TOUGH CHOICES AWAIT THE BUDGET

Botswana's 2027/28 budget will be shaped by a difficult balancing act of restoring fiscal stability while investing in the economic diversification needed to reduce dependence on diamonds.

Both objectives are critical to the country's long-term economic future, but economists warn that pursuing them simultaneously will require difficult decisions about how limited public resources are allocated.

The challenge comes as the government continues to grapple with fiscal pressures despite signs of improvement in public finances.

In the 2025/26 financial year, expenditure exceeded revenue by P16.8 billion. Revenue and grants amounted to P69.48 billion against total expenditure of P86.28 billion, forcing the government to rely on borrowing and draw down savings to bridge the gap.

Customs and excise was the largest revenue contributor at P24.98 billion, accounting for 36 percent of total collections, followed by non-mineral income tax and VAT at P16.31 billion and P13.71 billion, respectively. Mineral revenues contributed P12.05 billion, or 19 percent of total collections.

The expenditure structure further illustrates the strain on public finances, with recurrent expenditure absorbing P70.13 billion compared with P16.16 billion allocated to development spending.

Preliminary figures for the 2026/27 financial year, however, suggest an improving fiscal position.

Government reported revenue and grants of P38.23 billion against expenditure of P36.5 billion, resulting in a surplus of P1.6 billion. Customs and excise contributed P13.3 billion, while mineral revenues and non-mineral income tax each contributed P6.4 billion. A further P7.3 billion came from Bank of Botswana receipts.

A BSA economist Tshephiso Gaetsewe said the budget must simultaneously reduce deficits, support economic recovery, sustain employment and social protection programmes, while also funding infrastructure development and economic diversification under NDP 12 and the Botswana Economic Transformation Programme (BETP).

This balancing act is becoming increasingly difficult as the outlook for diamonds weakens.

Weak global demand, growing competition from lab-grown diamonds and slower economic activity in key markets such as China mean Botswana can no longer rely on diamond revenues as a consistently expanding source of income.

"In this environment, government spending should prioritise investments that improve productivity, attract private-sector investment and create future revenue streams, particularly in infrastructure, energy, digitalisation, education and export-oriented sectors," Gaetsewe said.

However, redirecting public expenditure towards productive investment will require confronting the composition of the existing budget.

A substantial share of government spending is already committed to wages, transfers and operational costs, leaving limited room for development expenditure.

Gaetsewe identified this as one of the most difficult trade-offs facing policymakers, warning that recurrent expenditure could increasingly crowd out capital investment if left unchecked.

"While many of these expenditures are necessary, they generally do not generate the same long-term economic returns as productive capital investments. As fiscal pressures increase, the government will need to ensure that development spending is not crowded out by recurrent expenditure growth," she said.

The second major trade-off lies between fiscal restraint and economic growth.

Excessive austerity could weaken an already subdued economy, while continued high spending risks widening deficits and accelerating debt accumulation.

"The guiding principle should be economic returns. Projects and programmes that enhance productivity, job creation, export earnings and private-sector investment should receive priority. In a resource-constrained environment, it should not be about how much the government spends, but how effectively it spends," she said.

On the revenue side, Gaetsewe argued that government should focus on enforcing existing tax reforms rather than introducing additional tax increases.

The priority, she said, should be improving compliance, reducing leakages and collecting revenue already due through stronger tax administration, digital systems and improved data sharing.

She added that reforming state-owned enterprises, leveraging public-private partnerships to finance infrastructure and formalising SMEs could also help broaden the revenue base.

Ultimately, however, a more sustainable fiscal position will depend on whether diversification generates new economic activity and taxable income.

Expanding sectors such as tourism, manufacturing, agriculture, financial services and the digital economy would create additional corporate tax, PAYE and VAT revenues, while reducing exposure to volatile diamond receipts.

Yet diversification itself presents another resource allocation challenge.

Although BETP identifies several potential growth sectors, Botswana's constrained fiscal position limits its ability to provide meaningful support across all sectors simultaneously.

Gaetsewe argued that government should concentrate resources on sectors capable of generating employment, attracting investment and diversifying exports within a shorter timeframe, identifying tourism, agribusiness and agro-processing as immediate priorities.

Tourism benefits from an established international brand and opportunities to expand beyond traditional wildlife products into cultural, business, sports and meetings, incentives, conferences and exhibitions (MICE) tourism.

Agribusiness, meanwhile, offers opportunities to improve food security, reduce import dependence, increase value addition and create employment, particularly in rural areas.

Government support, she said, should focus on addressing infrastructure, financing, skills and market-access constraints limiting growth in these sectors.

She further argued that clear targets and timelines would be necessary to assess whether public investment is generating the intended economic returns before support is extended to additional sectors.

Gaetsewe believes the 2027/28 budget should prioritise implementation over new policy announcements.

"If the current approach continues without stronger implementation, Botswana risks remaining caught in a cycle of fiscal deficits, rising debt and continued dependence on diamond revenues," she said.

The risks of failing to consolidate are also highlighted by economist Keith Jefferis in his third-quarter 2026 Econsult Review.

Jefferis argued that the diamond revenue shock has made fiscal adjustment necessary to prevent a rapid rise in public debt, the crowding out of private investment through higher interest rates and increasing pressure on the exchange-rate peg.

The 2025/26 and 2026/27 budgets projected deficits of P25.5 billion (9.3 percent of GDP) and P26.4 billion (8.9 percent of GDP) respectively, with the deficit expected to fall to 3.2 percent of GDP by 2028/29.

Preliminary Ministry of Finance figures place the 2025/26 deficit at P16.8 billion, or 6.1 percent of GDP, while the first quarter of 2026/27 recorded a preliminary surplus.

Jefferis said there are signs that spending controls and revenue measures are producing results but cautioned that the figures remain preliminary and could be revised.

He noted that the reported first-quarter surplus was aided by a P7.3 billion distribution from the Bank of Botswana based on its 2025 profits, a one-off receipt not included in earlier budget projections.

He expects expenditure controls to continue, arguing that fiscal stabilisation remains necessary to contain borrowing costs and debt accumulation.

He also warned that interest payments could exceed 10 percent of government revenue by 2029, further limiting resources available for essential services.

Additional pressure, he said, could arise from unfunded policy commitments, including the proposed National Health Insurance scheme.

"Further tough choices regarding the level and composition of government spending cannot be avoided," he said.

The Ministry of Finance's 2027/28 strategy reflects this dual challenge, identifying fiscal consolidation and economic diversification as its two catalytic priorities. These are supported by cross-cutting interventions in human capital and social development, infrastructure modernisation, innovation and digital transformation, the green economy and public service delivery.

The proposed fiscal strategy focuses on strengthening domestic revenue mobilisation through customs, income tax, VAT and improved tax administration, while improving expenditure efficiency through the use of digital tools, stronger public financial management systems, anti-corruption measures and reforms including e-procurement, public investment management and the transition from cash to accrual accounting.