FISCAL SPACE FOR CHILDREN: AN ANALYSIS OF OPTIONS IN BOTSWANA APRIL 2018
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FISCAL SPACE FOR CHILDREN:
A N A N A LY S I S O F O P T I O N S I N B O T S W A N A
APRIL 2018
UNICEF works in 190 countries and territories to save children’s lives. To defend their rights. To help them fulfil their potential. And we never give up. UNICEF, for every child.
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
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1.4 Data limitations .......................................................................................... 2
1.5 Organisation of the FSA ............................................................................ 3
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OF OPTIONS
2 Botswana’s Macroeconomic and Fiscal Context ........................................ 5
2.1 Longer-term national economic trends .......................................... 5
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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
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2.1.4 Employment and Poverty .................................................................. 8
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2.2 Recent macroeconomic developments .......................................... 10
2.2.1 Real GDP growth ............................................................................. 10
2.2.2 International trade ............................................................................. 10
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2.2.3 External and internal debt .................................................................11
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2.2.4 Inflation, interest rates and the exchange rate ................................. 13
2.3 Recent fiscal developments ............................................................. 15
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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
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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
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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
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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
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5.3.3 Better quality, more effective spending (efficiency gains) .................................. 65
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5.3.4 Running larger budget deficits ........................................................................... 66
5.3.5 Decreasing illicit financial outflows ......................................................................67
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6 Conclusions ......................................................................................................................... 69
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6.1 Addressing general fiscal resource issues ............................................................ 69
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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
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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
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BSP Budget Strategy Paper
CMA Common Monetary Area
DSP Department of Social Protection
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ETSSP Education and Training Sector Strategic Plan
OF OPTIONS
EHSP Essential Health Services Package
FS&T Financial Statements and Tables
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FSA Fiscal Space Analysis
AN ANALYSIS
GIA Government Investment Account
GoB Government of Botswana
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GoB Government of Botswana
FOR CHILDREN:
GDP Gross Domestic Product
HIV/AIDs Human Immunodeficiency Virus/Acquired Immunodeficiency Syndrome
IHSP Integrated Health Services Plan
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IMF International Monetary Fund
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JC Junior Certificate
MAS Medical Aid Schemes
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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
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REER Real Effective Exchange Rate
RAD Remote Area Dwellers
SACU Southern African Customs Union
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SADC Southern African Development Community
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SDR Special Drawing Rights
SOEs State Owned Enterprises
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SB Sustainable Budgeting
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TEC Total Estimated Cost
UN United Nations
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UNICEF United Nations Children's Fund
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US$ United States Dollar
UMIC Upper-Middle Income Countries
VAT Value Added Tax
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VDC/WDC Village/Ward Development Committee
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VGFP Vulnerable Group Feeding Programme
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Page vii
PREFACE
This report, which focuses on Botswana, is part of a series of country studies
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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
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Analysis and Fiscal Space Profiles of countries in the Eastern and Southern
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Africa Region’. The project aims to strengthen UNICEF’s advocacy efforts
through a better understanding of the role of political economy factors in
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processes and decisions around creation and use of fiscal space for invest-
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ments in children in Eastern and Southern Africa.
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This report was written by Dr Keith Jefferis of Econsult Botswana, on behalf
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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.
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The writers of this report wish to thank UNICEF Botswana Country Office
staff in Gaborone for their support. They also express gratitude to the
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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
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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
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highly subject to the performance of the almost half of the budget to tertiary education
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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
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long-term challenges of generating new and increasing priority spending (on a real, per
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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
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(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
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outlook in the short-term, a steady, long-term economic growth is in line with recent trends,
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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
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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 ixEXECUTIVE 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
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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
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expansion of exemptions) would raise more
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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.
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growth.
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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,
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fuel and property taxes, and cost recovery especially as mineral revenues decline. Hence
there is no guarantee that even if revenues are
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(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
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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
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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
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Botswana has a “mature and comprehensive”
allocation of fiscal resources to priority
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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
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UNICEF can most effectively intervene to
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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
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context. children (OVC) care programme. There are
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also several programmes that have an indirect
Fiscal identity impact on children, notably those that are
targeted at low-income households. These
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Priority expenditure
= ______________________ include destitute person’s allowances, and the
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Tax and non-tax revenue Ipelegeng public works programme. In
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+ 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
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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
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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
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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
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internal financing flows, are projected on the 2010/11 to 2016/17. The main data source is
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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
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accounting identity is satisfied. World Bank and the IMF. In some respects,
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budgetary data published by the government
For any projection year, this net internal of Botswana are quite detailed, and include
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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.
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framework. Chapter 3 looks at the recent
evolution of priority expenditure flows in the
education, health and social protection
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categories and outlines some specific
challenges in the various areas relevant for
expenditure on children.
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FISCAL FOR CHILDREN:
SPACE FOR ANALYSIS OF
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Page 03for 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
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16
14
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12
percent
10
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8
6
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4
2
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0
FISCAL SPACE
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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 05Figure 2: Annual real GDP growth, 1995-2016
15%
10%
5%
0%
-5%
-10%
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Source: Statistics Botswana, National Accounts
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Figure 3: Diamond production (million carats)
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40,000
ANALYSIS OF
35,000
AN ANALYSIS
30,000
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Produciton - mcts
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25,000
20,000
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15,000
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10,000
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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
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Source: United Nations (UN) Population Prospects, 2017
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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
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population was 16 years, but had risen to 24
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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,
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cent in 2015. The proportion of the population as the structure of Botswana’s economy has
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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
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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 07Figure 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 15Table 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.
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