The Governor of the Bank of Botswana, Linah Mohohlo
The Governor of the Bank of Botswana, Linah Mohohlo has said the banks were solid and under control, this follows misinformed reports that have been circulating suggesting that there is a liquidity crisis and bank customers face a credit crunch. “The banking sector in Botswana is sound and profitable; a tightening of the bank liquidity is what is evident,” Mohohlo said.
The Governor noted that though the banks are sound, profitability has declined as expenses increased faster than income however the situation varies from bank to bank.
Describing the prevailing liquidity situation with the banking sector Mohohlo said the banking sector has been faced with a situation of excess liquidity which saw banks dishing out loans at the same time charging higher interest rates on credit. Be that as it may, the reserve bank had been in communication with the banks that measures could be put in place to absorb the excess liquidity at any given point hence they should manage their risks.
A warning that most banks did not take heed off, hence they are grappling with tight liquidity problems. As result this has resulted in a period of rapid credit growth by commercial banks, compared to slower increase in deposits thus resulting in a sharp increase in the intermediation ratio, which is simply a ratio of bank loans to deposits.
“They are crying now because they did not manage their risk properly. I believe risk is something they are beginning to learn now. Banks were not taken by surprise it’s something that we have been warning them about to avoid a Laissez-faire approach in their operations,” Mohohlo said. The Governor underscored the need for banks to impart skills to their staff.
“You can’t afford to be reckless banks should be mindful of how they remunerate their depositors and how they charge their credit,” Mohohlo said.
In the past five years, excess liquidity in the banking system as represented by outstanding BoBCs has declined from P17, 7 billion as at end 2010 to P4.6 billion in February 2015.
“The main cause was the BoB phased reduction of the excess money that is continuously mopped by way of auctioning of BoBCs. The cap for this excess money currently is P5 Billion and it was put in place to encourage productive lending by banks as well as to moderate the cost of mopping up excess liquidity,” Mohohlo said.
She added that the recent economic and market developments have had no adverse impact on levels of capital in banking industry, with the aggregate capital adequacy ratio at 19 percent as at January 2015 and above the prudential limit of 15 percent.
In the 12 month period to January 2015, the aggregate industry balance sheet grew healthily by 11 percent, with deposits growing by 7 percent and credit growing by 13 percent.
The ratio increased from 53.1 percent at the end of 2010 to 87.6 percent in the period of four years to the need of 2014. Mohohlo said as such funds previously held in BoBCs have been diverted to loans by banks and more than doubled growing by 104.3 percent from P22.1 billion in December 2010 to P45.2 billion in January 2015.
During the same period deposits increased at a slower pace of 31.7 percent from P40.4 billion to P53.2 billion in the same year period. “The slower growth in deposits is possibly due to sluggish growth in incomes, inadequate financial inclusion, more streamlined procedures for government funding of parastatals and very low interest rates paid by banks on deposits,” she explained.
She highlighted that comparing with rest of Africa banks in Botswana are more profitable.
Mohohlo said the excess liquidity has been effectively absorbed by the economy to benefit businesses and households.
As funds available for lending income exhausted, it is inevitable that credit expansion would slow down. However credit has continued to grow to robust pace as evidenced by January 2015 annual growth rate of 13 percent, which is higher than nominal economic growth.
She said the fuss over the tightened lending criteria at banks is normal saying in situation of tighter liquidity banks tend to tighten lending criteria, while taking measures to boost deposits. “Even then current developments do not suggest that new lending will cease completely as growth in deposits remains positive,” said the Governor.
Mohohlo said it is imperative that banks undertake measures to attract deposits and focus on productive use of more limited funds available for lending.
“More emphasis on deposit mobilization and improved financial inclusion would be steps in the right direction towards a more mature banking sector,” she said.
The Governor said in situations like this of tight liquidity there are more complementary measure that there BoB stands ready to undertake in support of banks as they review their operations in an environment of reduced liquidity. These include reduction of the Primary Reserve Requirement and enhanced access to BoB lending facilities.
The BoB has since reduced the Primary Reserve Requirement from the current 10 percent to 5 percent with effect from April 1, 2015. This will release a total of P2.3 billion to augment the banks loanable funds. Mohohlo underscored that the reduction of Primary Reserve Requirement should not be mistaken as a bailout to the banks rather it’s just a measure adopted in moments of reduced liquidity.
Marcian Concepts have been contracted by Selibe Phikwe Economic Unit (SPEDU) in a P230 million project to raise the town from its ghost status. The project is in the design and building phase of building an industrial hub for Phikwe; putting together an infrastructure in Bolelanoto and Senwelo industrial sites.
This project comes as a life-raft for Selibe Phikwe, a town which was turned into a ghost town when the area’s economic mainstay, BCL mine, closed four years ago. In that catastrophe, 5000 people lost their livelihoods as the town’s life sunk into a gloomy horizon. Businesses were closed and some migrated to better places as industrial places and malls became almost empty.
However, SPEDU has now started plans to breathe life into the town. Information reaching this publication is that Marcian Concepts is now on the ground at Bolelanoto and Senwelo and works have commenced. Marcian as a contractor already promises to hire Phikwe locals only, even subcontract only companies from the area as a way to empower the place’s economy.
