Botswana: Selected Issues and Statistical Appendix

This Selected Issues paper and Statistical Appendix provides medium-term estimates of the cost of the government’s current anti-HTV/AIDS policies and programs in Botswana. The paper throws light on the policy challenges that Botswana authorities face in combating the crisis. The findings suggest that the cost of treating HIV/AIDS patients is likely to be high, about 10 percent of GDP, by 2010 (using the baseline estimates). The paper also analyzes Botswana’s approach to medium-term fiscal management.

Abstract

This Selected Issues paper and Statistical Appendix provides medium-term estimates of the cost of the government’s current anti-HTV/AIDS policies and programs in Botswana. The paper throws light on the policy challenges that Botswana authorities face in combating the crisis. The findings suggest that the cost of treating HIV/AIDS patients is likely to be high, about 10 percent of GDP, by 2010 (using the baseline estimates). The paper also analyzes Botswana’s approach to medium-term fiscal management.

II. Botswana’s Approach to Medium-Term Fiscal Management4

A. Introduction

21. In many respects, Botswana’s National Development Plan (NDP) is a textbook example of a medium-term expenditure framework (MTEF).5 However, despite its long-running success in fiscal planning, there is some evidence to suggest that the coordination of macroeconomic policies could be improved. Looking forward, the looming demands of HIV/AIDS and possible declines in Southern African Customs Union (SACU) revenue may require new procedures and policy benchmarks. Nevertheless, the design and implementation features of the NDP framework offer a useful example of a working MTEF to the developing member countries of the IMF.

B. Concept of a Medium-Term Expenditure Framework

22. A medium-term expenditure framework provides a platform for integrating policymaking, planning, and budgeting in a way that leads to more efficient budget outcomes. At a very general level, a MTEF contributes to improved efficiency by (i) creating a transparent and predictable fiscal regime conducive to high growth and macroeconomic stability, (ii) matching the allocation of public resources with policy priorities within and among sectors; and (iii) imposing hard budget constraints on line ministries and agencies while providing them with sufficient autonomy in their choice of methods for achieving their objectives.

23. An MTEF has two main components. The first is a set of policy objectives derived from principles that seek to guarantee prudent fiscal management.6 The second is a set of policy actions for attaining those objectives.7 Countries have approached the setting of policy objectives in a variety of ways, reflecting their peculiar experiences and circumstances. A common element, nonetheless, is the emphasis on transparency as a vital principle for establishing confidence in a fiscal framework. Hence, the chosen fiscal rule needs to be clearly defined in writing. Transparency also would govern the setting of annual fiscal policy objectives, the implementation of fiscal policy, and the publication of public accounts.

24. An enabling legislation—typically called & fiscal responsibility law—has proved to be a vital instrument for institutionalizing the commitment to a rules-based fiscal arrangement and the transparency of the MTEF regime. Its provisions most commonly include the following:

  • a qualitative set of principles of sound fiscal management that should be followed in preparing medium-term budgets;

  • a requirement that the Minister(s) responsible for preparing and implementing budgets provide regular fiscal strategy statements to parliament and the public that demonstrate how the actual medium-term proposals presented by the government adhere to those principles of sound fiscal management, and

  • specification of a set of public documents that make available a defined set of information to parliament and the general public that allows them to make judgments about the adequacy of the fiscal strategy presented by the minister and the government.

25. In broad terms, the development of an MTEF begins with the formulation of a medium-term fiscal framework comprising macroeconomic projections, and projections for revenue, expenditure, financing, and debt. These projections, together with the defined policies and priorities, form the basis for the formulation of an MTEF from which the fiscal stance is subsequently derived.

