FISCAL SPACE FOR CHILDREN: AN ANALYSIS OF OPTIONS IN BOTSWANA APRIL 2018
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TABLE OF CONTENTS Abbreviations ..................................................................................................... vi Preface ................................................................................................................ viii Executive Summary ........................................................................................... ix 1 Introduction and methodology ...................................................................... 1 1.1 The objective of the fiscal space analysis ................................................. 1 1.2 Priority expenditure categories for children ............................................... 1 1.3 Methodology – fiscal space analysis ......................................................... 2 BOTSWANA IN BOTSWANA 1.4 Data limitations .......................................................................................... 2 1.5 Organisation of the FSA ............................................................................ 3 OPTIONS IN OF OPTIONS 2 Botswana’s Macroeconomic and Fiscal Context ........................................ 5 2.1 Longer-term national economic trends .......................................... 5 ANALYSIS OF AN ANALYSIS 2.1.1 Real GDP growth ............................................................................. 5 2.1.2 Demographic trends ......................................................................... 6 2.1.3 Structure and composition of the national economy ........................ 7 CHILDREN: AN 2.1.4 Employment and Poverty .................................................................. 8 FOR CHILDREN: 2.2 Recent macroeconomic developments .......................................... 10 2.2.1 Real GDP growth ............................................................................. 10 2.2.2 International trade ............................................................................. 10 SPACE FOR 2.2.3 External and internal debt .................................................................11 FISCAL SPACE 2.2.4 Inflation, interest rates and the exchange rate ................................. 13 2.3 Recent fiscal developments ............................................................. 15 FISCAL 2.3.1 Revenue performance ...................................................................... 15 2.3.2 Expenditure performance ................................................................. 18 2.3.3 Government financial performance .................................................. 19 2.3.4 State enterprises .............................................................................. 21 2.3.5 External support ............................................................................... 21 2.3.6 Government debt (external, internal) ................................................ 21 2.3.7 Fiscal projections – National Development Plan 11 ......................... 23 2.3.8 Economic and fiscal challenges and long-term prospects ............... 24 3 Botswana’s priority expenditure and fiscal space ...................................... 29 3.1 Introduction ....................................................................................... 29 3.2 Priority expenditure and fiscal space in recent years ................... 30 3.3 Composition of priority spending by sector .................................. 33 3.3.1 Education ......................................................................................... 33 3.3.2 Health ............................................................................................... 36 3.3.3 Social Protection ............................................................................... 37 3.3.4 Priority expenditure forecasts ........................................................... 40 3.3.5 Budget execution in priority spending areas .................................... 41 Page iii
4 The Base Scenario .............................................................................................................. 43 4.1 Base scenario assumptions .................................................................................... 43 4.2 Base-scenario projection results ............................................................................ 44 5 Options to Increase Fiscal Space: Alternative Scenarios ................................................ 47 5.1 Options to increase fiscal space ......................................................................... 47 5.2 Alternative scenarios and projections compared with the base scenario ...... 48 5.2.1 Alternative 1: Increased Non-Mineral Income Tax (NMIT) and VAT collection .... 48 5.2.2 Alternative 2: Increased priority expenditure ..................................................... 50 BOTSWANA IN BOTSWANA 5.2.3 Alternative 3: Increased NMIT rates ................................................................... 52 5.2.4 Alternative 4: Increased VAT rate ...................................................................... 53 5.2.5 Alternative 5: Reduction in non-priority expenditure ........................................... 54 OPTIONS IN OF OPTIONS 5.2.6 Combined fiscal space scenarios ...................................................................... 56 5.2.7 Impact of changed economic activity scenarios ................................................. 57 5.2.8 Summary ............................................................................................................ 60 ANALYSIS OF 5.3 Other options (non-modelled) .............................................................................. 62 AN ANALYSIS 5.3.1 “Earmarking” or ring-fencing revenues raised from specific sources ................. 62 5.3.2 Developing additional revenues sources from within the sector ........................ 63 CHILDREN: AN 5.3.3 Better quality, more effective spending (efficiency gains) .................................. 65 FOR CHILDREN: 5.3.4 Running larger budget deficits ........................................................................... 66 5.3.5 Decreasing illicit financial outflows ......................................................................67 SPACE FOR 6 Conclusions ......................................................................................................................... 69 FISCAL SPACE 6.1 Addressing general fiscal resource issues ............................................................ 69 FISCAL 6.2 Actions specific to priority spending ...................................................................... 70 6.3 Concluding Comments ............................................................................................. 71 References ............................................................................................................................... 73 . Appendix 1: Fiscal space projections .................................................................................. 76 Appendix 2: VAT Rates – Selected Countries ...................................................................... 88 Page iv
