On the 10th February, 1996 The Honourable Vice President and Minister of Finance and Development Planning, Festus Mogae tabled the Government of Botswana's budget proposals for the forthcoming year and delivered the traditional budget speech.

Overall comment - prudence and practicality keep Botswana on the list of potential places to invest.

The theme of the budget was "Sustainable Government Budget", an echo of the Government's focus in its eighth National Development Plan (NDP8) - "Sustainable Economic Diversification". This is in keeping with the ruling party's constantly stated intention to resist the politically attractive temptation to short circuit the established planning system to achieve short-term gains at the expense of long-term growth.

Highlights of the budget speech were:

INTRODUCTION

A brief summary of the achievements of Botswana during its three decades of independence. The establishment of a genuine non-racial multi-party participatory democracy; a peaceful society; attainment of budgetary self-sufficiency; significant improvements in roads, telecommunications, postal services, financial and other services. Access to social services such as potable water, health and education has increased. Formal sector employment has risen from 25,000 at Independence to over 235,000 in 1996. Mortality rates have been reduced while life expectancy has increased from 50 years to 67 years. Per capita income has risen from about P70 to P9,800 in 1995/96. Underpinned by stable economic growth, the quality of life of Batswana has improved beyond original expectations. The Government attributes this success to its prudent, modest and cautious approach and determination to adhere to macroeconomic and fiscal discipline, even during years of relatively low economic growth.

Government recognises that the nation, like the individual, has to try to cut its coat according to its cloth. "Government has a lot to learn from the budgeting process and cost consciousness of successful private companies."

Government expenditure has to be based on the expected long term profile of revenues to ensure stable economic growth. In good years, savings must be accumulated to be drawn down on in bad times.

There must be a judicious mix of development expenditure. The temptation to increase expenditure without a proportionate return must be avoided.

Botswana is still overly dependent on mineral revenues which account for 45% of the total revenues in the 1997/8 budget. There is a great need to improve tax collection, broaden the tax base and institute cost recovery measures.

ECONOMIC REVIEW

The Vice President noted that the global economic situation is encouraging with continued strong growth in the developing countries estimated at 6% in 1996 and expected to be maintained in 1997. Africa seems to be emerging from the dismal early 1990's with a real output growth rate of some 5% in 1996 likely to sustained in 1997.

Within the Southern African Development Community (SADC) -of which Botswana is a founder member - real GDP grew by 3.5% in 1995 compared with 2.7% in 1994. A large contributing factor was the good rains in the last season. A higher growth rate is needed in the region to combat widespread poverty and unemployment. The member states of SADC are working towards this goal. In August 1996 important protocols were signed in the areas of Energy, Trade, Transport, Communications and Meterorolgy and the Combatting of Illicit Drug Trafficking.

On the domestic front a significant growth rate was recorded during the year. Provisional figures show that the overall real GDP growth rate more than doubled from 3.1% in 1994/95 to 7% in 1995/96. This is mainly due to the significant recovery in the mining sector which accounts for about a third of GDP. This sector grew by 9.9% in 1995/6. A major contributing factor was the coming on full stream of the additional plant capacity at the Jwaneng diamond mine (owned equally be the Government of Botswana and DeBeers Centenary).

Non-mining GDP showed a growth rate of 5.6% in 1995/6. This is taken to be an indication of the relative efficacy of the diversification policies of the past. Additional engines of growth are Manufacturing and Trade and Hotels -growth in which sectors should translate into the much needed jobs for the growing labour force.

In 1996/97 it is forecast that real DDP will grow by 6.8% and non-mining GDP at 7.6%. This latter growth is expected from expansion in the Bank, Insurance and Business Services (8.5%), Trade, Hotel and Restaurants (7%) and Manufacturing (5.5%) sectors.

The Pula depreciated significantly against major currencies during 1996 - 29.1% against Sterling and 12.8% against the Yen. It also weakened regionally - .8% against the Rand and 10% against the Zimbabwe dollar. The positive side of such depreciation is that Botswana exporters have gained in terms of the average sale price of goods.

The balance of payments recorded an overall surplus of P848 million in 1996 compared with P591 million in 1995, mainly due to the strong performance of the current account. As a percentage of GDP this was an increase of 4% in 1995 to 5.1% in 1996. Partly as a result of the improved performance in the balance of payments, but also due to valuation gains arising from Pula depreciation, the foreign exchange reserves grew by 39% from P13.25 billion at the end of 1995 to P18.41 billion at the end of 1996. Thus foreign exchange reserves grew by 7.5% from US$4.696 billion to US$5.05 billion. Special Drawing Rights (SDR) grew by 10.6% from SDR 3.164 billion to SDR 3.5 billion. Foreign exchange reserves as at the end of 1996 were sufficient to finance about 29 months of imports of goods and services.

Inflation finally fell just below 10% during 1996. The Government believes that this rate is still too high and plans to bring it down further during the course of NDP8. Thus inflation control will remain a high priority for the overall policy of macroeconomic stability. There will be an intensification of policity aimed at enhancing productivity, liberalising the economy to encourage competition, restraining wage increases, and fiscal discipline.