C. Experience of some African Countries with Medium-Term Expenditure Frameworks

26. The literature on MTEFs indicates that they have proliferated in developing and transition countries since the late 1990s, with Africa in the forefront. African countries account for somewhat over half of the existing MTEFs (about 25 in various stages of implementation), and they started earlier than developing countries in other regions, including transition countries, in preparing them.8 According to the Le Houerou and Taliercio, the World Bank has been involved in the decisions of many African countries to adopt and implement a MTEFs, many of which came about as a result of public expenditure reviews. MTEFs now feature in the formulation of poverty reduction strategy papers as the underlying statement of policy objectives and, in the tracking of poverty-related expenditure from debt relief, in the implementation of the Poverty Reduction and Growth Facility arrangement of the Fund, and also the World Bank’s new lending instrument, the Poverty Reduction Credit. The adoption of a medium-term approach to public expenditure management has by no means been limited to the developing world. Indeed, medium-term frameworks have been adopted by several industrial countries to provide a coherent strategy for managing public finances. Among these, the United States, the United Kingdom, Canada, Australia, and New Zealand all have three-year medium-term frameworks that are submitted to the legislature as part of the budget documents. Continental European countries, including Germany, Austria, Norway, and Sweden, also follow such a medium-term approach.

27. In their study of METFs in Africa, Houerou and Taliercio9 found a number of shortcomings in the design of the frameworks, the organizational and administrative processes involved, and the arrangements for legitimizing and building the necessary consensus for the success of the METFs. Among the salient weaknesses were a general lack of comprehensiveness, characterized by partial coverage of economic sectors, the exclusion of capital expenditures by a majority of the countries, and the focus on the central level of government. In a good number of the countries, the MTEFs were not meaningfully integrated into the annual budget process but were undertaken as parallel exercises. As regards political backing, only a minority of the countries submitted their MTEFs to both cabinet and parliament for approval. In a few cases, the Ministry of Finance promulgated the MTEF without recourse to higher political approval. Furthermore, the MTEF in most cases was managed by the Ministry of Finance without much overlap with other authority structures, and only in few did civil society play a role. These observed shortcomings in the MTEF design in the countries studied led the authors to conclude with justification that the MTEFs were in general of limited usefulness in controlling aggregate spending and fiscal deficits. In addition, the MTEFs lacked the political support and broad social consensus that would have enhanced their capability to effect change.

28. Given its broad objectives, an MTEF is expected to contribute to (i) improved fiscal and macroeconomic balance; (ii) inter-sectoral and intrasectoral resource allocation closely in line with priorities, greater budgetary predictability for line ministries, (iii) more efficient use of public resources; (iv) greater political accountability for public expenditure outcomes; and (v) more credibility of budgetary decision making. Against the four benchmarks for which some information was available, Le Houerou and Taliercio did not find much support for the potential benefits of the MTEFs in the African cases examined. This lack of success is attributed to the weak initial conditions in these countries with regard to not only budget formulation—with which the MTEF is concerned—but also capacities for budget execution and auditing, including reporting.

29. The broad conclusions of the study lent support to widely held views about the prerequisites for success of the MTEFs. Prominent among these are (i) a good macro-fiscal model; (ii) a sound budget foundation, whose main elements include budget execution that complies with the approved budget, (iii) the publication of quarterly budget execution reports based on the same classification system as the budget; and (iv) publication of external audit reports backed by sanctions for misappropriation of resources.

D. Review of the Budget Process in Botswana

30. Since independence in 1966, Botswana has used a series of multiyear plans to guide fiscal policy. The current NDP—the eighth in the series—is a six-year plan set to end in March 2003. The link between the central government’s annual budgets and the NDP is very close. In each year, capital expenditure allocations in the budget are derived directly from the investment program in the plan.10 Similarly, the aggregate provision for current spending is arrived at as an annual ceiling within which allocations to line ministries and agencies are made. The plan itself is based on projections from a macroeconomic model, the Macroeconomic Model of Botswana, which provides forecasts of all major macroeconomic aggregates. In the periodic reviews of each plan, account is taken of the strategic policy priorities within and between sectors and any changes during the course of the implementation. The process is also sufficiently flexible in allowing agencies to pace both their capital and current outlays within their approved investment programs and current spending ceilings. In addition, the planning process involves broad consultation and discussion, including with civil society, the close involvement of a broad-based cabinet committee in decision making, and approval by parliament.

