President Lt Gen Ian Khama has raised hopes high when he made a major pronouncement that Botswana will tap in its foreign reserves to stimulate the economy. In what is now known as the Economic Stimulus Package, the president is upbeat that the package is exactly what the doctor has ordered for the ailing economy.
The stimulus package is intended to jumpstart tourism development, construction, land allocation and manufacturing. The end results will be a booming diversified economy that will create thousands of jobs.
The pronouncement has caused a frenzy of curiosity and excitement that has played out in a protracted debate that seeks to unravel the benefits of the economic stimulus package. It does not help that President Khama in delivering the envisaged stimulus package left out major talking points, for example, the amount that will be taken from the reserves. To help you better understand we put some things into context.
An economic stimulus is an act of revitalising a struggling or sluggish economy through the use of monetary policy or fiscal policy. A struggling economy encompasses depressed aggregate demand due to high levels of unemployment, high debts hindering investments and also other factors.
To stimulate the economy, the country has two options. It could use monetary policy by using interest rates, cutting interest rates makes borrowing cheaper hence businesses and individuals could borrow to finance investments. The other option is the use of fiscal policy, here the government could either lower taxes or increase its spending to stimulate the economy.
Botswana has used both approaches in stimulating the economy, recently the Bank of Botswana lowered its interest rate in an effort to jolt businesses and individuals in getting access to cheap borrowing. The Economic Stimulus Package will make use of fiscal policy in the hope of reigniting economic activities. Both policy choices have different aspects to them, monetary policy brings short term relief while fiscal policy as a long term remedy.
It would appear that the big debate surrounding the economic stimulus package stems from how it will be financed. Botswana prides itself in its foreign reserves that currently stand at P88 billion, enough to cover Botswana for 20 months should the country stop receiving revenues. This will be the first time the government has to resort to it, even when the government was running a deficit budget (Expenditure exceeding revenues) they did not tap into it. To tap in the reserves requires parliamentary approval.
Can an economic stimulus be financed through reserves only? The answer is no. The economic stimulus can also be financed through borrowing. In fact Botswana has a good credit record, its debt to Gross Domestic Product stood at 23.10% and has good credit ratings pegged at stable by leading credit agencies.
This means it will be easy for Botswana to access loans at lower interest rates. Botswana could also tap into local markets for financing the economic stimulus. Consider this, Botswana Public Officers Pensions Fund has an excess of P60 billion in assets and is planning on investing more in the local market, this represents an opportunity for the government to act on it. A domestically held debt poses no problem unlike sovereign held debts.
Countries all over the world use the economic stimulus to prop their economies. During the financial crisis, the American Recovery and Reinvestment Act of 2009 — better known as the “economic stimulus” was instituted to jumpstart the economy. The $800 billion stimulus even up to now remains largely controversial and divisive. On the other hand you have those that purport that it worked while others remain unfazed and posit that it did nothing to kick-start the economy.
This is the nature of economic stimulus packages they have mixed results depending on implementation. Economic stimulus lead to deficits, the high expenditure will invariably be greater than revenues.
This could be problematic for Botswana considering that the country has a huge import bill, should demand for diamonds continue to fall, the results might be dire. Hence the paradox of economic stimulus: Big spending in stimulating the economy, slow recovery or returns.
On the surface economic stimulus makes sense. If the private sector is not spending, the government sweeps in with the big cheque and starts spending. This creates jobs and saves jobs from companies that were on the brink of retrenchments.
But for this to work, economists usually turn to multipliers. The expenditure is stimulative if the multiplier is greater than 1.0 (For an extra 1 pula spent, the GDP rises by more than P1 pula). However, many economists think that at best, the multiplier is 1.0 (simple replacement of spending that would already occur) and at worst less than 1.0 (For every pula spent, GDP will rise by less than 1 pula).
The trick of economic stimulus lies in the shot reaching the intended patient, it should revive factors that are slowing the economy. It happens that economic stimulus may dissipate to the right and wrong people. People and businesses that benefit from the stimulus package might lock into their gains by putting away the money in savings instead of expanding their business operations and hiring additional workers. This will defy the intended benefits of the economic stimulus which promotes national gains over private gains.
The president’s economic stimulus package is desirable. Botswana’s economy is not producing as much as it could and that there are many more people who want to work than there are jobs available. So a stimulus will boost both output and employment. Whether it will work or not will be dependent on the finer details that are supposed to be dealt with in the coming weeks. The success of it will require immense monitoring and evaluation during the implementation stages.
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”