The procurement method for the tender is Open Domestic bidding which means Joint Ventures with foreign companies is not allowed. According to Marcian Concepts General Manager, Andre Strydom, in an interview with this publication, the project will come with 150 to 200 jobs. The project is expected to take 15 months at a tune of P230 531 402. 76. Marcian will put together construction of roadworks, storm-water drains, water reticulation, street lighting and telecommunication infrastructure. This tender was flouted last year August, but was awarded in June this year. This project is seen as the beginning of Phikwe’s revival and investors will be targeted to the area after the town has worn the ghost city status for almost half a decade.
The International Monetary Fund (IMF) has slashed its outlook the world economy projecting a significantly deeper recession and slower recovery than it anticipated just two months ago.
On Wednesday when delivering its World Economic Outlook report titled “A long difficult Ascent” the Washington Based global lender said it now expects global gross domestic product to shrink 4.9% this year, more than the 3% predicted in April. For 2021, IMF experts have projected growth of 5.4%, down from 5.8%. “We are projecting a somewhat less severe though still deep recession in 2020, relative to our June forecast,” said Gita Gopinath Economic Counsellor and Director of Research.
The struggle of humanity is now how to dribble past the ‘Great Pandemic’ in order to salvage a lean economic score. Botswana is already working on dwindling fiscal accounts, budget deficit, threatened foreign reserves and the GDP data that is screaming recession.
Latest data by think tank and renowned rating agency, Moody’s Investor Service, is that Botswana’s fiscal status is on the red and it is mostly because of its mineral-dependency garment and tourism-related taxation. Botswana decided to close borders as one of the containment measures of Covid-19; trade and travellers have been locked out of the country. Moody’s also acknowledges that closing borders by countries like Botswana results in the collapse of tourism which will also indirectly weigh on revenue through lower import duties, VAT receipts and other taxes.
Latest economic data shows that Gross Domestic Product (GDP) for the second quarter of 2020 with a decrease of 27 percent. One of the factors that led to contraction of the local economy is the suspension of air travel occasioned by COVID-19 containment measures impacted on the number of tourists entering through the country’s borders and hence affecting the output of the hotels and restaurants industry. This will also be weighed down by, according to Moody’s, emerging markets which will see government losing average revenue worth 2.1 percentage points (pps) of GDP in 2020, exceeding the 1.0 pps loss in advanced economies (AEs).
“Fiscal revenue in emerging markets is particularly vulnerable to this current crisis because of concentrated revenue structures and less sophisticated tax administrations than those in AEs. Oil exporters will see the largest falls but revenue volatility is a common feature of their credit profiles historically,” says Moody’s. The domino effects of containment measures could be seen cracking all sectors of the local economy as taxes from outside were locked out by the closure of borders hence dwindling tax revenue.
Moody’s has placed Botswana among oil importers, small, tourism-reliant economies which will see the largest fall in revenue. Botswana is in the top 10 of that pecking order where Moody’s pointed out recently that other resource-rich countries like Botswana (A2 negative) will also face a large drop in fiscal revenue.
This situation of countries’ revenue on the red is going to stay stubborn for a long run. Moody’s predicts that the spending pressures faced by governments across the globe are unlikely to ease in the short term, particularly because this crisis has emphasized the social role governments perform in areas like healthcare and labour markets.
For countries like Botswana, these spending pressures are generally exacerbated by a range of other factors like a higher interest burden, infrastructure deficiencies, weaker broader public sector, higher subsidies, lower incomes and more precarious employment. As a result, most of the burden for any fiscal consolidation is likely to fall on the revenue side, says Moody’s.
Moody’s then moves to the revenue spin of taxation. The rating agency looked at the likelihood and probability of sovereigns to raise up revenue by increasing tax to offset what was lost in mineral revenue and tourism-related tax revenue. Moody’s said the capacity to raise tax revenue distinguishes governments from other debt issuers. “In theory, governments can change a given tax system as they wish, subject to the relevant legislative process and within the constraints of international law. In practice, however, there are material constraints,” says Moody’s.
‘‘The coronavirus crisis will lead to long-lasting revenue losses for emerging market sovereigns because their ability to implement and enforce effective revenue-raising measures in response will be an important credit driver over the next few years because of their sizeable spending pressures and the subdued recovery in the global economy we expect next year.’’
According to Moody’s, together with a rise in stimulus and healthcare spending related to the crisis, the think tank expects this drop in revenue will trigger a sizeable fiscal deterioration across emerging market sovereigns. Most countries, including Botswana, are under pressure of widening their tax bases, Moody’s says that this will be challenging. “Even if governments reversed or do not extend tax-easing measures implemented in 2020 to support the economy through the coronavirus shock, which would be politically challenging, this would only provide a modest boost to revenue, especially as these measures were relatively modest in most emerging markets,” says Moody’s.
Botswana has been seen internationally as a ‘tax ease’ country and its taxes are seen as lower when compared to its regional counterparts. This country’s name has also been mentioned in various international investigative journalism tax evasion reports. In recent years there was a division of opinions over whether this country can stretch its tax base. But like other sovereigns who have tried but struggled to increase or even maintain their tax intake before the crisis, Botswana will face additional challenges, according to Moody’s.
“Additional measures to reduce tax evasion and cutting tax expenditure should support the recovery in government revenue, albeit from low levels,” advised Moody’s. Botswana’s tax revenue to the percentage of the GDP was 27 percent in 2008, dropped to 23 percent in 2010 to 23 percent before rising to 27 percent again in 2012. In years 2013 and 2014 the percentage went to 25 percent before it took a slip to decline in respective years of 2015 up to now where it is at 19.8 percent.