31. As regards the fiscal policy regime, the plan defines a broad fiscal objective consistent with achieving an efficient allocation of resources. In particular, the size of the government’s expenditure program, is fixed in principle at a level compatible with the overall supply of resources in order to avoid crowding out private sector investment and undermining the objective of macroeconomic stability. The plans also affirm the need for fiscal prudence on a long-term basis.

32. The specific goal, as stated in the NDP-8, is to maintain a sustainable fiscal position. This is defined as a fiscal outcome in which the nonmining revenue of government is at least equal to the total of the “noninvestment recurrent expenditure” of the government.11 In that situation, the government would be able to devote its revenue from mining—a depleting resource—to public investment aimed at expanding and diversifying the country’s production base. Adherence to this rule has generated budget surpluses in most years, resulting in a buildup of substantial reserves.

33. From the foregoing it can be seen that, Botswana’s approach to public resource management is clearly in line with the sound practices outlined above. The annual budget cycle is based on a long-term perspective, and allows for the effective coordination of the country’s overall and sectoral development priorities. The planning framework described in the NDP-8 appears to provide an effective mechanism for aligning the government’s spending program with changing priorities, especially in the context of the midterm review of each plan, and the process of consultation and approval seems to ensure that policies will have the necessary political legitimacy and broad support. Finally, macroeconomic stability and fiscal prudence are achieved through the use of a macro economic framework and adherence to a fiscal rule intended to guarantee fiscal sustainability.

34. Botswana’s outstanding economic performance over nearly three decades also suggests that the country’s implementation of a succession of medium-term public expenditure programs has made a positive contribution to its macroeconomic track record. Real GDP growth averaged close to 9 percent between 1974/75 (July-June) and 2001/02, inflation has largely been kept in line with developments in South Africa, which is the country’s major source of imports, and prudence in the use of receipts from diamonds has generally been accompanied by fiscal and current account surpluses, which, in turn, have enabled the buildup of a high international reserve levels (Figure II.1). International reserves in recent years have hovered around 30 months of imports. In addition, monetary and exchange rate policies have been largely successful in reducing inflation. As regards spending priorities, the most significant feature of resource allocation in the budget has been the relatively large share of social spending, especially on education. Spending on education averaged 24 percent of total spending in the five-year period ended 2001/2002 (April-March), and social spending as a whole 41 percent. The respective shares of general public services and economic services were held almost constant.

Figure II.1.
Figure II.1.
Figure II.1.

Botswana: Selected Economic Indicators

Citation: IMF Staff Country Reports 2002, 243; 10.5089/9781451806373.002.A002

35. While the medium-term fiscal frameworks have contributed to prudent policies that have underpinned Botswana’s impressive economic performance, the fiscal projections themselves have deviated quite significantly from actual outcomes. Both revenue and expenditure outturns have most of the time been considerably higher than projected in the plan (Figure II.2). Apart from the normal uncertainties that are associated with estimating budget revenue and expenditure, the deviations also reflect the addition of new projects to the plan, as well as modifications to projects already in the plan including changes to take account of increased costs. These changes prompt the authorities to make to annual reviews of the macroeconomic framework to ensure that the goal of macroeconomic stability is not jeopardized. However, updates to the medium-term macroeconomic projections that are done in the context of the annual budget are not published, making it difficult to relate the revenue and expenditure program in the plan to the spending figures in the budget.

Figure II.2.
Figure II.2.

Botswana: Deviation of Actual Revenue and Expenditure from Plan Levels 1997/98-2002/03 1/

(In percent)

Citation: IMF Staff Country Reports 2002, 243; 10.5089/9781451806373.002.A002

1/ Year beginning April 1, 2002/03 data are budget estimates.

E. Enhancements to Botswana’s Approach

36. While Botswana’s NDP approach has been a clear success, there are, nevertheless, possible modifications that would contribute to greater effectiveness. These include adopting a new fiscal rule that could accommodate fiscal pressures that may emerge over the coming years; improving the coordination of monetary and fiscal policies, disseminating more comprehensive information on the budget, including the underlying near-and medium-term programs, and moving toward an outcome-oriented budget process.

