20 Dec 2023

One of the long-term risks facing Botswana is that as mineral revenue gradually declines, previous gains of fiscal sustainability will be reversed, Finance Minister, Ms Peggy Serame has said.

 She was responding to a question from Kanye South MP, Mr Thapelo Letsholo who had asked about strategies in place to generate, store and preserve Botswana’s wealth for the wellbeing of future generations and the potential benefits of adopting similar practices in addition to Botswana Sovereign Wealth Fund and the Pula Fund.

Ms Serame explained that the decline in mineral revenue would among others reduce the country’s track record of prudent economic and financial management and compromise the ability to provide critical services and infrastructure development in health, education, water and sanitation for the future generation.

“In recognition of this, our first attempt at maintaining fiscal sustainability and generating intergeneration equity was through the Sustainable Budget Index (SBI) in 1994, which ensured that mineral revenue is not consumed but invested productively in financial, human and physical assets,” she said.

Minister Serame said other attempts were through the revenue saving fiscal rule approved in the 11th National Development Plan (NDP 11), which proposed saving 40 per cent of mineral revenue for future generations and financing the development budget with the remaining 60 per cent.

She said while the SBI had largely been complied with, the fiscal rule in NDP 11 had not been implemented or operationalised as it lacked mechanisms to ensure compliance. As such, Ms Serame said government was working on enacting into law, the revenue fiscal rule highlighted in NDP11 to restore fiscal sustainability in the medium to long term.

Ms Serame said government was of the view that a legally-backed fiscal rule would build up a longer-term savings buffer that would cushion the transition to the post-diamonds era and support intergenerational equity.

Additionally, Ms Serame said the newly extended agreement between the government of Botswana and De Beers Group recognised Botswana as a major player in the diamond exploration process and offered an opportunity to participate in the diamond midstream.

Among others, Ms Serame said the agreement established a Diamond for Development Fund where the De Beers Group would contribute P1 billion annually for 10 years. “The fund will among others, support our efforts towards a knowledge-based economy and accelerate Botswana’s economic diversification drive,” she said.

Ms Serame said lessons and best practices from other Sovereign Wealth Funds (SWFs) must be understood in the context of Botswana’s unique macroeconomic conditions. She said Botswana was a relatively undiversified primary commodity exporter and was vulnerable to exogenous shocks and susceptible to periods of sustained droughts, animal diseases and adverse global markets fluctuations affecting government revenue and ability to sustain desired government expenditure path.

The minister said the foreign exchange reserves had thus played a significant role in supporting macroeconomic stability, response to shocks, economic stabilisation and largely maintenance of policy making.

Ms Serame said lessons on SWFs could be drawn not only from Norway but from commodity-dependent economies including among others United Arab Emirates, Saudi Arabia, Kuwait, Chile and the US States of Wyoming and Alaska.

She said in Norway, oil revenue was invested in the Government Pension Fund Global to benefit both current and future generations. She said resources in the fund could only be transferred to the budget according to a decision by Parliament.

Moreover, she emphasised that the Norwegian model would be challenging to implement in Botswana, given the high dependence on diamond revenues for the annual fiscal budget, implying that the non-resource would be large and, therefore impossible to finance through the income from the Pula Fund.

“Nonetheless, the expected improvements will be achieved upon the legislation of the fiscal and/or improvement of the Pula Fund. This work is expected to be concluded before the end of the current financial year,” she said.

MP Letsholo had also asked about the efforts made to set aside a portion of Botswana’s diamond revenues for the benefit of future generations and whether the move was open to considering the establishment of a diamond future fund, which would allocate a small percentage of all diamonds revenues into a fund reserved for future use, excluding its use for funding budget deficits.

Additionally, Mr Letsholo wanted to know about lessons or best practices that could be drawn from nations like Norway, which have successfully implemented similar strategies with their oil reserves, enabling future generations to rely on the interest generated from their Future Fund’s Investments in various global companies. ENDS