as exemptions inherently give rise to higher administration cost and exemption creep. For example, there is little rationale for exempting transport fuels from VAT, given the highly inelastic nature of fuels.<sup>26</sup> On the expenditure side, there is an urgent need to improve the effectiveness of public spending considerably, with a view to delivering public services within a more constrained budget envelope.<sup>27</sup> Besides trimming the overall wage bill, as envisaged in NDP10, this requires a thorough review of spending programs to evaluate and rationalize them.

At the same time, efforts need to be stepped up in building in-house capacity to regularly monitor macroeconomic developments and conduct fiscal analysis. Projections can be performed at various levels of complexity, but they should allow the government to identify emerging risks and vulnerabilities, internalizing them in policy formulations. To this end, a timely availability of reliable data will be critical.

These actions are necessary not only from the fiscal sustainability point of view, but also from the point of view of facilitating private sector activities and accelerating growth of non-diamond sectors, that is, maintaining Botswana’s living standard. These efforts will take time to yield results. The current global crisis is an opportunity to start a structural transformation of Botswana’s economy. This transformation needs to be well under way before the long-term decline in diamond exports sets in. A timely response to Botswana’s emerging fiscal challenges would make a transition less painful, before the current fiscal policy stance leads to unsustainable outcomes that would require significantly large and more painful adjustments later.

# **5.2 Botswana’s Fiscal Rules**

Over time Botswana has adopted various formal and informal rules in an attempt to maintain fiscal discipline, especially, with regard to spending financed by mineral revenue. With the change in policy emphasis, over time, some rules have been phased out. The rule to limit public spending to 40 percent of GDP is no longer in use. Neither is the Sustainable Budget Index (SBI). Currently, the remaining rules are the statutory ceilings of 20 percent of GDP for government external and domestic debt and guarantees, respectively. Should Botswana adopt additional rules to ensure medium-term fiscal sustainability?

The statutory debt and guarantee ceilings can continue to serve as effective instruments to in restraining the size of overall fiscal deficits. Rather than introducing new rules, Botswana could benefit more from implementing the existing rule effectively. In this regard, focus needs to be given to addressing obstacles that hamper the effective implementation of the rules.<sup>28</sup> Specifically, this requires a more specific definition of “government debt” in the Stock, Bonds and Treasury Act (1995), without which the rule could be interpreted in an inconsistent manner, or could potentially be abused.<sup>29</sup> As important as the definition is the ability to monitor the adherence. Again, this requires the timely availability of reliable fiscal, debt and macroeconomic data, in particular, within the period to which the rule is applied.

Botswana could also consider the use of the non-resource fiscal balance as a benchmark to evaluate the fiscal stance. Recent literature shows that, particularly from a short-term stabilization perspective, the use of non-resource balance, scaled by non-resource GDP, provides a useful guide by delinking the fluctuations associated with the developments in mining. Indeed, in countries such as Norway, budget

> 26 There is a specific tax on transport fuels, but it is very low (currently P 0.21 for petrol, P 0.12 for diesel per liter).

> 27 Botswana’s social outcomes, which fall short of those expected in a middle income country despite generous funding, may be a reflection of expenditure effectiveness.

> 28 See Kopit (2001) for the preconditions considered as key to a successful implementation of fiscal rules.

> 29 For exampe, the Act is not clear about the level of government (central government only or inclusive of local authorities, statutory or wholly-owned government corporation, government agency, etc) and the coverage of debt (inclusive of concessional and/or short-term debt, commitment or disbursement based, etc.).

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