World Bank Botswana Country representative and Special Envoy to SADC Xavier Furtado has urged developing countries to exercises transparency and openness when exploring borrowing opportunities to finance their national development agenda, mega projects and government spending.
Furtado was delivering a key note address at the Africa Securities and Exchanges Association Conference held in Kasane last week. He said currently economies are facing substantial challenges that are clouding the global economic outlook in both the near and long term. In particular for emerging market and developing economies lackluster investment is increasingly becoming a concerning issue.
Xavier noted that in these economies which African countries form part of , investment growth is expected to remain weak and below historical averages, held back by sluggish global growth; limited fiscal space; and structural constraints that misallocate or discourage investment such as poor business environments, labor and product market controls, and weak governance. “Subdued investment weakens the foundations for the sustained growth that is needed to alleviate extreme poverty and advance shared prosperity,” he said.
According to the World Bank Botswana Boss in response to these challenges and an era of low interest rates, government borrowing might appear to be an attractive option to finance growth-enhancing investment projects. In Botswana government debt is constituted by both external and domestic borrowing s with the latter dominated by government treasury bills and issuance of bonds to the local capital market. Government through Bank of Botswana regularly issues bonds on Botswana Stock Exchange to finance various expenditure needs.
For external Borrowings Botswana explores debt facilities from international financing organizations such as the World Bank International Finance Corporation (IFC), African Development Bank, and First World Economies to finance mega infrastructural projects for basic necessities such as provisions of water, transportation amongst others.
Botswana and many African countries has been tapping into the over $60 billion credit facility extended by Chinese government for interest loans towards multi million pula projects. In particular Botswana is set to rope in over P10 billion from China for mega rail and road infrastructure development. Xavier Furtado says debt is often an important tool for development and poverty reduction, and sustainable borrowing can help countries finance investments in infrastructure, health, education, and other essential areas.
He underscored that to be additive to growth, however, debt has to be transparent and well managed. The contrary according to the Furtado would only render debt into becoming more of a burden than a benefit by increasing vulnerability to crises, eroding the effectiveness of macroeconomic policy, and weighing on investment and growth.
Furtado explained that local capital markets are increasingly growing as source of funding for both the corporate and public sectors. He noted that for the markets to be developed there is broad agreement that improvements in market infrastructure and transparency, better corporate governance, and the development of benchmarks and domestic institutional investors all contribute to the development of local securities markets.
“In light of these happenings we believe that opportunities abound across many emerging markets sectors. To foster growth, we need to connect investors to products that build human and physical capital which can be achieved through improving capital market activity,” he said. In their recently published report on African Debt Management Organisation of Economic Corporation & Development (OECD) says African counties rely on concessional multilateral and bilateral funding and rudimentary domestic markets.
Greg Horman of the OECD Secretariat says issuance of domestic debt in some countries is erratic and in small volumes, leading to problems in developing fungible and liquid instruments and benchmarks. Horman further noted that African countries generally have explicit legal requirements governing debt contracting and servicing, underscoring that the framework is not always clearly defined and adequately implemented.
“Institutional responsibilities are often fragmented across front and back office functions, across domestic and external debt, and across agencies in African countries,” he said. The OECD also observed that Middle office functions of debt strategy formulation and risk management are often absent .These factors according to Greg Horman impede implementing a holistic approach to debt management because co-ordination between debt management and fiscal, monetary, and macroeconomic policies is often weak.
“Specific institutional structure for debt management is less important than ensuring that that there is good governance and that there are forward-looking policies focused on risk-based debt sustainability,” he said. He observes that debt management is key component of a correct policy mix however noting that Debt management alone cannot solve macroeconomic imbalances or structural problems. “An appropriate debt level and debt structure, as well as healthy domestic markets, can contribute to reducing vulnerabilities,” he said.
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The recent discovery of a pandemic, Covid-19, which moves at a pace of unimaginable and unpredictable proportions; locking people inside homes and barring human interactions with its dreaded death threat, is currently being felt.
Member of Parliament for Kanye North, Thapelo Letsholo has cautioned Government against excessive borrowing and poorly managed debt levels.
He was speaking in Parliament on Tuesday delivering Parliament’s Finance Committee report after assessing a motion that sought to raise Government Bond program ceiling to P30 billion, a big jump from the initial P15 Billion.