ABBREVIATIONS BoB Bank of Botswana BoBC Bank of Botswana Certificates BCWIS Botswana Core Welfare Indicators Survey BMTHS Botswana Multi-Topic Household Survey BNHI Botswana National Health Insurance BPC Botswana Power Corporation BWP Botswana Pula BURS Botswana Unified Revenue Service BLNS Botswana, Lesotho, Namibia and Swaziland BOTSWANA IN BOTSWANA BSP Budget Strategy Paper CMA Common Monetary Area DSP Department of Social Protection OPTIONS IN ETSSP Education and Training Sector Strategic Plan OF OPTIONS EHSP Essential Health Services Package FS&T Financial Statements and Tables ANALYSIS OF FSA Fiscal Space Analysis AN ANALYSIS GIA Government Investment Account GoB Government of Botswana CHILDREN: AN GoB Government of Botswana FOR CHILDREN: GDP Gross Domestic Product HIV/AIDs Human Immunodeficiency Virus/Acquired Immunodeficiency Syndrome IHSP Integrated Health Services Plan SPACE FOR IMF International Monetary Fund FISCAL SPACE JC Junior Certificate MAS Medical Aid Schemes FISCAL MTDMS Medium Term Debt Management Strategy mcts Million Carats MoBE Ministry of Basic Education MoESD Ministry of Education and Skills Development MFDP Ministry of Finance and Development Planning MFED Ministry of Finance and Economic Development MoHW Ministry of Health and Wellness MLGRD Ministry of Local Government and Rural Development MoTE Ministry of Tertiary Education, Science and Technology NDP National Development Plan NSPF National Social Protection Framework NER Net Enrolment Rate NFA Net Financial Asset NMIT Non-Mineral Income Tax Page vi
ABBREVIATIONS NMGDP Non-Mining Gross Domestic Product ODA Official Development Assistance OAP Old Age Pension OVC Orphan and Vulnerable Children OSEC Out of School Children PEI Poverty Eradication Initiative PIMA Public Investment Management Assessment PIP Public Investment Plan PSLE Primary School Leaving Examination BOTSWANA IN BOTSWANA REER Real Effective Exchange Rate RAD Remote Area Dwellers SACU Southern African Customs Union OPTIONS IN SADC Southern African Development Community OF OPTIONS SDR Special Drawing Rights SOEs State Owned Enterprises ANALYSIS OF SB Sustainable Budgeting AN ANALYSIS TEC Total Estimated Cost UN United Nations CHILDREN: AN UNICEF United Nations Children's Fund FOR CHILDREN: US$ United States Dollar UMIC Upper-Middle Income Countries VAT Value Added Tax SPACE FOR VDC/WDC Village/Ward Development Committee FISCAL SPACE VGFP Vulnerable Group Feeding Programme FISCAL Page vii
PREFACE This report, which focuses on Botswana, is part of a series of country studies BOTSWANA IN BOTSWANA carried out by Ecorys and associates for UNICEF between 2016 and 2018, in various sub-Saharan African economies. These studies are deliverables under Ecorys’ contract with UNICEF entitled ‘National Political Economy OPTIONS IN Analysis and Fiscal Space Profiles of countries in the Eastern and Southern OF OPTIONS Africa Region’. The project aims to strengthen UNICEF’s advocacy efforts through a better understanding of the role of political economy factors in ANALYSIS OF processes and decisions around creation and use of fiscal space for invest- AN ANALYSIS ments in children in Eastern and Southern Africa. CHILDREN: AN This report was written by Dr Keith Jefferis of Econsult Botswana, on behalf FOR CHILDREN: of Ecorys and DNA Economics of South Africa. The report is based on litera- ture review and data collection carried out by Econsult Botswana. Dr Jefferis was assisted by Ms Sethunya Sejoe in the data collection and analysis. SPACE FOR FISCAL SPACE The writers of this report wish to thank UNICEF Botswana Country Office staff in Gaborone for their support. They also express gratitude to the FISCAL various officials of the Government of Botswana and other stakeholders. The content of this report does not reflect the official opinion of UNICEF. Responsibility for the information and views expressed in the report lies entirely with the author(s). Page viii
EXECUTIVE SUMMARY Botswana’s fiscal space is relatively However, there are major concerns about the unconstrained in absolute terms, in the quality of service provision in Botswana short-term at least, due to high fiscal revenues despite the high levels of spending on from diamond exports and a history of prudent infrastructure. This reflects over-investment in public financial management. The government expensive tertiary education and curative budget has been roughly balanced in recent healthcare, which are not always pro-poor, years. Debt levels are low, with public and and under-investment in primary education publicly-guaranteed debt totalling only 22.3 and primary healthcare. With regard to social per cent of GDP in 2015/16, well below the protection, large numbers of people receive statutory limit of 40 per cent of GDP. benefits from government, in the form of Government also has accumulated cash school feeding and other supplementary savings roughly equivalent to the level of debt, feeding programmes, old age pensions, public BOTSWANA IN BOTSWANA so that net indebtedness is close to zero. work programmes, and poverty alleviation programmes. However, overall social However, economic growth is volatile and still protection spending is skewed by allocating OPTIONS IN highly subject to the performance of the almost half of the budget to tertiary education OF OPTIONS diamond sector, which in relative terms is in scholarships, which are strongly biased long-term decline. Botswana faces major towards higher income groups. Despite high ANALYSIS OF long-term challenges of generating new and increasing priority spending (on a real, per AN ANALYSIS sources of export-led growth, to supplement child basis), the ongoing implications of past diamonds. Furthermore, government revenues spending decisions, along with persisting are mainly derived from external sources inequalities, and spending inefficiencies CHILDREN: AN FOR CHILDREN: (diamond exports and SACU), which cannot highlight the need for better priority spending. be relied upon indefinitely, and domestic fiscal revenue generation is low. Despite positive In a baseline status-quo scenario where SPACE FOR outlook in the short-term, a steady, long-term economic growth is in line with recent trends, FISCAL SPACE contraction of fiscal space is taking place, as increasing spending on priority sectors based the fiscal contribution of the highly-taxed on projected needs will lead to a financing FISCAL diamond sector diminishes, and the high level “gap”. Between 2017/18 and 2022/23, the of public spending commitments generated on overall priority expenditure is estimated to be the basis of high historical revenues have to 9.4 per cent of GDP, on average, which be managed. amounts to