Matambo’s Budget speech – 2015/16

SHARE   |   Sunday, 08 February 2015   |   By Kenneth Matambo
Matambo Matambo

Domestic economic performance and outlook

Over the past year, the domestic macroeconomic environment remained stable, with positive outlook, as shown by the performance of the main economic indicators such as economic growth, inflation and monetary policy, balance of payments and exchange rate movements. The performance of these variables reflects the impact of previous and current Government policies and strategies to drive the economy.
A positive macroeconomic environment was confirmed by the Moody's Investors Service assessment of Botswana's credit profile in terms of its economic, institutional and fiscal strength as well as susceptibility to event risks. The agency rated Botswana A2 in 2014, with a stable outlook. Among the key credit strengths for these rating was the Government's robust balance sheet, as indicated by its fiscal surplus and low debt levels. The report endorsed Government's prudent approach to fiscal policy and the effectiveness of its consolidation measures going forward. This positive domestic economic environment is favourable for private sector development, which should be the source of growth and employment creation in the country.
Economic Growth
Real GDP registered a growth rate of 5.8 percent in 2013 compared to the 4.3 percent growth in 2012. This growth was attributable to both mining and non-mining sectors of the economy. The Mining sector registered a significant growth rate of 10.6 percent in 2013, owing to strong demand in the global economy for our diamonds, especially in the emerging economies of China and India.
The non-mining sectors collectively registered a positive growth rate of 5.0 percent in 2013, with Trade, Hotels & Restaurants growing at 6.3 percent; Social and Personal Services at 6.0 percent; while General Government and Finance & Business Services grew by 5.5 percent each. However, the Water and Electricity sector recorded a negative growth rate of 27.2 percent in 2013. The continued underperformance of the Water and Electricity sector is of major concern, given the importance of water and power in the economy. To address the challenges facing this sector, Government continues to undertake regulatory reforms and has allocated the sector a substantial development budget in 2015/2016 financial year.


Inflation and Monetary Policy

Domestic inflation rose from 4.1 percent in December 2013 to 4.6 percent in August 2014, and has since declined to 3.8 percent in December 2014, remaining within the Bank of Botswana's objective range of 3-6 percent. The projected external price developments and lower forecasts for oil prices will result in moderate pressure on domestic prices. Therefore, inflation is expected to remain within the Bank's objective range in the medium term.
In terms of the monetary policy, the focus remains on monetary stability, which fosters international competitiveness of the domestic industries and supports the broader national objectives of sustainable economic growth and employment creation. With the positive medium-term inflation outlook and credit developments, the Bank of Botswana continued to maintain an accommodative monetary policy stance during the year. The Bank Rate was maintained at 7.5 percent in 2014, after it was last adjusted downwards by 50 basis points in December 2013. At the same time, commercial bank credit grew by 14.0 percent from P39.4 billion in November 2013 to P44.9 billion in November 2014, which is supportive to economic growth.


Balance of payments and Foreign Exchange Reserves

The balance of payments continued to record strong performance during 2014. Preliminary estimates indicate that the current account of the balance of payments registered a surplus of P13.1 billion in 2014, a moderate increase of 1.5 percent from the P12.9 billion in 2013. This is attributable to the increase in receipts from the Southern African Customs Union (SACU), which increased from P13.8 billion in 2013 to P15.0 billion in 2014. As a result of the positive current account balance, the overall balance of payments is projected to record a surplus of P10.0 billion in 2014, a significantly higher surplus from the P1.3 billion in 2013.
The positive overall balance of payments contributed to the increase in foreign exchange reserves. As at the end of December 2014, the reserves amounted to P79.0 billion, equivalent to 18 months of import cover of goods and services. This is an increase of 16.5 percent from P67.8 billion in December 2013. The increase in the foreign exchange reserves reflects mainly the net foreign exchange inflows and the exchange rate movements between the Pula and the major international currencies. In terms of the Special Drawing Rights (SDR) and the United States Dollar (USD), the foreign exchange reserves were SDR 5.7 billion and USD 8.3 billion, respectively, as at end of December 2014.
I am pleased to report that Government's net financial asset position has improved significantly. As at the end of March 2014, Government's net financial assets stood at 1.7 percent of GDP, an improvement from the negative 6.9 percent of GDP in March 2013. This was because Government's balances at the Bank of Botswana had risen from P20.61 billion to P31.75 billion over the 2013/14 financial year, while Government's net debt and guarantees had increased only marginally over the same period, from P28.33 billion to P29.52 billion. 


