineral revenue.”
Serame had promised that the government would implement necessary interventions to deal with current realities. It is important to note that Serame’s speech was prompted by reports on the state of the government’s finances, especially given that Jefferis mentioned there is no legal requirement for the Ministry of Finance to seek parliamentary approval for budget adjustments.
GIA Can No Longer Absorb Shock
In the past, when Botswana faced economic shocks, it relied on savings from the Government Investment Account (GIA), which helped keep debt levels below 20% of GDP.
Due to these drawdowns, the GIA has been on a downward trajectory falling from P30.5 billion in 2008 to P21.8 billion in 2009 and further to P13.6 billion in 2010 (during the Global Financial Crisis). Due to the impact of COVID-19, Serame said the GIA declined from P23.9 billion in 2018 to P2.8 billion in December 2020. It however recovered in 2021, increasing from P5.6 billion in December 2021 to P12.1 billion in December 2023, owing to the combined impact of the recovery in the diamond market and the resumption of economic activity globally as most economies opened up.
However, Serame said the recovery was short-lived, as the GIA fell to P5.1 billion in April 2024 from P18.5 billion in April 2023. GIA currently sits at P5.9 billion as at July 2024.
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