USD1,903 in per child terms (at 2015/16 prices and exchange rate). This gap, Priority spending – which is for the purposes which is estimated at 1.8 per cent of GDP, can of this study defined as (selected) expenditure be met by internal financing flows, most likely in the education, health, and social protection additional debt. Although the gap could also sectors – averaged 10.8 per cent of GDP be met by drawdowns of government’s cash between 2012/13 and 2015/16, and 32 per balances, this would conflict with current cent of total government spending. In policy, which is to rebuild these balances in education and health, there have been major order to provide a buffer to help adjust to investments in infrastructure, with new external shocks as well as medium-term hospitals, schools, tertiary and vocational structural change. There is a considerable education institutions being built. With some appetite for government debt amongst exceptions, the availability and quality of domestic investors, and the cost is relatively infrastructure is not a binding constraint on the low when compared to South Africa, for provision of priority sector services. instance. Page ix
EXECUTIVE SUMMARY Various options could be used to increase On average the fiscal deficit would be reduced by fiscal space for priority spending, including 1.9 percent of GDP over the projection period. improving tax collection efficiency and raising tax rates or introducing new taxes. For Fiscal space could also be increased by additional instance, a 10 per cent increase in the government borrowing. As an illustration, a 0.5 percentage-points increase in priority spending as efficiency of collection of VAT and income tax a percentage of GDP, from 9.4 per cent to 9.9 per would raise additional fiscal resources that cent, would lead government borrowing to would reduce the average fiscal deficit by 0.5 increase by 4.3 per cent of GDP (to 20.7 per cent) percent of GDP (to 1.3 per cent) over the over the five-year projection period. The increased projection period. Alternatively, a 10 percent level of debt is well within the statutory limit (40 per increase in non-mineral income tax rates cent of GDP), but the rapid rate of increase of debt would raise a slightly smaller amount, that is entailed is likely to be of concern to BOTSWANA IN BOTSWANA reducing the average deficit by 0.3 percent of government. GDP. A 2 percentage point increase in the VAT rate, from 12 to 14 per cent (without any A further option would be for government to draw down on savings accumulated during the mining OPTIONS IN expansion of exemptions) would raise more OF OPTIONS boom years. These savings amounted to around money, reducing the average deficit by 0.5 17 per cent of GDP at the end of 2017. Higher percent of GDP. priority spending could therefore deplete these ANALYSIS OF savings quite quickly, which would be in conflict AN ANALYSIS Current policy is to focus on tax collection with official policy to rebuild these reserves to efficiencies and tax reforms rather than buffer the adjustment away from mineral-led introducing new taxes or raising tax rates. CHILDREN: AN growth. FOR CHILDREN: Nevertheless, the VAT rate is low by regional and international standards. Other potential There will be fierce competition between spending sources of additional revenue include higher ministries for limited fiscal resources in future, SPACE FOR fuel and property taxes, and cost recovery especially as mineral revenues decline. Hence there is no guarantee that even if revenues are FISCAL SPACE (especially from tertiary education scholarships). There is unlikely to be much realised as suggested above, they will be devoted to priority spending on children. It will be crucially FISCAL scope for raising additional resources from important to make a strong case for the impact of user fees, although a proposed national health priority spending on children as compared to other insurance scheme may provide limited (non-priority) claims on the budget. This could additional resources for healthcare. include decisions within sectors (e.g. priority primary education spending vs non-priority tertiary Fiscal space for priority spending could also spending), and also between sectors (e.g. health be increased by reducing non-priority vs. defence). spending. This would amount to a re-prioritisation of overall spending from As additional fiscal resources cannot be relied non-priority to priority areas. A reduction in upon for priority spending, the main gains will have non-priority spending to around 17.5 per cent to be sought from the way in which existing budgets are spent. This involves both improving of 2017/18 defence spending would be high level resource allocation decisions within equivalent to 0.5 per cent of GDP on average priority sectors (e.g. types of education and over the projection period, similar to the tax healthcare), and changing the balance between increase scenarios discussed above. investment and recurrent spending within priority sectors (e.g. less on new infrastructure, more on These adjustments could be combined for maintenance and staffing). It also requires greater impact on fiscal space. As an government to improve efficiencies in key areas illustration, a combination of increased tax such as procurement processes, staff productivity efficiency, higher income tax and VAT rates, and the use of information. Better resource and reduced non-priority spending could allocation requires analysis and information on amount to 3.4 percent of GDP by 2022. where resources can be most productively used, which is an area where UNICEF plays and should continue to play an important role. Page x
[1] INTRODUCTION AND METHODOLOGY 1.1 The objective of the fiscal space • Education: analysis priority education expenditure includes all expenditure on pre-primary, primary and This report presents an analysis of the “fiscal secondary schools, special needs education, space” that is available to the Government of vocational education and teacher training. It Botswana (GoB) to undertake and expand excludes education spending on universities priority expenditure on child-related services. and post-secondary bursaries. Priority Children depend on this type of expenditure for spending accounts for approximately 65 per their human development and general welfare. cent of total education spending. The report considers both the recent and future “fiscal space”, which refers to the capacity that • Health: is available to government to undertake or in this report, all healthcare expenditure is increase expenditure that benefits children. classified as priority expenditure on children. Fiscal space is analysed in terms of the Although, not all healthcare spending is situation and trends regarding government focused on children, child-focused spending expenditure, revenues and financing, and cannot accurately be separated from total various options are considered that