Wednesday, November 24, 2010

Diamonds Are Not Forever: Botswana Medium-term Fiscal Sustainability

This World Bank  Policy Research Working Paper (by Naoko C. Kojo) analyzes Botswana’s medium-term fiscal sustainability in view of the expected depletion of diamonds in the future. The paper shows that in the absence of policy adjustments, Botswana’s current fiscal policy strategy is unsustainable over the longer term, which could endanger macroeconomic stability and Botswana’s reputation as Africa’s success story. The paper further contends that ensuring medium-term sustainability of Botswana’s public finances requires stronger revenue collection, through improved revenue administration, greater tax enforcement, and the rationalization of tax exemptions in order to realize the full revenue potential. 

At the same time, the government needs to maximize the effectiveness of public expenditure and bring down public spending to levels that are more in line with long-term revenue prospects. The paper emphasises that a greater control over the public sector wage bill is critically important. It is further argued that growth of a dynamic non-mining sector is crucial for Botswana not only from the fiscal sustainability point of view, but from the point of view of achieving balanced development that will create jobs and deliver durable reduction in poverty and inequality. Fiscal policy will have to play a central role in this process. Click here to access the full paper.

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