Moody’s a US based international finance and economic commentator says Sub Saharan Africa is today in more debts than it was half a decade ago, the New York headquartered agency said in a report this week.
The Moody’s report shows that while most Sub-Saharan African countries plan to consolidate their budgets to stabilize debt, they are now more vulnerable to shocks and negative financing because they are in a weaker fiscal position than five years ago. “Expenditure cuts are often less complex to implement quickly than revenue-raising measures," said David Rogovic, Moody's Vice President – Senior Analyst and the report's co-author. "The credit risks associated with lack of spending flexibility are most pronounced where it coincides with higher debt burdens and for those whose fiscal metrics are more vulnerable to shocks." He said
These debt burdens according to Rogovic are now higher than just five years ago making Sub Saharan African countries more vulnerable and with less capacity to employ countercyclical fiscal policy to absorb future shocks. According to the report, spending flexibility varies across the region. In particular Moody’s says Angola, one of Africa’s largest economies and Gabon, have less expenditure flexibility today, as past fiscal consolidation relied more on discretionary spending than mandatory spending, while higher interest payments also increase the share of mandatory spending in the government's spending mix.
With Zambia, the regions copper mining giant, higher capital expenditures to finance public investment has led to more expenditure flexibility today, though there is a sharp increase in external borrowing. Moody’s says high wage bills constrain spending flexibility in Namibia, and South Africa while high share of spending directed towards transfers and subsidies constrain expenditure flexibility in Mauritius and South Africa, whereas Ghana’s rigid spending structure reflects a high interest bill. Rwanda, Cameroon and Cote d'Ivoire were also noted to have greatest spending flexibility
The continent’s largest and most populated country Nigeria was observed to have relatively less flexibility to cut spending. Moody’s says analysis and observation at the oil rich country are captured in particular on spending at the federal government level, where interest makes up a relatively large share of total spending.
In the event of shocks, spending flexibility – defined as countries' scope to cut government spending rapidly and significantly – allows sovereigns to broadly adhere to their plans and lends resiliency to fiscal strength. Based on Moody's assessment of the proportion of mandatory spending relative to the regional average, Rwanda, Cameroon & Cote d'Ivoire has the most flexible spending structures.
Credit risks associated with lack of spending flexibility are most pronounced where it coincides with higher debt burdens and susceptibility to financing shocks. For Namibia and Ghana, rigid expenditure combines with other fiscal weaknesses to increase downward pressures on fiscal strength and their credit profiles from shocks. Meanwhile, higher-than-average spending flexibility in Rwanda and Cameroon mitigates some of the risks associated with a rising government debt burden, if governments are willing and able to use that flexibility in the face of a shock.
By contrast, mandatory spending accounts for over 80% of total spending in Namibia, Mauritius, South Africa and Ghana. For Namibia and Ghana, rigid expenditure combines with other fiscal weaknesses to increase pressure from shocks on their fiscal strength and credit profiles. In the regional entirety Moody’s says expenditure cuts are often easier to implement quickly than revenue-raising measures. Fiscal strength will likely be more resilient for those with capacity to cut expenditure quickly and significantly in the face of a shock.
As a developing region comprising of mostly low middle income economies, with wide inequality and significant poverty in some parts, Sub Saharan Africa is currently battling with uphill task of transforming their countries. Lack of adequate Infrastructure has been and is still currently one of the leading impeding factors.
Africa has been on attempts to solve this problem embarked on an external borrowing wave to resource their infrastructure development budgets, a move that landed the continents’ leaders in China, the world most populated country and second largest economy. Last year at China- Africa Forum , the country announced it would reserved $60 billion for Africa .
Chinese President said the funds would be channeled to projects aligned to the Chinese government’s Belt and Road Initiative covering telecommunications, construction of roads, bridges and sea ports, energy, and human capacity development. The money which will be spent in the next 3 years entails $15 billion being categorized as government grants, $15 billion as interest free loans and 20 billion dollars of credit lines and USD 5 billion for financing imports from Africa.
In Botswana President Masisi boasts that China has extended a grant amounting to P340 million to the government of Botswana, adding into 136 million pula grant already extended to Government of Botswana announced for the construction of Kazungula Primary School in the Chobe district. The grants come with an overly criticized loan to Botswana amounting to over P10 billion to used for amongst other Mosetse –Kazungula Railways. The Africa- China bromance has not landed well with the Western power, US lenders in particular say Africa is entrapping itself in miscalculated external borrowing that just increases its debt burden.
This century is always looking at improving new super high speed technology to make life easier. On the other hand, beckoning as an emerging fierce reversal force to equally match or dominate this life enhancing super new tech, comes swift human adversaries which seem to have come to make living on earth even more difficult.
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”