37. The fiscal policy rule in place has so far proved to be prudent. Recurrent expenditure other than those on education and health is to be funded from nonmineral revenue, allowing mineral revenue to be devoted to investment spending. However, this rule has limitations that are likely to become more of a constraint:

  • First, as progress is made in implementing public sector capital projects and programs and recurrent spending grows, there is no guarantee that the growth in nonmineral revenue will keep pace. Indeed, indications of this failure to keep pace were apparent from projections in the NDP-8 document. Moreover, since all expenditure on health is classified as investment spending under the present fiscal rule, adherence to the rule will not guarantee that nonhealth spending will adjust to accommodate the growth in HIV/AIDS expenditure over the coming years.

  • Second, Botswana has so far continued to accumulate reserves through surpluses in the budget. This prudent posture will enable the government to finance a reasonable level of budget deficits without increasing its gross debt for some time. However, large deficits accompanied by a rapid drawing on the accumulated reserves could be perceived by markets and the wider public as a change in the prudent policy stance. In the circumstances, one possible rule could be to set a single-year limit on the level of the overall budget deficit. Another approach, which would take into account Botswana’s unique net foreign assets position, might be to set annual ceilings on the net use of the surpluses. Over the medium term, such a rule could be institutionalized as an anchor for a rules-based fiscal regime, akin to the practice in many advanced countries.

38. The authorities confirm that the macroeconomic framework of the plan is updated annually and, as underlying assumptions change, with a view to ensuring the mutual consistency of the macroeconomic targets. However, there are indications that the coordination of policies has weakened in recent years. One such indication is the buildup of Bank of Botswana certificates, which were issued by the bank to contain the excessive growth of liquidity caused by an overly expansionary fiscal stance. The resulting mix of policies has contributed to high real interest rates, which are inimical to the desired growth in private investment.

39. The annual revisions to the medium-term program are presently not published. This makes it difficult for market participants to relate the annual budget to the six-year plans and come to a proper understanding of the longer-term fiscal outlook. Making budget information available to international investors in an easily understood framework has become even more important, in light of the government’s plan by to take advantage of its long track record of sound public finance management and resulting domestic and international confidence by issuing a long-term bond and developing financial markets. A medium-term framework, published annually, is a mechanism that has been used by many countries and could serve the purpose in Botswana’s case.

40. The regular overbudgeting of capital spending creates room for inefficiency in the implementation of the public projects. The pressure to implement at a pace that exceeds the available supervisory capacity makes it easier for firms that undertake these projects to get away with substandard performance. While there are no indications of this occurring, there remains a need for a more conservative capital expenditure program, based on a more realistic estimate of human resources availability.

41. Finally, while the top-down control of recurrent expenditure is an important factor for efficiency at the operational level, the existing budget system is mainly input oriented, with performance measured by expenditure outlays. There is therefore, room for improving efficiency through reform that would shift the focus of the system to the analysis of output and outcomes.

4

Prepared by Patrick Akatu.

5

The term “medium-term fiscal strategy (MTFS)” is also used in the literature.

6

One such principle that seeks to achieve improved levels of public savings is the “golden rule,” which requires that current expenditures be financed from revenue.

7

The description of an MTEF given here, while generally applicable, may be more representative of the practices in advanced economies than in African countries and other developing countries, where the main focus of reform efforts has been on achieving better linkage between sectoral and intersectoral spending priorities within the available resource envelope.

8

Phillipe Le Houerou and Robert Taliercio, “Medium-Term Expenditure Frameworks: From Concept to Practice—Preliminary Lessons for Africa,” World Bank, Africa Region Working Paper No. 28 (Washington: World Bank, 2002).

9

Ibid.

10

The investment spending programs are, however, reviewed periodically. At such reviews, new projects and programs are brought into the plan, existing projects modified, and implementation speeded up or delayed.

11

Noninvestment recurrent expenditure is defined recurrent expenditure other than recurrent outlays on education and health.

Botswana: Selected Issues and Statistical Appendix
Author: International Monetary Fund