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

2. 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

3. 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

4. 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

5. Development of Experimental Fiscal Fitness Index

6. 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: to 1.000
Performance Criteria:
Very high: >0.800
High:
Medium:
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
Yet to perform robustness checks to validate the methodology

7. Experimental Fiscal Fitness Index: Preliminary results

8. 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

9. 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

10. 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

11. 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

12. 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