can BOTSWANA IN BOTSWANA healthcare spending in Botswana. potentially increase the fiscal space for priority, child-focused spending. The objective of this • Social protection/development: report is to present options for enhancing the OPTIONS IN Botswana has a “mature and comprehensive” allocation of fiscal resources to priority OF OPTIONS social protection system 1, which includes a spending using a projection exercise and a set range of different schemes and benefits. The of illustrative scenarios, and to identify where ones of direct interest from a child-priority ANALYSIS OF UNICEF can most effectively intervene to AN ANALYSIS perspective are feeding programmes (primary positively influence resource allocation school, secondary school, and vulnerable decisions by government, given the country groups), and the orphan and vulnerable CHILDREN: AN context. children (OVC) care programme. There are FOR CHILDREN: also several programmes that have an indirect Fiscal identity impact on children, notably those that are targeted at low-income households. These SPACE FOR Priority expenditure = ______________________ include destitute person’s allowances, and the FISCAL SPACE Tax and non-tax revenue Ipelegeng public works programme. In FISCAL + External grants addition, old age pension is included, as it is - Non-priority expenditure often the case that grandparents care for their - External debt service grandchildren. Priority spending, according to - Internal interest expenditure this definition, represents around half of total + External debt disbursements spending on social protection programmes. + Net internal financing flows 1.3 Methodology – fiscal space analysis To analyse fiscal space for priority expenditure, the methodology starts from the 1.2 Priority expenditure categories for “identity” that governs the relationship children between priority spending and its underlying fiscal space. This report refers to expenditure categories This identity states that total expenditure regarded as beneficial to children as “priority” (comprising current, non-interest, interest, and expenditure. For Botswana, such priority capital expenditure) less the sum of total expenditure categories for children consist of revenue and external grants is equal to the sub-sets of the following three “institutional” overall deficit, which is in turn equal to the net expenditure categories: (i) education; (ii) flow of external and internal financing. health; and (iii) social development. The composition of child-focused expenditure in each of these three sectors is described below: 1) World Bank (2015) Botswana Poverty Analysis. Available online at: http://documents.worldbank.org/curated/en/351721468184754228/pdf/88473-REVISED-WP-P154659-PUBLIC-Box394819B.pdf. Page 01
[1] INTRODUCTION AND METHODOLOGY If total expenditure is broken down into the • World economic conditions; three categories of (1) priority and (2) • Botswana’s macroeconomic variables; non-priority non-interest expenditure and (3) • Merchandise exports and imports; interest expenditure, this identity can be • Tax and non-tax revenue; rearranged for any year as shown in the box. • External grants to the government; • Government expenditure in the priority and The “below-the-line” accounts taken together non-priority categories; and constitute fiscal space for the • External and internal debt. priority-expenditure flow. For a retrospective analysis – that is, for analysis of fiscal For each scenario, some of the assumptions performance in historical years – this structure are set as simple numbers (growth rates, can be applied directly to show how the percentages of GDP, etc.). Many of the below-the-line flows (the retrospective fiscal assumptions, however, are constructed from space) combined to finance the priority other assumptions made by multinational expenditure flows. agencies. For example, the growth rates of real GDP and of the price level are chosen BOTSWANA IN BOTSWANA For the projection analysis, the accounting based on projections by either the World Bank identity is applied in a different way. For each or International Monetary Fund (IMF). It is projection year, the priority-expenditure flow is easy to combine these assumptions into an OPTIONS IN OF OPTIONS projected on the basis of programming assumed growth rate for nominal GDP. assumptions, encompassing the various determinants of recurrent and non-recurrent 1.4 Data limitations ANALYSIS OF expenditure in the education, health, and AN ANALYSIS social protection categories. Similarly, the This analysis is based on budgetary data below-the-line accounts, except for the net covering actual figures (budget outturn) for CHILDREN: AN internal financing flows, are projected on the 2010/11 to 2016/17. The main data source is FOR CHILDREN: basis of programming assumptions. The total the Ministry of Finance and Economic net internal financing flow for each year is then Development (MFED). Additional data sources calculated residually, to ensure that the include the Bank of Botswana, UNICEF, the SPACE FOR accounting identity is satisfied. World Bank and the IMF. In some respects, FISCAL SPACE budgetary data published by the government For any projection year, this net internal of Botswana are quite detailed, and include FISCAL financing flow is the fiscal space “gap”, that is, actual and projected expenditures by line item the difference between the projected and institution. priority-expenditure flow and the projected financing requirements. If this gap is “too There is also a functional classification of large”, then the programming assumptions, expenditures, although at a more aggregated taken together, would be considered level. Nevertheless, there are some unfeasible. The criteria for “too large” include limitations. The breakdown of expenditures the limits on the government’s capacity to does not allow some disaggregation that borrow in domestic financial markets and the would enhance this fiscal space analysis. For implied increase in the government’s instance, many elements of spending on debt-to-GDP ratio. primary and secondary education are combined; spending on compensation of The projection exercise is formulated by employees is not separated from other applying various assumptions, together recurrent expenditures for some items; constituting a “scenario” to the historical data spending data is much less comprehensive for base. The relatively simplified, illustrative expenditures undertaken by local projection exercise applies scenarios to governments than by central government; and historical data (as discussed in Appendix 1). the basis for the classification of spending into Each scenario comprises programming recurrent and non-recurrent expenditures is assumptions for the years 2017/18 to 2022/23, sometimes questionable. covering: Page 02
