Maestro Gaolathe's good fortune budget: Botswana's canny finance minister, Baledzi Gaolathe, has presented a 'people friendly' budget for 2006/07, cutting taxes and raising public sector wages on the strength of a healthy surplus. Barry Baxter reports.

Author:Baxter, Barry
 
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Presenting the 2006/07 budget, Botswana's finance minister Baledzi Gaolathe called upon Batswana to use what he was giving them to build an innovative and more productive economy. The budget, which found favour with the public, reduces personal taxes, increases development spending, raises public service wages, and commits to $7bn worth of growth-accelerating projects.

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"The private sector needs to strengthen its ability to be innovative in order to compete in world markets. There have been concerns about our workers' unsatisfactory attitude towards their jobs and inadequate focus on the customer. They have to strive for improved productivity to enhance Botswana's competitiveness," he told the National Assembly in February while presenting a budget in surplus by $171.7m.

Gaolathe also said that 2004-05, expected to show a P1.43bn deficit, would outturn at P574m surplus; and a budgeted P112m surplus for 2005-06 would be improved to P1.58bn (the current pula/dollar exchange rate is approximately P18.5/$1).

Although the unassuming finance minister would be embarrassed to be credited with bringing about this good fortune, it is his prudent but often criticised tough fiscal policies of the past two years that have found the resources to regenerate an economy that, while fundamentally sound, is suffering short-term malaise.

Most of the resources for his new policies have come from his innovative forex manipulation of the dollar earnings from diamond production.

In volume (carat weight) it has--and will in the future--change only slightly. Botswana is the world's largest producer by value of diamonds and produced 31.9m carats in 2005 and 31.1m in 2004--but production has reached a plateau.

Over 2004, Botswana's export of diamonds totalled $2.8bn; in 2005, they were an estimated $2.6bn--but in May last year, Gaolathe devalued the pula by 12% and instituted a 'crawling band' exchange regime.

"It has been done," said Gaolathe, "to help Botswana's new export industries whose market is South Africa." The pula had been appreciating against the dollar and the rand--it now began to track the heavily dollar-influenced South African rand month by month.

The exporters did benefit, but pula diamond revenues more so. "Mineral revenues over 2005-06 increased by $174.9m primarily because of diamond revenue increases," Gaolathe said. "A record surplus in the current account of $1.2bn is forecast for 2005, driven by a balance of substantial increase in exports as compared to the smaller increase in imports. Exports of goods in 2005 are $4.2bn which represents a 31% increase on 2004, mainly reflecting increased exports of diamonds."

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The net result is an estimated surplus in the overall balance of payments of $944m compared to a deficit of $42m in 2004.

A full 12 months of the new exchange regime should see a significantly higher increase. Since the devaluation, the pula has appreciated against the euro by 3.6%, the British pound by 4.4%, but depreciated against the dollar by 0.7% and 5.5% against the rand.

Growth aim is 6% to 2010

Gaolathe's tighter economic control over 2004 and 2005 was aimed at cutting government spending and bringing inflation and household credit into line with Central Bank targets. Annual growth in development spending became negative over the second half of 2004 and remained so over the first half of 2005.

In 2006-07 development spending will be $1.06bn, up by 32% over 2005-06 and 50% over 2004-05. Longer term, the National Development Plan will see a continued aggregate increase in development spending by 30% to 2009-10. The $7bn budget for special projects will also run to 2010. "The expected outlook for the economy to 2010 is a growth rate of more than 6% a year," Gaolathe said. To achieve it would be a challenge to Botswana's implementation capacity.

Botswana remains a diamond economy and short term this will sustain revenues, but long-term development depends, as Gaolathe said in his speech, on an innovative and productive economy.

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