The country stands at a crossroads, where it is imperative that we balance books towards fiscal sovereignty and fiscal prudence. As we prepare to absorb Southern African Customs Union (SACU) receipts (E2.6 billion), while confronting a civil service salary review requiring E1.6 billion in new spending, the temptation for further budget support loans increases. I contend that this moment requires restraint and not reliance, as budget support loans tend to create dependency and slow progress towards the required fiscal reforms to improve on fiscal sovereignty. Budget support loans, while politically expedient and often packaged as development friendly, pose long term risks to the country’s fiscal sovereignty, fiscal autonomy and economic resilience. If the kingdom is to truly build a sustainable and inclusive future, we must surely rethink budget support.
Easy money illusion
In theory, budget support loans provide benign injections of money into the fiscal purse. Largely framed as soft loans from multilateral institutions or bilateral partners to help government meet its short-term fiscal gaps. Theoretically, they offer flexibility, low interest rates and policy support. However, it cannot be over emphasised that such loans entrench existing structural vulnerabilities. A 15-year debt trend shows that the country’s debt to GDP ratio has risen steadily to just above 40 per cent or just at that 40 per cent mark. Budget support also forms part of the country’s debt portfolio. However, unlike project-based financing, budget support loans rarely generate direct economic returns. Typically, budget support tends to fund salaries, pay off existing debt obligations and operational costs. Albeit the essential nature of such cost categories for government, I contend that it is not sustainable to finance such core costs through debt instruments. The ideal picture is to ensure that these cost categories be financed through sustainable domestic funding streams; necessitating that we restructure and reform our public financing modalities.
The recurrent trap
Utilising loans to finance recurrent expenditure, especially salaries is dangerous precedent. This creates a structural mismatch between temporary financing and permanent obligations. As an example, once salaries are adjusted, they become entitlements. Consider the current quagmire facing government, salary review requires E1.6 billion, while government has a budget of E500 million. If we get a loan to fund the E1.1 billion through debt, we will be able to pay salaries for this year. However, we would need that E1.1 billion in next year’s budget and all other budgets to come. This juxtaposes with declining SACU receipts, the IMF projects that SACU receipts will decline in the next two years. A present the wage bill alone exceeds SACU revenue receipts and the additional E1.1 billion will further extend the gap. In future, we will struggle balancing recurrent expenditures, aswell as investing in critical capital projects that will unlock the productive capacity of the economy. There are several countries in the region that give an example of how reliance on budget support loans to support public sector wages and or subsidies results in Crisis. Malawi at present is a living case, Zambia and Ghana are still trying to recover, following episodes of rapid growth in public sector debt including budget support. The result was inflation, currency depreciation and IMF bail outs. We must learn from our neighbours and choose a different path, that of voluntary structural reforms, rather than coerced structural reforms.
Fiscal sovereignty at risk
One of the most insidious consequences of budget support loans is the erosion of fiscal sovereignty as development partners often attach policy conditions to these loans. An example in Eswatini is the fact that the IMF and the World Bank once imposed a condition on the country to contain the wage bill. Recall in 2010/11 when government launched the Fiscal Adjustment Roadmap? The ethos of the document was to rationalise the wage bill. South Africa also imposed her own conditions when the country required a E2 billion loan to smooth government cashflow troubles. Furthermore, the country’s fiscus is largely dependent on SACU receipts – a volatile and externally determined source of funding, which further erodes our fiscal autonomy as a country. It is imperative to ensure that we build towards fiscal sovereignty to minimise external shock in funding the very operations of government.
Bold reforms
Minimising budget support loans and reducing reliance on external sources of funding, does not have to translate in ignoring fiscal gaps. Rather, we should see it as a call to find sustainable financing mechanisms for gap financing. The World Bank’s Public Finance review estimates that the country can raise an additional 1.6-3.3 per cent of GDP through improved tax administration and reforms, without increasing the effective tax rate. It is also important for the kingdom to re-prioritise spending, reduce procurement inefficiencies and reduce non-essential travel. Lastly, we need to improve fiscal buffers such as the SACU stabilisation fund.
Minimising budget support loans is not just about economics, but about dignity. It is about building a nation that pays its own way, sets its own priorities and answers to its own people. Ensuring that the civil service is paid, not because donors have approved it, but because we can. Engendering national pride and dignity. This we can attain through embarking on the relevant reforms.
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