[1] INTRODUCTION AND METHODOLOGY Therefore, data on spending in some of the Chapter 4 presents the “base scenario” of priority-expenditure categories is limited. Since fiscal modelling projections, based on a set of detailed data were not available for more macroeconomic and fiscal policy assumptions detailed expenditure categories, this report closely related to the current trajectory and the could not produce more refined definitions and eleventh National Development Plan (NDP 11) calculations for scenarios involving relevant projections. Chapter 5 presents various sub-categories. options available to policy makers to enhance fiscal space with an illustrative projection 1.5 Organisation of the FSA exercise based on a set of alternative scenarios for the priority expenditure flows and The remainder of this report is organized as fiscal space that would fund them for the years follows. Chapter 2 summarizes Botswana’s 2017/18 to 2022/23 (the NDP 11 period). past and present macroeconomic and fiscal Chapter 6 presents the main findings from the circumstances; it also analyses the budgetary analysis. Further projection details are process and the general efficiency of the fiscal included in Appendix 1. BOTSWANA IN BOTSWANA framework. Chapter 3 looks at the recent evolution of priority expenditure flows in the education, health and social protection OPTIONS IN OF OPTIONS categories and outlines some specific challenges in the various areas relevant for expenditure on children. FISCAL SPACE FISCAL FOR CHILDREN: SPACE FOR ANALYSIS OF AN ANALYSIS CHILDREN: AN Page 03
for every child, hope
[2] BOTSWANA’S MACROECONOMIC AND FISCAL CONTEXT 2.1 Longer-term national economic trends 2.1.1 Real GDP growth Botswana’s economic growth over the long independence in 1966 and much slower, term can be broadly divided into two more diversified growth over the past 25 periods: a period of rapid, mineral-led years (Figure 1). growth in the first 25 years after Figure 1: GDP growth, five-year averages, 1970-2015 20 18 BOTSWANA IN BOTSWANA 16 14 OPTIONS IN OF OPTIONS 12 percent 10 ANALYSIS OF AN ANALYSIS 8 6 CHILDREN: AN FOR CHILDREN: 4 2 SPACE FOR 0 FISCAL SPACE FISCAL Source: Authors, based on data from World Development Indicators (NY.GDP.MKTP.KD.ZG) Although mining is no longer seen as a diamonds, in terms of prices and volumes, major driver of long-term growth, it remains have a large impact on GDP through mining the largest sector of the economy. production. Downstream sectors such as Botswana’s real GDP growth tends to be diamond cutting and polishing, sorting and quite volatile and driven by large swings in valuing, and selling activities are also affected the performance of the mining sector, by the instability in the diamond sector, which particularly in diamond mining (see Figure can also lead to large swings in inventory 2). Fluctuations in the global market for accumulation and depletion (Figure 3). Page 05
Figure 2: Annual real GDP growth, 1995-2016 15% 10% 5% 0% -5% -10% BOTSWANA IN BOTSWANA Source: Statistics Botswana, National Accounts OPTIONS IN Figure 3: Diamond production (million carats) OF OPTIONS 40,000 ANALYSIS OF 35,000 AN ANALYSIS 30,000 CHILDREN: AN Produciton - mcts FOR CHILDREN: 25,000 20,000 SPACE FOR 15,000 FISCAL SPACE 10,000 FISCAL 5,000 0 Source: Statistics Botswana 2.1.2 Demographic trends Population growth was adversely affected by the HIV/AIDS pandemic in the 1990s and 2000s, when Botswana has a total population of approximately the mortality rate rose rapidly. However, with better 2.2 million. The annual population growth rate is access to health services, the mortality rate has currently estimated at around 1.9 per cent (Figure improved. Population growth is projected to decline 4). Compared to other African countries, Botswana’s steadily and fall below 1 per cent in the late 2030s, population growth rate reached a peak relatively with the total population expected to reach 3.6 early on in its post-independence development, million towards the end of the century, based on rising to 4 per cent in 1976, and has since declined. current demographic projections.2 2) All projections are from United Nations, Department of Economic and Social Affairs, Population Division (2017). World Population Prospects: The 2017 Revision, DVD Edition. Page 06
[2] BOTSWANA’S MACROECONOMIC AND FISCAL CONTEXT Figure 4: Population growth rate, 1970-2030 OPTIONS IN OF OPTIONS BOTSWANA IN BOTSWANA Source: United Nations (UN) Population Prospects, 2017 ANALYSIS OF AN ANALYSIS Botswana has a relatively young population. At 2.1.3 Structure and composition of the independence in 1966, the median age of the national economy CHILDREN: AN population was 16 years, but had risen to 24 FOR CHILDREN: years by 2015. The growth rate of the child Traditionally, Botswana has been seen as an population (19 years and under) has also economy where growth is driven by mining fallen sharply, down to an estimated 0.6 per activities. This perception no longer holds true, SPACE FOR cent in 2015. The proportion of the population as the structure of Botswana’s economy has FISCAL SPACE aged 19 and under has fallen from a peak of changed considerably in the last three 59 per cent in 1975 to 42 per cent in 2015, decades. The share of mining as a percentage FISCAL and is projected to fall to 28 per cent by 2050. of GDP has been falling steadily from a peak The gender ratio is mildly biased towards of 53 per cent in the 1989 to around 20 per females, with an estimated 102 females per cent in 2016 (see Figure 5). Production of 100 males in 2015. Botswana therefore has diamonds appears to have levelled off, and the potential to reap a demographic dividend although in all likelihood Botswana will from declining dependency ratios3 as long as maintain its production output at or around barriers to job creation can be addressed. current levels for the foreseeable future. The contribution of diamonds to GDP is expected Rural-urban migration has continued steadily, to further decline as the rest of the economy driven by limited economic opportunities in grows and diversifies. While Botswana rural areas and perceived opportunities in produces other minerals such as copper, towns. Approximately 63 per cent of the total nickel, soda ash, gold, coal, these industries population lived in urban areas in 20114, with are relatively small in economic terms when approximately 400,000 people living in and compared to diamond mining, and also face around the capital, Gaborone5. similar challenges of market volatility and declining reserves. 3) World Bank (2016) Forever Young? Social Policies for a Changing Population in Southern Africa. Available online at: https://openknowledge.worldbank.org/bitstream/handle/10986/24996/Forever%20Young.pdf?sequence=6 4) The proportion of the population living in cities, towns, and urban villages. 5) Based on the results of the 2011 Population and Housing Census. Page 07
