- Budget deficit to widen due to reduced revenue
- Inflation forecast to slow in the second half of 2023
- IMF projects inflation to return to pre-pandemic levels in 2024
The measures – which include reduction of VAT by 2 percent (from 14 percent to 12 percent), zero-rating of cooking oil and Liquefied Petroleum Gas (LPG) on tax for the next six months, and an 18.5 percent increase of student allowances – will come at a cost to the government with Botswana Unified Revenue Service (BURS) missing on its targets.
Although she did not provide a detailed account of how much these measures – which come into effect on 1st August 2022 – will impact of the tax collection for the current financial year, the Minister of Finance and Economic Development, Peggy Serame, did point out that the relief package amounts to P1.8 billion.
A significant amount of the government’s annual budget comes from BURS through collection of a plethora of taxes and levies. For the current financial year, the taxman has been charged with collecting P46.4 billion in tax revenue. Owing to this decrease in revenue, a budget deficit for the 2022/2023 financial year, which was forecast to reach P6.98 billion, is expected to expand due to a drop in revenue.
“The value of the interventions will amount to P1.8 billion, and inevitably the budget deficit will expand and most of these is attributable to reduced revenues along with increased expenditure in students’ allowances,” Minister Serame said when announcing the short-term measures in Parliament this week. The measures come as the country battles rising inflation which reached 12.7 percent in June, the highest since January 2009 and higher than the May rate of 11.9 percent.
Inflation is being pushed higher by increases in international energy prices and the weakening Pula against the United States Dollar (USD), which is now at 3.2 percent depreciation against the US currency recorded in July. Domestic inflation is anticipated to remain in double digits for the rest of the year and only return to Bank of Botswana’s (BoB) medium-term objective of 3 – 6 percent in the second half of 2023. But the International Monetary Fund (IMF) notes that global inflation is generally expected to return to to near pre-pandemic levels by the end of 2024.
In its World Economic Outlook update for July 2022, the IMF says several factors could cause inflation to maintain momentum and raise longer-term expectations. “Further supply-related shocks to food and energy prices from the war in Ukraine could sharply increase headline inflation and pass through to core inflation, triggering a further tightening in monetary policy,” reads an IMF report published this week.
The Fund observed that such shocks could, if sufficiently severe, cause a combination of recession accompanied by high and rising inflation. In June, BoB increased the Monetary Policy Rate (MoPR) by 50 basis points from 1.65 percent to 2.15 percent to moderate prospects for second-round effects of a recent increase in public service salaries, administered prices and entrenched expectations for high inflation.