Government Investment Account (GIA) which forms part of the Pula fund has been significantly drawn down to finance Botswana’s budget deficits since 2008/09 Global financial crises.
The 2009 global economic recession triggered the collapse of financial markets in the United States, sending waves of shock across world economies, eroding business sentiment, and causing financiers of trade to excise heightened caution and hold onto their cash.
The ripple effects of this economic catastrophe were mostly felt by low to middle income resource based economies, amplifying their vulnerability to external shocks. The diamond industry which forms the gist of Botswana’s economic make up collapsed to zero trade levels across the entire value chain.
The Upstream, where Botswana gathers much of its diamond revenue was adversely impacted by muted demand in the Midstream. The situation was exacerbated by zero appetite of polished goods by jewelry manufacturers and retail outlets due to lowered tail end consumer demand.
This resulted in sharp decline of Government revenue, ballooned budget deficits and suspension of some developmental projects. To finance the deficit and some prioritized national development projects, government had to dip into cash balances, foreign reserves and borrow both externally and locally.
Much of drawing was from Government Investment Account as opposed to drawing from foreign reserve component of the Pula Fund; the latter was spared as a fiscal buffer for the worst rainy days.
Consequently this resulted in significant decline in funds held in the Government Investment Account (GIA). The account serves as Government’s main savings depository and fund for national policy objectives.
However as the world emerged from the 2009 recession government revenue graph picked up to pre recession levels before going down again around 2016/17 owing to challenges in the diamond industry.
Due to a number of budget surpluses from 2012/13 financial year the Government Investment Account started expanding back to P30 billion levels before a series of budget deficits in the National Development Plan 11 pushed it back to decline a decline wave.
When the National Development Plan 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at budget deficits.
This as explained by Minister of Finance in 2017 would be occasioned by decline in diamond revenue mainly due to government forfeiting some of its dividend from Debswana to fund mine expansion projects.
Cumulatively since 2017/18 to 2019/20 financial year the budget deficit totaled to over P16 billion, of which was financed by both external and domestic borrowing and drawing down from government cash balances. Drawing down from government cash balances meant significant withdrawals from the Government Investment Account.
The Government Investment Account (GIA) was established in accordance with Section 35 of the Bank of Botswana Act Cap. 55:01. The Account represents Government’s share of the Botswana‘s foreign exchange reserves, its investment and management strategies are aligned to the Bank of Botswana’s foreign exchange reserves management and investment guidelines.
Government Investment Account, comprises of Pula denominated deposits at the Bank of Botswana and held in the Pula Fund, which is the long-term investment tranche of the foreign exchange reserves.
In June 2017 while answering a question from Bogolo Kenewendo, the then Minister of Finance & Economic Development Kenneth Mathambo told parliament that as of June 30, 2017, the total assets in the Pula Fund was P56.818 billion, of which the balance in the GIA was P30.832 billion.
Kenewendo was still a back bench specially elected Member of Parliament before ascending to cabinet post in 2018. Last week Minister of Finance & Economic Development, Dr Thapelo Matsheka, when presenting a motion to raise government local borrowing ceiling from P15 billion to P30 Billion told parliament that as of December 2019 Government Investment Account amounted to P18.3 billion.
Dr Matsheka further told parliament that prior to financial crisis of 2008/9 the account amounted to P30.5 billion (41 % of GDP) in December of 2008 while as at December 2019 it stood at P18.3 billion (only 9 % of GDP) mirroring a total decline by P11 billion in the entire 11 years.
Back in 2017 Parliament was also told that the Government Investment Account may be drawn-down or added to, in line with actuations in the Government’s expenditure and revenue outturns. “This is intended to provide the Government with appropriate funds to execute its functions and responsibilities effectively and efficiently” said Mathambo, then Minister of Finance.
Acknowledging the need to draw down from GIA no more, current Minister of Finance Dr Matsheka said “It is under this background that it would be advisable to avoid excessive draw down from this account to preserve it as a financial buffer”
He further cautioned “The danger with substantially reduced financial buffers is that when an economic shock occurs or a disaster descends upon us and adversely affects our economy it becomes very difficult for the country to manage such a shock”