Figure 5: Structure of GDP (value added) in 1989/90 and 2016 Social & Personal Serv. Govt. 3% Finance & 12% Agric. Business Serv. 5% 6% Transp. & Comms 3% 1989/90 Trade & Hotels etc. 5% Construction 6% Mining Water & Elec. 53% 2% Manuf. 5% BOTSWANA IN BOTSWANA Finance & Business Serv. 15% Govt. Transp. & 16% Social & OPTIONS IN Comms Personal OF OPTIONS 6% Serv. 6% ANALYSIS OF 1989/90 AN ANALYSIS CHILDREN: AN Agric. FOR CHILDREN: 2% Trade & Mining SPACE FOR Hotels etc. 22% 20% Constructi FISCAL SPACE on Manuf. 7% 6% FISCAL Source: Calculations based on merchandise trade data from Statistics Botswana and services trade data from Bank of Botswana As Botswana transitions from a mineral-led to the Botswana economy has been unable to diversified growth model, economic growth is create sufficient formal employment for its being driven by the services sector (including growing population. tourism). The contribution of the services sector to GDP rose from 30 per cent in 1994 The mining sector employs capital intensive to 43 per cent in 2016. Growth in the services production methods and creates few jobs. Much sector accounted for 60per cent of overall of the growth in employment comes from the GDP growth over this period6. While public sector. The government has grown largely Botswana’s economy is becoming increasingly on the basis of mineral revenues and the public diverse, it still remains heavily dependent on sector (including public enterprises) is the major diamond mining for export earnings and employer, accounting for over 40 per cent of government revenues. formal employment. Around half of total employment is outside of the formal sector, 2.1.4 Employment and Poverty including in agriculture, the informal sector, or government schemes, all of which generally In spite of its strong economic performance, provide relatively low incomes. 6) Calculations based on National Accounts data, Statistics Botswana Page 08
[2] BOTSWANA’S MACROECONOMIC AND FISCAL CONTEXT Figure 6: Headcount poverty rates, various years 70% 60% 50% % of population 40% 30% BOTSWANA IN BOTSWANA 20% 10% OPTIONS IN OF OPTIONS 0% 1985/6 1993/4 2002/3 2009/10 2015/16 ANALYSIS OF AN ANALYSIS Source: Statistics Botswana, various household surveys CHILDREN: AN Even in the formal sector, wages are still low, Rural areas and urban villages10 have FOR CHILDREN: with the minimum wage set at around P1,100 experienced the largest reduction in poverty (USD105) a month. In 2015/16, the rates (Figure 7). Despite this progress, unemployment rate stood at 18 per cent 7. Botswana is one of the most unequal SPACE FOR countries in the world, with a Gini coefficient of FISCAL SPACE The headcount poverty rate has declined 60.5 in 2009/10. Many people live just above steadily over the years (Figure 6). By 2015/16, the poverty line and are at risk of falling back FISCAL 16.3 per cent of the population lived in into poverty11. households with incomes under the national poverty line, suggesting that growth has largely been pro-poor. This is due to a combination of employment growth, welfare provision and social transfers, rural / agricultural development, and demographic changes8. Nonetheless, if the poverty rate is measured using the international USD 1.25 a day standard, then 13.4 per cent of the population lived in poverty in 2009/10; a figure much higher than other comparable middle-income countries9. 7) Statistics Botswana (2017) Economic Activity Stats Brief. Available online at: http://www.statsbots.org.bw/sites/default/files/GROSS%20DOMESTIC%20PRODUCT%20Q1%202017.pdf 8) World Bank (2015) Botswana Poverty Assessment. Available online at: http://documents.worldbank.org/curated/en/351721468184754228/pdf/88473-REVISED-WP-P154659-PUBLIC-Box394819B.pdf. 9) World Bank (2015) Botswana Poverty Assessment. Available online at: http://documents.worldbank.org/curated/en/351721468184754228/pdf/88473-REVISED-WP-P154659-PUBLIC-Box394819B.pdf. p.33 10) Urban villages are settlements on tribal land, which fall under district council (whereas urban areas have their own town/city councils). Urban villages vary in size, with populations from 5,000 upwards (the largest are effectively towns with populations of over 50,000). 11) World Bank (2015) Botswana Poverty Assessment, Available online at: http://documents.worldbank.org/curated/en/351721468184754228/pdf/88473-REVISED-WP-P154659-PUBLIC-Box394819B.pdf. p.9 Page 09
[2] BOTSWANA’S MACROECONOMIC AND FISCAL CONTEXT Figure 7: Headcount poverty rates by settlement type 50% 40% 30% 20% 10% 0% BOTSWANA IN BOTSWANA -10% OPTIONS IN OF OPTIONS -20% National Urban Urban village Rural ANALYSIS OF 2002/3 2009/10 2015/16 AN ANALYSIS Source: Statistics Botswana, various household surveys CHILDREN: AN FOR CHILDREN: 2.2 Recent macroeconomic 2.2.2 International trade developments SPACE FOR Minerals – mostly diamonds – accounted for FISCAL SPACE 2.2.1 Real GDP growth 75 to 85 per cent of goods exports between FY2011/12 and FY2016/17. Tourism is also an FISCAL The economy of Botswana was hard hit by the important source of foreign exchange. global financial crisis. The fall in demand for Botswana is a member of the Southern African diamonds during the global financial crisis Customs Union (SACU), and South Africa is impacted adversely on Botswana’s GDP, the main source of imports; exports, however, balance of payments and fiscal revenues. are mostly into global markets. The current While the economy has recovered partly from account has generally been in surplus, and as the crisis, the country’s economic woes were a result Botswana has built up large net exacerbated in 2015 by declining commodity foreign assets, mainly in the form of official prices and weak demand for diamonds. Thus, foreign exchange reserves. Botswana experienced a negative annual GDP growth for the first time since 2009. In Table 1 below shows some of the basic 2016, real GDP growth recovered to 4.3 per macroeconomic indicators for Botswana for cent (see Figure 2). On average, Botswana the fiscal years FY2011/12-FY2016/17. has achieved annual real GDP growth of around 4.5 per cent over the past two decades, and growth is forecast12 to continue in the range of 4 to 5 per cent over the next five years. 12) By the Government of Botswana (in NDP 11) and the IMF (2017 Article IV Report) Page 10
