QUARTERLY BUDGET REVIEW Q1 2018

1. QUARTERLY BUDGET REVIEWQ1 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?

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: 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

7. Experimental Fiscal Fitness Index: Preliminary results

8. 2018 Q1: Revenue

9. 2018 Q1: Spending

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 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 • 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 • Govthas instituted a number of measures to curtail the growth of interest payments & ensure fiscal & debt sustainability • But more needs to be done