QUARTERLY BUDGET REVIEW Q1 2018 “Are Interest Payments on Debt Derailing Fiscal Consolidation?” 21 June 2018

Introduction Excessive spending in the face of relatively low and flat revenues led to increased fiscal deficits since 2012 Deficits have persistently been above the 3% SADC threshold since then: this raises concerns about the sustainability of fiscal policies The significant mismatch between deficit targets and outturns puts the fiscal discipline and credibility of the budget into question

Policy response: improve fiscal health Fiscal fitness measures put in place since 2016 How to measure fiscal fitness? Trend analysis to gauge performance or budget execution But this does not give the whole picture Deviations between actual and targets to determine budget credibility With limited fiscal space, what is the likelihood of meeting our debt obligations? Fiscal and debt sustainability issues Experimental Fiscal Fitness Index developed with three dimensions (performance, credibility, sustainability) to explain these dynamics

Why Fiscal Fitness Index? Performance Trend analysis to determine if fiscal policy objectives are being met Budget Credibility Deviation of actual revenue/expenditure from approved budget For effective public financial management; instill discipline Sustainability Ability to meet debt obligations

Development of Experimental Fiscal Fitness Index

Experimental Fiscal Fitness Index: Methodology Quantitatively depicts general fiscal performance, credibility and sustainability of public finances Similar to the HDI; Based on relative distance methodology Index range: 0.000 to 1.000 Performance Criteria: Very high: >0.800 High: 0.700 - 0.799 Medium: 0.550 - 0.699 Low: < 0.550 Assume equal weights for the three dimensions (geometric mean) Weighted arithmetic averages used for indicators in each dimension based on fiscal indicators during 2000-2017 Yet to perform robustness checks to validate the methodology

Experimental Fiscal Fitness Index: Preliminary results

2018 Q1: Revenue Performance 23% of the 2018 approved budget VAT is highest performing, 35% of planned VAT already collected in Q1 Grants are the lame duck, only 5% of planned income collected Underscores the need for DRM Credibility Tax revenues: 9% higher than planned Thanks to 59% increase in VAT Non-tax revenue: 18% lower than planned Grants: 80% underperformance Generally credible: K12,004m against a target of K12,041m Sustainability There is need to boost other tax revenue streams other than VAT Non-tax revenue continues to disappoint; RTSA; delayed land titling Expect to raise 14.8% of GDP in 2018, compared to 14.9% of GDP collected in 2017: Revenue targets not ambitious enough

2018 Q1: Spending Performance 23% of the 2018 approved budget, only 4% higher than Q1 2017 Growth in wages & salaries kept in check, consistent with inflation: 6% higher than Q1 2017 37% of interest payments already paid off in Q1 2018 Social benefits & Capex underfunded and below Q1 2017 This is evidence of interest payments crowding out other spending Credibility Interest payments: 34% above budget, pulled up by external interest payments Capex: 28% below budget Social Benefits: 35% below Budget Fiscal deficit: 20% below target Generally credible as overall expenditure is well within projected levels: just 4% below target; but the underspend confirms the crowding out Sustainability Current spending: 114% of domestic revenues, down from 130% in Q1 2017 Wage bill: 46% of domestic revenues, down from 54% in Q1 2017 Improved fiscal sustainability But interest payments increased to 36% of domestic revenues, from 26% in Q1 2017 A major threat to fiscal fitness

Threats to fiscal fitness Interest payments increasingly ‘eating up’ domestic revenue: For every K1 of domestic revenues collected in Q1 2018, 36 ngwee was allocated to interest payments during Q1 2018 Interest payments are the fastest growing spending line: grew by 71% compared to Q1 2017

Threats to fiscal fitness Deficit decomposition: Interest payments now takes up the largest share of the fiscal deficit Since 2017, spending on interest payments as % of GDP has surpassed capital spending

Conclusion Recommendations It is clear from Fiscal Fitness Index that debt unsustainability stands in the way of nursing the country back to fiscal health Interest payments are Government’s Achilles heel and a major source of spending overruns in 2018 Govt has instituted a number of measures to curtail the growth of interest payments & ensure fiscal & debt sustainability But more needs to be done There is need to eliminate possible recording and reconciliation issues on interest payments between Budget Office & IDM There is need to reduce/freeze external, non-concessional borrowing Financing shortfalls created by reduced non-concessional borrowing could be reduced by widening creditor sources