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Revenue Diversification: A Discussion

On the 6th of February in front of the Botswana National Assembly, Honourable O.K. Mathambo, the Minister of Finance and Economic Development delivered the 2017 Budget Speech.  He mentioned that in the past year the economy grew by 3.8% and was forecast o grow at an average of 4.4% per annum for the entire NDP 11 (National Development Program) period.  A growth rate which is below the SADC regional target of 5%. He then went on to make perhaps  the most controversial statement of the speech saying;

‘The principal role of the Government is not to create jobs directly, but to provide a conducive macroeconomic environment to facilitate the development of the private sector. The private sector in turn is expected to take advantage of such an environment to undertake investments, which could contribute to the growth of the economy and creation of sustainable employment opportunities.’

A convincing argument can be made that the government has not been able to provide the said environment. What with strict immigration laws that make Botswana a less than ideal hub for foreign investors. But the most notable thing, according to me anyway, was how the government was going to go forward in reaching this increased economic growth rate.  For the past decade Botswana has failed dismally at diversifying its economy and has still continued to depend on diamond revenue. At the end of 2015, diamond exports accounted for 83.1% of total exports with mineral revenue accounting for a 30.4% share of total Government revenue. With the current decline in the demand for diamonds, largely attributed by the growing market of synthetic diamonds, it is now more important than ever for us to diversify our economy.

The government’s solution to this; Revenue Diversification. The Ministry will be considering proposals by the Tax Review committee on how to diversity the government revenue base. Revenue diversification is a concept adopted from Investment Portfolio Theory. In portfolio theory diversification is used to help reduce risk or variability. The government intends to do the same thing, to reduce revenue fluctuations which have been due to performance of imports within the SACU region. A number of countries have adopted this strategy. For this to work, literature based on this subject shows that a desirable tax structure must be implemented that includes taxes that are not perfectly correlated. That is the different tax revenues should not move in the same direction. When one tax revenue falls short due to economic conditions, not all other tax revenues are affected the same way and therefore risk of revenue fluctuating is low. It is important to note that economic conditions as well as tax structure have significant effects on the stability and growth of tax revenue flow.

According to Mathambo, the proposals are to include adjusting various taxes, levies, permits and licenses and reviewing some tax expenditures such as VAT exemptions. The degree of revenue variability is determined by the income elasticity of tax revenues. In simple terms, how tax revenue changes subject to economic conditions. Therefore to achieve higher government revenue, a combination of taxes with low elasticity are to be considered. These are taxes or levies that when changed have little impact on their revenue. One such example in Botswana is the alcohol levy. It is a well known fact that Batswana love their alcohol and over the years the government has been increasing the alcohol levy with little or no effect on the level of alcohol consumption. In fact the government continues to make  millions out of this because despite the price of alcohol, Batswana will nearly always continue to consume it at high levels. It is then highly likely that the alcohol levy will be increased yet again and be part of the tax portfolio proposed by the Taxation Review Committee. We have that to look forward to. The problem however is that this whole process of reshuffling the revenue base and adjusting taxes is long, raising the question of whether it will have any tangible impact during the NDP 11 period. Research has also shown that it tends to have a short impact. For more long term results, investing in growing industries with promise of diversifying the economy should be the appropriate route for the government to take. That being said, only time will tell how the Tax Review Committee plans to proceed.

Sources:

Full budget speech

 

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2 Responses

  1. Sipho Mahlangu
    Interesting article. I do think Botswana is high-key sleeping on its potential as the Main Hub for Tourism in the SADC. It has a huge (seemingly unrecognized) advantage over SA based on Many Factors, not excluding a ridiculously lower crime rate, which is SA tourism industry’s major buzz killer. There is so much to be exhibited to Tourists that y’all take for granted maybe.

    1. Lala
      😂😂😂 ‘high key’. Batswana leaders are high key sleeping on a lot of things unfortunately. The main problem is they aren’t welcome to new ideas. We were sent to school to help develop our country yet for some reason they won’t give us the time of day or even listen to some of our ideas. What was the point then of spending hundreds of thousands sending students to expensive schools abroad if you aren’t going to utilise the knowledge they obtained?? We are really just praying for change in the next up coming elections and then maybe things will be better. Astute observations by the way

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