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Botswana stands to lose billions in SACU revenues

Daily Mmegi, Botswana

Botswana stands to lose billions in SACU revenues

By Brian Benza, Staff Writer

18 November 2011

The global economic crisis, along with other evolving structural factors within SACU, could cut a P5-billion permanent hole in revenues that Botswana receives from the customs union, the IMF estimates.

In a working paper published this week, the IMF says Botswana, Namibia, Lesotho and Swaziland, which have already experienced a sharp loss in 2010/11/12 fiscal years due to the global crisis, face additional significant risks of a permanent loss of income as revenues are expected to further decline over the medium-term due to at least three structural factors.

The IMF listed the structural factors to include a change in the SACU revenue-sharing formula currently under discussion, a reduction in the common external tariff rates as a result of trade liberalisation, and the pending creation of the Southern African Development Community (SADC) customs union. BNLS countries are currently renegotiating revenue sharing formulae with South Africa after the members threw out an earlier recommendation in June in which Botswana stood to lose P8 billion by 2019.

While admitting that quantifying the risks faced by BNLS with precision is a daunting task, the IMF says the preliminary parameters under discussion on the revenue sharing formula and the impact on trade liberalisation point to an the estimated fall in SACU transfers ranging from five percent to 15 percent of GDP for BLNS.

According to the estimates, Botswana’s simulated loss stands at five percent of GDP, which would currently translate to about P5 billion, while Swaziland’s loss is estimated at 15 percent of the GDP, Namibia 5 percent and Lesotho 6.7 percent.

On average, Botswana received over P9 billion a year from SACU between 2006 and 2009. But the IMF earlier this year predicted that due to depressed conditions within the five-member union, Botswana’s share would this year decline by about P2.1 billion to P4.3 billion this year.

In a working paper, the Bretton Woods institution once again suggested that the most appropriate option of adjusting to the changes would be fiscal consolidation through mostly cutting down of the size the public sector.

"Overall, the design of fiscal adjustments needs to rely on multiple instruments, with a strong emphasis on reducing consumption, particularly in the public sector," reads the paper. "Under the assumption of a strong and permanent fall in SACU transfers, BLNS would have to pursue fiscal consolidation.

"Focusing on reducing consumption (government consumption, consumption tax) is most effective in bringing about the adjustment and mitigating the impact on growth. Reducing consumption not only restores fiscal sustainability, but also puts downward pressure on prices, contributing to reducing external imbalances. Moreover, by improving price competitiveness, government consumption cuts may provide better prospects for medium-term growth,"
Over the years, the IMF - along with the World Bank - have continuously advised Botswana to cut the size of its public sector wage bill to create fiscal space for recurrent costs associated with completed projects, as well as for social spending. In the paper titled The Design of Fiscal Adjustment Strategies in Botswana, Lesotho, Namibia, and Swaziland, the IMF suggests that the fiscal adjustments for BLNS need to be complemented by key public finance management reforms to ensure their sustainability.

Among such measures, it suggests that countries will need to identify contingencies, strengthen medium-term frameworks, and improve taxpayer compliance. "All these measures require not only a well designed fiscal consolidation plan but also continued efforts in fiscal transparency to ensure large ownership of the adjustment plans," the paper added.

However, the paper warns against implementing the adjustments quickly, saying it could have detrimental effects on growth. An abrupt adjustment can, in practice, have a detrimental impact on growth, thus calling for a more spread-out adjustment, added the report.