In a week’s time, the Minister of Finance and Development Planning Kenneth Matambo will present the 2016/17 budget speech with many expecting to hear a detailed report on the much talked about Economic Stimulus Package (ESP). Economists say a deficit is expected against a weak growth backdrop emanating from a sustained decline on the demand for commodities globally. An Economist at FNB Botswana, Moatlhodi Sebabole said he expects deficits in fiscal years 2015/16 and 2016/17. “This will reflect lower diamond and mining revenues as well as reduced SACU receipts,” Sebabole noted, explaining that the lower diamond activity will result in lower mineral revenue and thus stress the country collections.
The Budget Strategy Paper (BSP) released last year has already forecast a growth rate of 2.6 percent for 2015 due to a decrease in demand for diamonds in the global market. The paper acknowledged the downside risks posed by the heavy reliance on the mining sector particularly diamonds whose demand and prices are subject to global fluctuations. The BSP noted that the reduction in the growth rate is the result of lack of economic diversification. Katso Tshipinare, Barclays Bank Botswana economist, says the low demand for commodities appears to be spilling into 2016 indicating that this will affect the local GDP.
“The significant contribution of mining to our GDP means our country is directly affected by this sluggish demand for diamonds,” Tshipinare said.
Of particular interest to this year’s budget speech will be the ESP which was announced towards the end of 2015 by President Ian Khama. The finer details of this programme are yet to be publicised. Tshipinare said even though all budgets are meant to yield positive results, the interest in this fiscal year will focus on the details of the ESP. “This is where we expect to find targets and figures,” he said. Government has already made known its wish to draw from the Foreign Exchange Reserves to partly finance ESP projects. While growth is sluggish, government financial obligations on the other hand are expected to increase.“ Government expenditure is expected to rise due to an ever growing wage bill, drought relief measures and other operational expenses,” said Sebabole.
Due to the ESP it remains to be seen how Matambo’s budget will look like, but Sebabole explains that historically there has been tension between the development and the recurrent budget. “Therefore we might still see more aggressive growth on the recurrent as opposed to the development budget,” Sebabole remarked. The FNBB economist says the implementation of ESP, NDP 11 and Vision 2036 should be the catalysts behind the shift from fiscal consolidation to an expansionary stance. “Provided there is effective implementation and that private sector involvement is secured through public-private partnerships, major projects scheduled over the longer haul should all be growth –enhancing,” remarked Sebabole.
Sebabole believes the government has the legal capacity to also do more debt participation, given the favourable debt ratings and low debt-to-GDP levels compared to thresholds - at 23 percent as compared to 40 percent self-imposed thresholds. He said there is more room for debt maneuvering on the local front as local debt to GDP ratios are at 6.5 percent against a 20 percent threshold. There have been concerns that the local economy is technically on recession, however economists are not buying into those fears. “Practically there are several factors that we look at before we declare a recession,” declared Tshipinare. These factors, he said, include inter-alia, real GDP, real income, employment and industrial production among others.
“As an economy we had negative real GDP growth for two consecutive quarters in 2015,” he said. Sebabole, on the other hand, said the risk of technical recession is minimal, especially with pending real GDP growth numbers for a quarter four of 2015. “The last quarter of the year is usually robust and that is attributable to festive pick-up of diamond sales across the American and Asian markets,” he said, adding that at FNBB they are expecting a real GDP growth of around two percent in 2015 owing to the negative growth in the mining, agriculture and supply side of water and electricity.
Furthermore, Sebabole said the growth forecast indicate that the economy will grow around two percent in 2015 with risks to the downside and forecast below-trend growth of 3.8 percent in 2016. “The aggregate growth numbers do not, however, reflect the diversified sectorial performance,” said Sebabole. He believes growth should pick up towards a trend-like pace over the medium (2017-2019) if the diamond sector recovers, global growth volatility falls and the government’s economic diversification strategy begins to pay off.