Performance of public enterprises

As I indicated in last year's Budget Speech, there is need to closely monitor the operations of parastatal organisations, with a view of ensuring that they continue to contribute to growth and employment creation. To facilitate this, each Ministry will be required to implement the Guidelines for the Exercise of Shareholder Oversight over Parastatals to strengthen the governance and oversight structures of the parastatals, which should contribute to the overall improvement in their performance.
With respect to overall performance, the country's parastatal organisations continued to display uneven performance during the year; with some performing satisfactorily, while others recorded operational losses. Parastatals which performed satisfactorily included: the Botswana Telecommunications Corporation Limited (BTCL); National Development Bank (NDB); Botswana Communications Regulatory Authority (BOCRA); Botswana Housing Corporation (BHC); and the Botswana Meat Commission (BMC).
The BTCL recorded a net profit of P273.6 million in 2013, compared to a net profit of P236.9 million in 2012, due to growth in revenue as a result of increased customer base, especially in the mobile business sector. NDB registered a net profit of P45.8 million in 2013, compared to P40.6 million in 2012, due to initiatives such as Ntlhatlosa kwa Morakeng, which continue to attract customers. With continued demand for services due to the significant growth in the use of the mobile internet technology, particularly smart phones, BOCRA recorded a net profit of P40.6 million in 2013, compared to P31.2 million in 2012. The Botswana Housing Corporation's net profit declined to P34.9 million in 2013, from P50.4 million in 2012, due to among others, the rising finance costs. After experiencing hardships in its operations since 2008, the Botswana Meat Commission finally recorded a net profit of P25.8 million in 2013, compared to a loss of P324.1 million in 2012. This was mostly boosted by increased revenue as a result of re-admission of the Commission to the European Union market during the year.
The parastatal organisations that continued to experience operational and financial challenges include the Botswana Power Corporation (BPC) and Water Utilities Corporation (WUC). BPC recorded a net loss of P1.3 billion in 2013, compared to a net loss of P1.1 billion in 2012, due to increase in generation, transmission and distribution expenses. A large part of direct costs were incurred in procuring power from external sources, part of which was subsidised by Government through an emergency power grant.
Water Utilities Corporation also recorded a net loss of P191.1million in 2013, compared to a loss of P541.6 million in 2012. This was due to challenges relating to the implementation of Government Water Sector Reforms Project, which include increased costs on waste water treatment and distribution, rehabilitation of infrastructure inherited from the District Councils, increased staff and training costs, amongst others.


Economic outlook

Despite continued uncertainty over the global economic recovery, the outlook for the domestic economy remains positive. Real GDP is estimated to have grown by 5.2 percent in 2014, and forecast to grow at a slower rate of 4.9 percent in 2015. Such positive growth is mainly driven by the non-mining sectors including Trade, Hotels & Restaurants, Finance and Banking, and Social & Personal Services. Furthermore, activities such as increased diamond cutting and polishing; establishment in Selebi-Phikwe of the Steel Manufacturing Plant, and the Horticulture Agro-Processing Plant which is expected to be commissioned in the first quarter of 2015/2016; and the rolling out of the postal and banking services to the rural areas are expected to contribute to the growth of the non-mining sectors in the future. These sectors in turn, are expected to contribute to growth and economic diversification, thus creating employment opportunities, and empowering citizens.
A positive domestic economic outlook as shown by some major economic indicators characterised by low debt levels as confirmed by external organisations such as Moody's Investors Service, provides a basis for domestic and foreign investment in the country. Similarly, a supportive monetary policy that has ensured stability of the Real Effective Exchange Rate should promote competitiveness of domestic enterprises in the global market. The prospect of low inflation, also has the potential to impact positively on the standard of living of Batswana. Given this conducive macroeconomic environment, we expect the private sector to take the lead in driving economic growth and employment creation.


