Financial results released by Bank of Botswana and presented before President Mokgweetsi Masisi and his cabinet last week revealed that the Central Bank’s total assets declined by P3.3 billion for the twelve months period ended 31st December 2017.
In the financial year ended December 2016 BOB‘s total assets were sitting at P77.6 billion, while by the end of December 2017 the bank’s asset had degraded to P74.3 billion. This includes the foreign exchange reserves which were registered as P73.7 billion by December 2017 compared to P76.8 billion in December 2016.
However in United States dollar terms, the level of reserves increased by 4.2 percent from USD7.2 to USD7.5 billion, while the SDR amount remained unchanged at SDR5.3 billion. Bank of Botswana executives told journalists on Friday that the reserves were equivalent to 18 months of import cover of goods and services. BOB Head of Finance, Daniel Loeto explained that the decrease in foreign exchange reserves in Pula terms reflects the net foreign exchange outflows and net foreign currency revaluation losses, mainly arising from the appreciation of the Pula against the US dollar.
Another notable decline was in the Bank’s net income of which over half a billion contraction was registered. In the period under review the BoB realized net income of 739.5 million pula compared to P1.4 billion in 2016, mirroring a massive depreciation of 660.5 million pula. The BoB Finance Chief deliberated that a total of 1.1 billion pula was transferred from the Currency Revaluation Reserve to cover the distributable currency revaluation losses. “After this transfer the distributable net income for 2017 was P1.9 billion in comparison to the P3.6 billion in 2016,” he said
BoB also explained that the monetary policy was implemented through Open Market Operations (OMO) to absorb excess liquidity in turn ensuring that levels of interest rates remain consistent with the policy stance. In that regard, the Bank introduced measures to improve market efficiency and effectiveness of monetary operations, in particular to better align market interest rates to the policy stance. Two of the key measures were the relaxation on the amount of Bank of Botswana Certificates used to mop up excess liquidity, which helped to alleviate downward pressure on short-term interest rates and correct the misalignment with the policy stance.
In addition, the range of securities eligible for use by commercial banks as collateral when accessing the Bank’s credit facility were broadened to include all government securities, regardless of maturity and Pula denominated bonds issued by the International Finance Corporation in the Botswana market. Commercial banks were, therefore, able to manage liquid assets more efficiently, with less reliance on BoBCs for collateral purposes.
According to the BoB Finance Head, this is viewed as a good move to potentially reduce the cost of monetary policy implementation. Further, financial figures from BOB state that outstanding value of Bank of Botswana Certificates (BoBCs) also realized a decline in the period ended December 2017.
As of December 2016 outstanding value of BoBCs was sitting at P7.9 billion while P6.3 billion was registered in the same period ended December 2017. Loeto explained that Repurchase Agreements (repos) and reverse repos were used during the year to manage liquidity between auctions, and P54 million worth of reverse repos was outstanding at the end of 2017 compared to P1.3 billion in December 2016. “There were no outstanding repos as at the end of 2017,” he said.
Following the measures that were implemented to improve on the efficiency and effectiveness of monetary operations, the 14-day BoBC weighted average yield increased from 0.84 percent in December 2016 to 1.45 percent in December 2017, while the yield on the 91-day BoBC increased from 1.01 percent to 1.41 percent in the same period. In line with the Bank’s commitment to encouraging savings, commercial banks continued to offer and advertise the 91-day deposit facility or equivalent deposit product which pays an interest rate that, at a minimum, is the prevailing Bank Rate less 3.5 percentage points, 2 with higher interest rates for longer-dated deposits.
BoB also reports that the P15 billion Government Bond Programme remains in place, with a focus on the development of the capital market, as well as providing an alternative source of government funding. Outstanding bonds of various maturities and Treasury Bills increased from P9.3 billion at the end of 2016 to P10.2 billion in December 2017. Primary Dealers and their customers held P3.9 billion,37.7% and P6.3 billion 62.1 %, respectively, of the government securities outstanding at the end of 2017, while, the Bank held P20 million (0.2 percent) of the total outstanding securities for possible repo transactions.
During 2017, Bank of Botswana also embarked on the design of a new polymer P10 banknote, which was subsequently launched in February 2018. Polymer banknotes generally last longer than the conventional cotton-based banknotes, are not easy to counterfeit and are more resistant to dirt and moisture.
On Friday BoB revealed that its administration and operations expenses registered a 15 million pula hike due to reprinting and reproduction of some bank notes. In the period under review the annual rate of growth of banknotes in circulation increased from 6.2 percent in 2016 to 10 percent in 2017. “Notably, the rate of increase in net issuance of the P20 banknote denomination increased from 5.1 percent in 2016 to 18.6 percent in 2017, while for the P10 banknotes, the rate of increase fell from 6.5 percent to 1.3 percent in the same period.”
BoB also highlighted that the increase in the net issuance of P20 banknotes during the period under review was largely driven by the need to compensate for the reduced demand for both the P50 and P10 banknotes. The P200 denomination continued to have the highest share of total issuance and quantity of banknotes at 29.6 percent in 2017.
Bank of Botswana Governor Moses Pelaelo observed that during the period under review Botswana continued to attain good ratings from international finance & economic organization as well as global fiscal policy analysis bodies. Both Moody’s Investors Service and S&P Global Ratings retained Botswana’s investment grade credit ratings of A2 and A-, respectively.
Pelaelo explained that the ratings affirmed Botswana Government’s strong financial position as underpinned by well-established prudent macroeconomic policies, the net external creditor position, low public debt and a well-managed economy. “The rating agencies also recognize the existence of robust institutional frameworks that facilitate prudent policy making and continuing political stability,” he said. Pelaelo however underscored that both rating agencies reiterated the concerns about the country’s narrow economic base, specifically heavy reliance on the diamond industry and the slow pace of economic diversification.
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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”