[2] BOTSWANA’S MACROECONOMIC AND FISCAL CONTEXT Table 1: Selected macroeconomic indicators, 2011/12-2016/17 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 Gross domestic product (BWP mn) 108,807.1 112,252.0 131,241.1 147,930.3 148,852.5 173,835.5 GDP per capita (BWP) 53,430.5 53,916.5 61,753.0 68,294.7 67,535.1 77,608.9 GDP per capita (USD) 7,645.1 6,895.2 7,150.5 7,437.1 6,379.4 7,272.8 Per cent of GDP (current prices): Household consumption 44.5% 54.1% 50.0% 47.4% 52.0% 48.1% Government consumption 18.0% 19.0% 18.7% 19.9% 20.5% 17.9% Gross fixed capital formation 32.7% 34.9% 32.9% 30.4% 33.8% 31.2% Fiscal balance -0.2% 0.8% 5.5% 3.6% -4.7% -0.6% Trade balance (goods & services) -3.9% -8.6% -0.2% 8.0% 1.0% 8.9% BOTSWANA IN BOTSWANA Growth rate: Real GDP 7.3% 6.3% 5.2% 9.6% 4.0% -1.8% OPTIONS IN Real GDP per capita 5.2% 2.9% 7.4% 2.0% -3.5% OF OPTIONS Other (as at December) ANALYSIS OF Inflation (CPI) 9.2% 7.4% 4.1% 3.8% 3.1% 3.0% AN ANALYSIS Exchange rate (per USD) 7.524 7.776 8.718 9.515 11.236 10.650 Mining share of: CHILDREN: AN GDP 22.9% 17.2% 20.4% 22.2% 17.2% 19.6% FOR CHILDREN: Govt. revenues 41.1% 29.0% 37.7% 38.5% 30.4% 37.3% Exports of goods [1] [2] 77.4% 75.2% 76.2% 80.0% 73.9% 83.5% SPACE FOR FISCAL SPACE Notes: [1] Calendar year; [2] excludes diamond re-exports Sources: Statistics Botswana (National Accounts, Trade Statistics), Bank of Botswana (Botswana Financial Statistics) FISCAL 2.2.3 External and internal debt The overall level of public debt is relatively low and well within the statutory limit of 40 per Botswana is a substantial net creditor cent of GDP (Figure 9-). Public and publicly vis-a-vis the rest of the world, with official guaranteed debt has been declining in recent foreign exchange reserves making up the years. External debt and guarantees are largest portion of foreign assets. External higher than internal debt and guarantees. debt is low, at 13 per cent of GDP in 2016 (see Figure 8). As a result, debt service costs are low; over the five years from 2011 to 2015, debt service payments on public and publicly guaranteed debt averaged 1.2 per cent of current account receipts. Page 11
[2] BOTSWANA’S MACROECONOMIC AND FISCAL CONTEXT Figure 8: External assets and liabilities (% of GDP), 2007-2016 160% 140% 120% 100% 80% 60% 40% BOTSWANA IN BOTSWANA 20% OPTIONS IN 0% OF OPTIONS 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Foreign assets Foreign liabiliities ANALYSIS OF Official reserve assets External debt AN ANALYSIS Source: Botswana Financial Statistics CHILDREN: AN FOR CHILDREN: Figure 9: Public and Publicly Guaranteed Debt (% of GDP), 2011-2017 30% SPACE FOR FISCAL SPACE 25% FISCAL 20% 15% 10% 5% 0% 2010 2011 2012 2013 2014 2015 2016 2017 External - debt External - g'tee Internal - debt Internal - g'tee Source: MFED Budget in Brief, various years Page 12
[2] BOTSWANA’S MACROECONOMIC AND FISCAL CONTEXT 2.2.4 Inflation, interest rates and the the BoB, is the rate at which all banks are exchange rate obliged to peg their Prime Lending Rate14. As at November 2017, the Bank Rate stands at While the inflation rate averaged 9 per cent per 5.0 per cent with the Prime Rate slightly higher year during the 2000s, it has dropped steadily, at 6.5 per cent. These are the lowest levels for due to a combination of lower global and these rates since the Pula was introduced in regional inflation and a change in exchange 1976; taking into account the peak in 2008 rate policy (see below). Although the Bank of when the Bank Rate was 15.5 per cent. Other Botswana (BoB) does not have a formal key interest rates are the BoBC rate (the inflation target, it uses monetary policy to interest rate paid on central bank paper, Bank influence inflation so that it remains of Botswana Certificates, issued for liquidity range-bound between 3 and 6 per cent13. management purposes) and the Government Inflation has remained within this range since bond interest rates. The 3-month BoBC rate, mid-2013. In 2016, inflation dropped to 3.0 which is determined by a combination of policy percent, which is the lowest annual rate ever measures and liquidity conditions in the recorded. The determinants of Botswana banking sector, is currently15 1.47 per cent BOTSWANA IN BOTSWANA inflation include external (South African and (compared to a peak of 14.03 per cent in global) inflation, exchange rates (notably the 2002). The BoBC rate represents the return BWP-ZAR rate), as well as domestic demand that banks can earn on surplus liquid assets, OPTIONS IN OF OPTIONS pressures. The BoB attributes low inflation in and given the excessive liquidity in the 2016 to subdued domestic demand as well as Botswana banking sector, has a strong benign external price pressures (BoB, 2017). influence on deposit interest rates. ANALYSIS OF Interest rates have fallen along with inflation in AN ANALYSIS recent years (Figure 10). The Bank Rate, set by CHILDREN: AN FOR CHILDREN: Figure 10: Inflation and Interest Rates, 1990-2017 SPACE FOR 20 FISCAL SPACE 18 16 FISCAL 14 percent 12 10 8 6 4 2 0 1998 2004 1990 1991 1999 2005 1992 1993 2000 2001 2006 2007 1994 1995 2002 2008 1996 1997 2003 2009 2010 2011 2012 2013 2014 2015 2016 2017 Bank Rate Inflation Source: Bank of Botswana Interest rates in Botswana are determined and capital can flow freely into or out of the mainly by domestic policy and capital market country. For instance, as of August 2017, conditions rather than external factors, even interest rates were considerably lower than in though Botswana has no exchange controls South Africa, especially for short term products (Table 2). 13) It does not operate a formal inflation targeting regime. See the annual Monetary Policy Statements for more details of the monetary policy regime in Botswana. 14) The Prime Rate is 1.5% above the Bank Rate 15) As at 29th November, 2017 Page 13
[2] BOTSWANA’S MACROECONOMIC AND FISCAL CONTEXT Botswana is therefore quite different than the largely determined by those of South Africa. other members of the Common Monetary Area Monetary policy decisions in South Africa have (CMA) with South Africa, i.e. Namibia, Lesotho little or no influence on decisions in and Swaziland, where interest rates are Botswana16. Table 2: Botswana and South African interest rates Bond Botswana South Africa T-Bill (6 months) 1.3% 7.1% Bond (3-4 years) 4.2% 7.5% Bond (8-9 years) 4.5% 8.6% Source: BIFM, SARB www.resbank.co.za/Research/Rates/Pages/CurrentMarketRates.aspx 26/8/17 BOTSWANA IN BOTSWANA The Botswana Pula (BWP) is pegged to a rate policy is to keep the Real Effective basket of currencies comprising the South Exchange Rate (REER) stable, to support OPTIONS IN African rand and the Special Drawing Rights export competitiveness. The stability of the peg OF OPTIONS (SDR) through a crawling peg arrangement 17. has helped to reduce inflation over time. The The peg is underpinned by balance of payments nature of the peg means that the Pula-ZAR and ANALYSIS OF surpluses and the large foreign exchange Pula-US dollar exchange rates tend to move in AN ANALYSIS reserves. The general objective of exchange opposite directions (Figure 11). CHILDREN: AN FOR CHILDREN: Figure 11: Exchange rates movements, 2008-2017 1.5 6 SPACE FOR FISCAL SPACE 7 1.4 FISCAL 8 Rand per Pula Pula per USD 1.3 9 1.2 10 1.1 11 1 12 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 ZAR per BWP (LHS) BWP per USD (RHS) Source: Bank of Botswana 16) For instance, in South Africa the policy rate (repo rate) was increased from 5% to 7% between 2013 and 2016, while in Botswana the Bank Rate was reduced from 7.5% to 5.5% over the same period. 