depleted by 2012/13 compared with 2024/25 under the Baseline Scenario, while domestic debt would grow. Higher diamond exports than envisaged in the Baseline Scenario would brighten Botswana’s fiscal prospects. Nonetheless, even under the most favorable scenario, the NDP10 cumulative fiscal position would likely remain negative.

The government’s failure to adhere to the no net expansion policy of its establishment would similarly pose a significant fiscal risk. Simulation suggests that annual growth of 2.5 percent in the government establishment would have the same detrimental impact on the fiscal position as in the situation where diamond exports fall short of the Baseline assumption by 5 percent. With the declining mineral revenue, future fiscal adjustments will critically hinge on the government’s ability to contain the wage bill.

The projected results are not significantly sensitive to the non-mining sector’s performance, in that higher non-mining GDP growth would do little to improve Botswana’s medium-term fiscal prospects. One percentage point higher non-mining GDP growth than the Baseline assumption would reduce the endNDP10 cumulative fiscal deficit from P 34 billion only to P 31.4 billion.

Indeed, Botswana’s revenue collection from the non-mining sector is very low for its income level. The average effective VAT rate during 2002/03-2008/09—derived by dividing VAT collection by GDP—is 3.8 percent, much lower than the statutory rate of 10 percent (Table 5). VAT revenue productivity—measured by VAT revenue in percent of GDP divided by the statutory VAT rate—is 0.38, which compares less favorably with South Africa’s 0.53 and Mauritius’ 0.48 (Figure 7). Problems in revenue administration, tax enforcement and exemptions are the likely culprits for the heavy leakages in VAT collection.<sup>24</sup> As

**Figure 7.  VAT Revenue Productivity**

<!-- Start of picture text --> South Africa<br>Mauritius<br>Botswana<br>0.0 0.1 0.2 0.3 0.4 0.5 0.6<br><!-- End of picture text --> Source: Author’s calculation based on various IMF staff reports.

regards non-mineral income tax, the comparison is more difficult since the breakdown of personal income tax and non-mining company tax is unavailable. The average effective tax rate for non-mineral tax is low, at 7.6 percent during the same period, compared with 45.2 percent on the mining sector, and the statutory corporate tax rate of 25 percent (15 percent as basic company tax for resident companies, plus a 10 percent as additional company tax). This finding has a powerful policy implication. With the current tax arrangement, economic diversification away from diamonds would not generate enough non-mining, non-SACU revenue to offset falling mineral and SACU revenues in the future. Botswana’s relatively low revenue productivity suggests that there is scope to strengthen revenue collection.

**Table 5.  Effective Tax Rates (2002/03-2008/09 Average)** /1

||Mineral revenue|Non-miningincome tax|VAT|
|---|---|---|---|
|Effective tax(inpercent)|45.2|7.6|3.8|
|Proxy oftaxbase|Mining GDP|Non-mining GDP|GDP|
|Source: Author’s calculation.||||

1/ Since a major change was introduced in the tax structure (rates, coverage, and exemptions) in 2002/03, the effective tax rates before 2002/03 are not comparable.

> 24 For example, fuels are exempt from VAT in Botswana. Mineral products are zero-rated.

20