Indebtedness, cautious commercial banks, low personal incomes are key themes from the Bank of Botswana presentation of the monetary Policy Statement, an indication that many households continue with the inescapable consumerism that has been so much a feature of Batswana’s lifestyle.
Amid the achievement of key objectives of an Inflation range within the 3-6 percent and a stable financial environment, the recently released Bank of Botswana Mid-Term Review (MTR) of the 2017 Monetary Policy Statement (MPS) paint a picture of Batswana swimming in debt. According to the Bank of Botswana, annual growth in commercial bank credit was 4.1 percent in June 2017, lower than the yearly increase of 6.2 percent in June 2016, against the background of moderate economic activity and restrained growth in personal incomes. In particular, the year on year increase in lending to households fell from 7.6 percent to 5 percent in this period.
“The yearly growth in lending to the business sector decreased from 4.2 percent in December 2016 to 2.8 percent in June 2017; some large loans were repaid by parastatals. Excluding parastatals, the annual increase in borrowing by businesses rose from 7.4 percent in December to 9.5 percent in June 2017.” However Banking sector performance indicators, including levels of capital, liquidity, profitability and default ratios, suggest a stable financial environment. Even then, the aggregate ratio of non-performing loans (NPLs) to total loans increased from 4.9 percent in December 2016 to 5.3 percent in June 2017, says Bank of Botswana.
Meanwhile the slight deterioration in asset quality experienced by the banking sector is attributed to, in the main, challenges for some diamond cutting and polishing businesses, job losses resulting from the closure of BCL group of companies and ongoing retrenchments by some major employers, as well as weaker market for high-value residential properties. Job losses are the biggest dent to the economy at the moment more so that unemployment, especially among the youth, remains a thorn.
“The NPL to total loans ratio for individual banks ranged from 0.2 percent to 10.8 percent in June 2017. Households account for a larger share of total lending by commercial banks, which stood at 59.6 percent in June 2017.” Low personal incomes are forcing many households into debt. The Bank of Botswana observes that the annual growth in mortgages moderated to 4.4 percent in June 2017, from 7.3 percent in June 2016, which mainly reflects a weak housing market, especially at the upper-end, and tighter lending criteria by some banks.
“Nevertheless, unsecured household lending, which constitutes a large proportion of commercial bank credit, represents relatively small amounts spread across many borrowers of differing credit profiles, which mitigates associated financial stability risks.” The BoB says: Overall, current levels of credit growth continue to be supportive of economic activity and augur well for durable stability of the financial system. “The Board of the Bank has approved broadening the range of securities that are eligible for use by commercial banks as collateral when accessing credit facilities offered by the Bank. By allowing all government securities, regardless of maturities to be used for this purpose, commercial banks will be able to manage liquid assets more efficiently, with less reliance on BoBCs for collateral.”
The Central Bank is of the view that in turn, this should improve the efficiency of the policy transmission mechanism, while also reducing further the costs of monetary policy implementation. The bank new framework will become operational in the second half of 2017. “The Bank’s implementation of the exchange rate policy will continue to entail a 0.26 percent upward rate of crawl of the NEER for the remainder of 2017, given that inflation in Botswana is projected to be within the medium-term objective range of 3 – 6 percent and below the projected average inflation of trading partner countries.”
MPS examines price developments and the underlying causal factors in the first half of 2017. It also assesses key financial and economic developments that are likely to influence the inflation outlook and financial stability, in order to determine the likely monetary policy response in the second half of 2017.
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”