Growing the economy
To address the development challenges of poverty, unemployment, and income inequality, we need economic growth. Without enlarging the size of the economy, it would be impossible to create jobs that the country desperately needs to address youth unemployment, and generate revenues to support Government's social welfare programmes. It is for this reason that growth and economic diversification should remain our economic priorities.
Economic growth can also be generated through improving total factor productivity and increasing the productive human and capital inputs. Whereas, the country has performed reasonably well in increasing factor inputs, growth in factor productivity has been a challenge in the recent years.  In this regard, improving productivity must remain a priority for driving economic growth and ensuring that the economy performs at its potential capacity.
A recent challenge to the promotion of growth and economic diversification has been the declining total factor productivity in the domestic economy, especially labour productivity. In this regard, Government will continue to put in place measures to promote productivity that include: reforming the country's education and training system; improving work ethic through training the workforce; as well as reviewing labour legislation; with a view to promoting efficiency in the labour market. Such labour market reforms will assist the economy to transit from mineral-led to a knowledge economy. To further improve on total factor productivity, Government is implementing public sector reforms, enhancing research and development, and developing appropriate human skills.

Promoting inclusive growth


Despite the positive economic growth registered in the past years, the country continues to face development challenges of unemployment and poverty. To address this, Government will be promoting inclusive growth by creating a conducive environment for productive economic opportunities while ensuring that the benefits of economic growth are equitably shared among various sections of the society. While the focus will be on productive employment, Government will continue with its efforts to eradicate abject poverty by providing social welfare programmes to the poor and most vulnerable groups in the society.

Employment creation


An inclusive growth approach is premised on gainful employment of factors of production, especially labour. The current unemployment rate of 19.8 percent therefore represents underutilisation of one of the country's important resource, namely our human capital. This is a challenge for the country, especially that it affects the youth. It is for this reason that Government will continue to implement various programmes, projects and strategies geared towards assisting the youth and women to improve their livelihood. This year's development budget of P12.93 billion which will mainly be spent on infrastructure projects such as construction of new schools, new power transmission lines and water pipelines, is expected to go a long way in creating new employment opportunities. In addition, complementary laws, labour laws such as the Employment Act, Trade Disputes Act, Workers' Compensation Act and Trade Unions and Employers' Organisations Act will be reviewed to facilitate harmonious industrial relations and also to make the labour relations environment conducive for investment.

Poverty eradication


To address one dimension of inclusive growth, which is, the protection of the disadvantaged and marginalised groups of the society, Government will continue to put in place measures to improve the efficacy of our social welfare programmes. These measures will ensure food security, availability of social safety nets to reduce poverty, and the promotion of opportunities for special groups such as women, the elderly and people living with disabilities.
It is therefore pleasing to note that the poverty eradication efforts by the Government continue to yield results, as indicated by the decline in the population living in poverty from 30.6 percent in 2002/2003 to 19.3 percent in 2009/2010. Since November 2014, 9,588 projects funded by the Poverty Eradication Programme have been fully operational, covering all districts. Beneficiaries of such projects are now earning sufficient income to graduate from extreme poverty. Government will therefore continue to fund the programme, with a view to assisting more deserving citizens.
Meanwhile, Government is in the process of formulating a Botswana Poverty Eradication Strategy, which is expected to be finalized by end of September 2015. This strategy will serve to guide all efforts of Government towards poverty eradication across sectors to ensure consistency of action and results as well as fostering inclusive growth in our economic development agenda.

