The ongoing reported mismanagement or abuse of public funds and money laundering scandals ensnaring local fund managers who handle public assets worth billions of Pula has far reaching implications which can nosedive the reputation of Botswana’s financial sector, this is much to the chagrin of Bank of Botswana (BoB) Governor Moses Pelaelo.
This week Pelaelo stopped short of calling fund managers accused of financial scandals criminals. When addressing the media just after unveiling the Monetary Policy Statement on Tuesday, Pelaelo complained of illicit activities that seem to have currently dogged the financial sector. Even though he did not mention names or any case in particular, the governor stated the Bank is gravely concerned by apparent criminal activities in the financial sector by those mandated by the public or institutions to look after their funds.
Pelaelo said such criminals should be uprooted and removed for the sake of the financial sector integrity. “We need to take out the people from the system. How do you allow mice to look after seeds….monkeys can’t look after bananas. We must remove the bad apples,” Pelaelo said. Answering media questions on whether the Bank has conducted any study or research on illicit activities by some players in the financial sector, Pelaelo said the central bank is not able to trace them due to them being illegal.
Pelaelo said the Bank would not even have figures because they are not traceable. The governor said the Bank’s job would be limited only to supervisory duties and working in collaboration with other institutions. Pelaelo’s disapproval for bad apples in the financial industry came at the same time with the launch of the Financial Stability Council. This council, according to Pelaelo, was begat after the Bank found the need for a prospective Financial Stabilty Council as articulated by the central bank in the 2018 Monetary Policy Statement.
Pelaelo said the Bank and the Ministry of Finance and Economic Development Working Group, the Non-Bank Financial Institutions Regulatory Authority (NBFIRA) and the Financial Intelligence Agency (FIA) together approved the formation of the Council. The Council is formed by BoB, the Ministry of Finance and Economic Development, NBFIRA and the FIA. However the Financial Stability Council is not established to usurp or dilute the role of the respective institutions which is neither feasible nor desirable according to the Bank.
According to BoB, rather it is to share information and where, desirable, facilitate collective and coordinated approach to financial sector monitoring frameworks and crisis resolution. The Financial Stability Council which was launched this week after the first Monetary Policy Committee Meeting of the year is said by the Bank to be a step towards facilitating collaboration, cooperation and communication amongst the four government agencies for the purpose of implementing macro-prudential policy.
“The other important facet relates to national contingency planning for a financial sector crisis, anchored on proactive macro-prudential assessments, stress testing and a deeper understanding of cross-sectoral interactions of firms and financial markets. Given the nature and construct of financial intermediation and, in particular, the structure of balance sheets of banks, things will and often go wrong.
For these reasons, the strengthening of financial sector safety nets, encompassing effective crisis management, recovery and resolution plans as well as a proposal for the establishment of a deposit insurance scheme in Botswana, will form part of the agenda of the Financial Stability Council in 2019,” said Pelaelo when making the Monetary Policy Statement this week.
When making the Monetary Policy Statement this week Pelaelo said the Bank of Botswana is gravely concerned by the incipient personal greed and reported governance failures in some segments of the financial sector, which has the potential to erode fiduciary responsibilities and, consequently, undermine public confidence in financial markets.
When making his parting remarks during the signing of the Memorandum of Understanding between the bank and the concerned institutions in the Financial Stability Council Pelaelo said the Council’s main mandate is “to decisively address the incipient misconduct and governance challenges in the financial sector, deriving from greed and/or misunderstanding or incompetence with respect to fiduciary responsibilities, as well as opportunistic crime and fraud.”
Pelaelo told journalists that the just signed MoU is just the beginning as there will be consultation during this year. He said 2019 will also involve consideration of a deposit protection scheme for the country, to guarantee access to deposits up to a specified threshold, in the event of bank failure. Speaking at the signing of the MoU, NBFIRA CEO Oaitse Ramasedi agreed to work in partnership with BoB on the Council to protect the institution which is overlooking assets over P123 billion.
For his part, FIA Director Dr Abraham Sethibe said in the financial sector, “a fall of one will impact the other” hence the collaboration of all concerned parties in the Financial Stability Council. According to the BoB Governor other institutions which are expected to work with the Council is the Botswana Unified Revenue Services as Botswana continue to lose billions of Pula in tax evasion.
The latest Global Financial Integrity Report states that Botswana has lost P6.4 billion worth of exports in trade misinvoicing. On the other hand the same report suggest that deceit was used to under-invoice imports in order to hide around P9.2 billion(US$885 million) from the tax man’s eye.
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”