17) The Pula is pegged to a basket of currencies comprising the ZAR and the SDR (which is itself a basket of five currencies, the US dollar, euro, UK pound, Japanese yen and Chinese RMB). The weights of the ZAR and SDR are fixed, but can be adjusted. The rate of crawl of the pula against the basket is also fixed but adjustable. The exchange rate parameters (basket weights and rate of crawl) are generally reviewed, and may be adjusted, on an annual basis. The basket weights are chosen to reflect trade patterns, while the rate of crawl is chosen to achieve Real Effective Exchange Rate (REER) stability. The exchange rate of the Pula (against the basket) is therefore determined by a peg (i.e. it is a largely fixed exchange rate), and is not market-determined. However, most of the currencies in the basket are floating rate currencies, and their values therefore change constantly. Hence the bilateral exchange rates of the Pula against other currencies vary, despite the overall exchange rate of the Pula being fixed. The BoB publishes exchange rates (on a real time basis) at which it will trade the Pula and foreign currencies with authorized dealers (mostly banks). There are no limits on the foreign exchange dealings that authorized dealers may undertake with BoB (subject to a minimum deal size). Page 14
[2] BOTSWANA’S MACROECONOMIC AND FISCAL CONTEXT 2.3 Recent fiscal developments 2.3.1 Revenue performance distribution from the SACU revenue pool; (iii) non-mineral income tax (corporate and individual); Fiscal revenues are derived from four key and (iv) Value Added Tax (VAT) (see Figure 12). sources (in order of magnitude): (i) mineral External grants (donor funding) are not a revenues (taxes, royalties and dividends); (ii) significant source of income for government. Figure 12: Sources of government Revenue (average shares, 2012/13 – 2016/17) Other Grants 7% 1% VAT 12% BOTSWANA IN BOTSWANA Minerals 34% OPTIONS IN OF OPTIONS NMIT ANALYSIS OF 17% AN ANALYSIS CHILDREN: AN FOR CHILDREN: SACU 29% SPACE FOR Source: Calculations based on MFED’s Financial Statements and Tables FISCAL SPACE FISCAL Botswana’s income tax rates are relatively low Total revenues averaged 36 per cent of GDP when compared to other SACU countries, and over the past five years, with a downward the VAT rate is one of the lowest in the world trend, and are expected to decline further to (Table 3). Despite low tax rates, Botswana around 30 per cent of GDP over the next five has traditionally enjoyed a high ratio of fiscal years (Figure 13). revenues to GDP, driven mainly by mineral revenues. At its peak, in the early 1990s, total The relative size of fiscal revenues has been revenues amounted to almost 50 per cent of declining, as mineral revenue growth has GDP, and for most of the period since then a slowed and the overall contribution of mineral ratio of fiscal revenues to GDP of at least 40 revenues has declined, although minerals still per cent was accepted as the norm, and remain the largest single revenue source. In government spending was developed the five years from 1986/87 to 1990/91, accordingly. This led to a large government mineral revenues averaged 27 per cent of and significant public sector wage bill. GDP, whereas over the past five years, mineral revenues averaged 13 per cent of GDP. Page 15
Table 3: Main tax rates Personal income tax Less than P36,000 Zero 36,000 - 72,000 5% 72,000 - 108,000 1,800 + 12.5% of the excess over P72,000 108,000 – 144,00 6,300 + 18.5% of the excess over P108,000 144,000 and above 13,050 + 25% of the excess over P144,000 Company income tax (resident) Normal rate 22% Manufacturing rate 15% Mining companies (excl. diamonds) Variable rate (22% - 55%) Diamond mining companies Negotiable IFSC company 15% Botswana Innovation Hub company 15% Capital gains 22% BOTSWANA IN BOTSWANA VAT Normal rate 12% Withholding tax rates OPTIONS IN OF OPTIONS Interest (to residents) 10% Interest (to non-residents) 15% ANALYSIS OF Rent 10% AN ANALYSIS Dividends 7.5% CHILDREN: AN Source: Botswana Unified Revenue Service (BURS) FOR CHILDREN: Figure 13: Government revenues and spending (% of GDP), 2001/02 - 2022/23 SPACE FOR 55% FISCAL SPACE 50% FISCAL 45% NDP 11 projections 40% 35% 30% 25% 20% Expenditure Revenue Source: Econsult, based on data from MFED (Financial Statements and Tables), NDP 11, and Statistics Botswana (National Accounts) Page 16
[2] BOTSWANA’S MACROECONOMIC AND FISCAL CONTEXT Text Box 1: Mineral Revenues Mineral revenues are derived mainly from the diamond industry. The largest mines are run by Debswana, a 50-50 joint venture between the GoB and De Beers. Botswana has negotiated a very favourable fiscal deal with De Beers, and derives income from (i) royalties levied on the gross value of diamond production; (ii) corporate tax on Debswana’s profits; (iii) withholding taxes levied on De Beers’ share of profits repatriated; (iv) dividends derived from post-tax profits according to the GoB’s shareholding in Debswana; (v) dividends derived from GoB’s 15 per cent shareholding in De Beers. An overall revenue-sharing agreement provides for GoB to receive 81 per cent of Debswana’s profits (technically of free cash flow, which is broadly pre-tax profits net of capital investment spending). In addition to this high profit share, the magnitude of GoB’s diamond revenues reflect the very high profitability of Debswana, which has some of the largest, lowest cost diamond mines in the world. Costs of production are low, so that Debswana makes a profit margin of around 80 per cent BOTSWANA of sales value. Therefore, of USD100 worth of diamonds sold by Debswana, around USD65 IN BOTSWANA directly accrues as fiscal revenues to government. However, as the mines get deeper, the costs of production are rising (and hence profit margins are shrinking). OPTIONS IN OF OPTIONS Revenues from the SACU provide the The lower mineral revenues have partially been second-largest source of revenue for the mitigated by higher SACU revenues in recent ANALYSIS OF government. Receipts are determined years (Figure 14). However, this is not expected AN ANALYSIS according to a formula agreed between the to persist in the longer term. Domestic revenues five SACU members (South Africa, Botswana, (VAT and non-mining income tax), although CHILDREN: AN Lesotho, Namibia and Swaziland) in 2002. growing slightly, are not sufficient to compensate FOR CHILDREN: The main determinants of the SACU receipts for lower mineral revenues, even after the offset by the smaller BLNS (Botswana, Lesotho, from higher SACU revenues. In addition, SACU Namibia and Swaziland) countries is the size revenues are expected to decline over the SPACE FOR of the SACU revenue pool, which is in turn medium term, as South Africa’s economy slows. FISCAL SPACE largely dependent upon South African imports Thus, Botswana’s key economic challenge will and SACU common external tariff rates, and be remain focused on the ways and means to FISCAL each country’s share of intra-SACU trade. increase non-mining revenue. Page 17
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