In Economics there are usually two main ways used to stimulate the economy; namely expansionary monetary policy and expansionary fiscal policy. Against the background of a challenging economic outlook that has negatively affected the price of various commodities including Diamonds, which are still key to Botswana’s GDP, the Country’s economy was deemed to be in need of support.
The recently announced Economic Stimulus Package (ESP) is a plan through which the government is expected to boost economic growth. The stimulus package was proposed as a way to reinvigorate the economy and possibly reverse a recession by boosting employment and spending. The theory behind the usefulness of a stimulus package is rooted in Keynesian economics, which argues that the impact of a recession (or sluggish economy) can be mitigated by increasing government spending.
Expansionary fiscal policy involves increasing government expenditure or cutting taxes in order to influence aggregate demand. Higher government spending represents an injection into the economy and cutting income tax increases disposable income and therefore expected to induce people to spend more. However, it has been discovered that cutting tax is more effective if it is targeted at the low income bracket. This is because low income earners tend to have a higher marginal propensity to consume. In other words, a bigger proportion of their disposable income is spent on consumption.
The problem with the expansionary fiscal policy intervention is that it may increase government debt (if government spends more) or it may just not work (if people choose to save what is accrued from their reduced income tax) or it may cause a crowding out effect. The crowding out can take two forms; resource crowding out (where government borrows from the private sector and increase spending leaving private sector with less capacity) and financial crowding out (where government borrowing put pressure on interest rates in general, to attract savers and hence lowering private sector spending and investment).
Expansionary monetary policy on the other hand involves cutting interest rates to increase consumer spending and investment. It is believed that low interest rates reduce cost of borrowing; reduce mortgage interest payments thereby increasing disposable income; and reducing the incentive to save.
The fiscal stimuli, which are often used to reboot most economies, can actually increase output in the short run when the economy is operating below its potential. To have the greatest impact with the least long-run costs, the stimulus should be timely, temporary and targeted. It should be timely so that its effects are felt while the economic activity is still below potential because when the economy has recovered, stimulus becomes counterproductive. It should be temporary to avoid raising inflation and to minimise the adverse long-term effects of a larger budget deficit. And it should be well targeted to direct resources to where they are needed.
From this background and the fact that the monetary policy in Botswana is considered to be supportive, thinking of stimulating the economy from the fiscal side is not remote. Again if the envisaged stimulus plan can be timely, temporary and targeted, then the idea of using some of the foreign reserves can be considered. However, making fiscal stimulus timely is challenging especially because in involves not only increasing spending but also implementing them. On the other hand, increases in government spending that are not matched by positive output might results in lower investment or more borrowing.
Though the full details on the stimulus package are yet to follow, few sectors are mentioned as the target. In the tourism sector, the redevelopment of the Kasane-Kazungula project through the ESP is expected to upgrade Kasane as tourist centre and Kazungula as a centre for transport and logistics. Furthermore, other tourist projects and infrastructure are mentioned including the commercialisation of community based organisations through the Community Based Natural Resource Management (CBNRM) policy.
The continuous support programs to the agricultural sector sustains subsistence farmers who, though may not be adding to the national output, sustain rural economies and reduce reliance on government subventions. The horticultural components of the ESP include such projects as water recycling in Serowe, the national agro-processing plant in Selibe-Phikwe, rehabilitation of Glen Valley infrastructure and electrification of Shashe Farms.
The ESP is expected to enhance delivery of quality public infrastructure through the implementation of recent legislation governing the construction industry, which has set professional standards for improved performance and self-regulation to protect public interest. In Information and Communication Technology (ICT), as part of ESP initiatives, reservations are made for citizen owned and operated ICT companies that provide government computer maintenance and procurement. Through ESP, extensive programme of construction and maintenance works in schools country wide have been initiated. However, what matters most at the end is that all these initiatives must be implemented on time and for the purpose to which they are intended. The whole idea is to boost spending; increase demand; increase the employment rate; increase income; leading back to increased spending.