Financial inclusion


Achieving inclusive growth as a policy objective will depend on, among others, the extent to which the financial system provides basic financial services to the people. In this regard, the financial sector has intensified its efforts to promote financial inclusion, broadly defined as the delivery of financial services at affordable costs to disadvantaged and low-income segments of the society. Mobile financial services is one of those initiatives that are being used to promote financial inclusion. It includes mobile money transfer and mobile banking such as e-wallet and others which are easily accessible and convenient medium for the delivery of financial services. 

Citizen Economic Empowerment


Inclusive growth cannot be achieved without empowering citizens to take an active role in economic activities. It is for this reason that Government continues to make concerted efforts to empower citizens in order to benefit from economic growth. To this end, the amended Citizen Economic Empowerment Policy makes it mandatory for sub-contracting of Government funded projects to 100 percent citizen owned companies. It further stipulates that 30 percent of each Ministry's projects budget should be reserved for 100 percent citizen owned companies to promote citizen empowerment.
To further advance citizen economic empowerment, the implementation of Local Procurement Scheme has been progressing at different levels across the country. All the District Administration Tender Committees have been trained on the Scheme. Effective implementation of the Scheme should translate into more empowerment of citizens in rural areas, especially through businesses owned by women, youth and People Living with Disabilities.
The Government is committed to creating a favourable environment for the development of the small, medium and micro enterprises (SMMEs), as part of citizen empowerment in the country. However, the success of the SMMEs will depend on various factors such as their ability to deliver quality products to clients, delivery of goods and services on time, and reasonable pricing of such goods and services. This, in turn, requires that SMME's also invest in innovation and skills development to ensure their long term sustainability.

2013/2014 Budget outturn


The budget outturn for the 2013/2014 financial year was a surplus of P7.22 billion, a significantly higher amount compared to the P3.47 billion that had been projected in the revised budget. Total revenues and grants increased by 7.8 percent from P45.43 billion in the revised budget to P48.95 billion in the final budget outturn. This was attributable to the stronger than anticipated performance of mineral revenue occasioned by unforeseen high volumes of diamond sales, exchange rate gains as well as underspending in the development budget by 27 percent. Total expenditure and net lending on the other hand amounted to P41.73 billion against a revised budget of P45.04 billion.

2015/2016 Budget proposals


I now present the budget proposals for the 2015/2016 financial year. Through this budget, Government will address key priority areas which include: human capital development; fight against HIV/AIDS including elimination of mother-to-child transmission of HIV; poverty eradication; provision of water and power supplies; employment creation; as well as maintenance of existing infrastructure.
The projected total revenues and grants for 2015/2016 amount to P55.38 billion, of which Mineral Revenue accounts for 34.4 percent, Customs and Excise for 29.5 percent, while Non-Mineral Income Tax accounts for 17.5 percent. Mineral revenues are projected to grow by 10.4 percent, from P17.24 billion in 2014/15 to P19.03 billion in 2015/16. This positive growth is however likely to be undermined by the downside risks associated with growth prospects in the global economy, resulting in reduced revenues, specifically from diamonds.

Recurrent budget


The proposed Ministerial Recurrent Budget for the financial year 2015/2016 is P36.70 billion. This amount represents a growth of P2.31 billion or 6.7 percent over the current year's revised budget of P34.39 billion.

Statutory Expenditure


The 2015/2016 budget estimates for Statutory Expenditure is P7.93 billion which is an increase of P2.39 billion or 43.1 percent over the current year's revised budget of P5.54 billion. The growth is principally due to obligations arising from the maturing of Government Bond BW003 and repayments of loan principals.

Development Budget


A total of P12.93 billion is proposed for the development budget for the financial year 2015/2016. The largest share of the development budget is allocated to the Ministry of Minerals, Energy and Water Resources (MMEWR) at P3.32 billion or 25.7 percent of the budget. This will allow Government to continue to address the water and power issues facing the country by putting in place appropriate infrastructure.

This is an abridged National Budget Speech 2015/16 delivered by the Minister of Finance and Development Planning, Kenneth Matambo, on Monday.

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