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Banking Association explains liquidity problems

Botswana Bankers Association CEO, Oabile Mabusa

The Chief Executive Officer of the Botswana Bankers Association (BBA) Oabile Mabusa has said that the level of intermediation in banking markets has been constrained by liquidity problems.

Mabusa nevertheless went on to acknowledge that though there was no liquidity crisis, local banks had dramatically lost surplus liquidity due to unprecedented changes in the banking system.

“In the absence of significant growth in the deposit base, the impact of the moratorium will continue to bite on banks’ bottom lines,” Mabusa hinted.

The Association though has full confidence that the regulator, which has already signaled its continuous close watch of the market to assess the impact of the moratorium, will take corrective action to avert any possible long-term adverse impact.

Experts have argued that from 2008 things took a turn and the bank’s excess liquidity dropped sharply, to a minimal level; in contrast to 2006, when excess liquid assets made up 45% of bank assets, by the end of 2013 this had dropped to 6%.

Last year the Govenor of the bank of Botswana Linah Mohohlo dispelled perceptions that the banking system was experiencing an overall tight liquidity situation. Mohohlo was quoted saying “I would like to correct the misconception that, in order to alleviate the perceived liquidity shortage, the Bank of Botswana needs to inject liquidity into the banking system.”

Mabusa further revealed that the moratorium has had a negative impact on the banks, highlighting that it had directly constrained the ability of banks to recoup the investments made in modernizing and improving their operations, as well as their growth potential, thus forcing them to fund more of their operating costs out of interest income.

The moratorium has in fact had a direct dampening effect on bank revenues and has led to negative growth or stagnation non-interest revenues accompanied by positive growth in operating costs.

“These factors combined have a net negative effect on bank revenues and profitability,” said Mabusa.

He said despite the biting effects of the moratorium, Banks are in the business of managing risks and this just happens to be one of the risks of doing business.

“Among the possible ways to react to the moratorium, banks are likely to refocus their marketing channels and service delivery channels in order to attract more customers into using alternative and value-add services which have the capacity to generate tariff income” he asserted.

By current indications, the domestic market is set to maintain conditions of growth supported by with moderate credit demand and resilient asset performance.

“This is likely to come with a time lag, which means that medium to long-term market conditions are likely to be challenging but still favorable for the banking sector,” he posited.

 Regarding the banking sector’s contribution to economic growth Mabusa said, “If we are to use bank balance sheet growth and profitability as proxy determinants of banking sector contribution to economic growth, it can be concluded that this role has been mitigated in the historical context.”

However, he said the fact that banks have used their capital to finance credit demand indicates their commitment to market under tough conditions.

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Botswana on high red alert as AML joins Covid-19 to plague mankind

21st September 2020

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.

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Finance Committee cautions Gov’t against imprudent raising of debt levels

21st September 2020
Finance Committe Chairman: Thapelo Letsholo

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.

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Gov’t Investment Account drying up fast!  

21st September 2020
Dr Matsheka

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”

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