The Botswana banking sector which has historically been characterized by high rates of profitability has recorded a decline in deposit which is often characterized or accompanied by high bank lending interest rates.
According to a report by E Consult, Botswana has registered a lending spread decline from its peak in 2009 and is now below the average. The report which was compiled by Sethunya Sejoe and Keith Jefferis observes that although at an average the decline is not at its lowest these changes have been associated with a dramatic improvement in the efficiency of financial intermediation, with banks now holding far fewer BoBCs and lending out a much greater proportion of deposits.â€¨â€¨Amongst the drivers of these changes, E Consult highlights the increased competition in the banking sector; and lower policy interest rates.
They also note that despite increased competition, larger banks can still charge higher spreads than smaller banks. The bulk of the deposit-lending spread is now accounted for by operational costs and non-performing loans, rather than profit. Further reductions in spreads would therefore require more efficient banking operations at lower costs and reduced loan losses.
The report analysis highlights that while the above characterisation of the Botswana banking sector was accurate in the early years of the period examined, it is no longer the case today.It continues to highlight that Profitability has declined substantially, and 2016-17 period was amongst the lowest in the ten countries reviewed. Average bank lending rates have also dropped significantly and are similarly now around the lowest in the country group
In a study the combined deposit-lending spreads for the ten Southern African Development Community (SADC) and the East African Community (EAC) countries is included in the comparative analysis for the period 2007 to 2017. Of the countries considered, South Africa and Namibia had the lowest average spread of 3.6 percent and 4.4 percent over 2007-17 respectively. Uganda and Zambia are reported to have had the highest average spread of 13.8 percent and 11.1 percent respectively during the period.
Deposit -lending spreads in Botswana hoover around the average compared to other countries’ spreads over the years. The spread is noted to have declined sharply in 2013-2015, from 9.4 percent in 2012 to 7.3 percent in 2015, before rising slightly in 2016. It has been reported that capital as a percentage of liabilities is lower in Botswana than in most of the other countries, although commercial banks in Botswana remain adequately capitalised in accordance with statutory requirements.
Jefferis and Sejoe note that the highest levels of capitalisation are seen in Uganda, Zambia and Kenya, where banks are arguably over capitalised, which may in turn contribute to high spreads in those countries. “It may also be that risks are lower in the countries with lower bank capitalisation which include but are not limited to South Africa (SA), Botswana, Namibia and Mauritius.” The report also states that another explanation of the decline may be that commercial banks in Botswana are more efficient in the use of expensive Capital than other banks in other countries.
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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”