The Government will maintain its monetary policy unless circumstances warrant otherwise. The management of liquidity in the banking system will continue to be constant with creating stable macroeconomic conditions and promoting sustainable economic diversification. The interest rate policy will not only seek to align the level of our interest rates in real terms with those prevailing in international capital markets, but also seek to promote domestic services and economic development in Botswana.

With progressive liberalisation of exchange controls, monetary policy and indeed other macroeconomic policies, should continue to be managed in such a way that they do not destabilise capital flows.

Pursuant to the liberalisation policy, Government has recently relaxed exchange controls in order to facilitate dual listings of companies between the Botswana Stock Exchange and stock markets in other countries. This is expected to create a more conducive environment for the broadening and deepening of our share market as well as improving its liquidity. Dual listings should also enable local investors to invest in companies listed in reputable international stock exchanges. Further liberalisation of the exchange controls will be announced by the Central Bank in due course.

EMPLOYMENT

Formal sector employment grew marginally by 0.8% on a yearly basis to March 1996 due to a 3% increase in parastatal employment, 2.3% increase in public sector employment and 1.2% increase in private sector employment. Government intends to place even greater emphasis on providing employment particularly for the unemployed population amongst the out of school youth.

REVIEW OF THE 1995/96 AND 1996/97 BUDGET

The 1995/96 budget outturn showed an improvement in fiscal position, with an overall surplus of P269.9 million compared to the revised budget estimate deficit of P270 million. Contributing to the outcome was an improvement in the revenue situation as well as under-spending. Total revenues and grants were increased mainly due to the better than expected performance by the mineral and Bank of Botswana revenues, both of which were affected by the Pula depreciation.

The 1996/97 revised budget estimates show an improvement over the original budget forecast with an overall surplus of P442 million mainly due to exchange rate movements and the increase in diamond prices.

1997/98 BUDGET PROPOSALS

In the medium term, revenue prospects are favourable due to the increase in diamond production resulting from the continuous operations and significant expansion of the Orapa diamond fields. The long term revenue outlook will depend on the extent to which economic diversification will be achieved.

The total revenues and grants for 1997/98 are estimated at P7 815 million of which 83.7% is accounted for by mineral, Bank of Botswana and customs & excise revenues. The remaining 16.3% is accounted for by other revenues.

The proposed total recurrent expenditure budget for 1997/98 is P4 873 million, with 1.5% being set aside for the Productive Employment Development Fund and Financial Assistance Plan investment incentives. The expenditure budget for these incentives has been increased from P40 million to P72 million.

The Ministry of Education receives the largest share of 25% of the recurrent budget, followed by the Ministry of Local Government, Lands & Housing with 20% and the Office of the State President with 13%, mainly for the Botswana Defence Force and Police.

P2 427 million is proposed for the 1997/98 development budget of which 70% is for normal Government projects, 5% for the ongoing drought and cattle lung disease relief and the remaining 25% for equity injection and/or on-lending of external loans by government to parastatal and other autonomous organisations. The Ministry of Mineral Resources and Water Affairs claims the largest share of the development budget, some 20%, mainly due to the North-South Water Carrier project and the Major Village Water/Sanitation project. The Ministry of Local Government, Lands & Housing gets 19% of the total development budget to cover the recapital-isation of the Botswana Housing Corporation, primary schools expansions and other services to local authorities.

The budget proposals result in a budget surplus of P763 million with an anticipated increase in Government cash balances by P802 million.

The originally recommended 8% across the board salary inflation adjustment for the public sector was revised to 9.5% with effect from the 1st April 1997.

In keeping with the Government's intention to broaden the tax base and increase the disposable incomes of taxpayers, attracting investment and improving international competitiveness, the tax system will be further streamlined with effect from the 1st July 1997. The top personal marginal tax rate which has stood at 30% is once again brought into line with the top company rate of 25%. The level at which this top marginal rate will apply has been raised from P60 000 to P80 000. This will represent a loss to the fiscas of approximately P49.5 million during the financial year.

Capital Transfer Tax will, from the 1st July 1997, not be charged on mergers of companies where there is no change in the beneficial ownership of the assets. Donations to approved sports and approved educational institutions will now be tax deductable.

Sales tax (at 10%) will be extended with effect from the 1st April 1997 to cover the charges for selected professional services such as accounting and auditing fees, legal fees, management and consultancy fees, architectural, civil engineering and surveying fees, real estate commission, car rental charges, freight of goods charges (other than rail) and the labour component of garage service charges. Staple foods, construction materials, stationery, medicines, capital goods and most services will continue to be exempt from sales tax.

The content of this article is intended to provide general information on the subject matter. It is not therefore a substitute for specialist advise.

Minchin & Kelly (Botswana) - Gaborone +267 312734

cBusiness Monitor 1997 Tel +4(0) 171 737 0700