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Falling Oil Prices: Why we not so lucky!

The benefits that most countries are currently enjoying due to the plunging oil prices are likely not to be felt by Batswana due to various factors that include the recently hiked alcohol levy, replenishment of the National Petroleum Fund as well as high likelihood of tariffs going up.

Oil has been dealt a massive blow in recent months, the prices collapsed over 50 percent in the past six months amid feeble global demand compounded by strong supply growth. Analysts expect prices will fall further from current levels due to a variety of supply factors including increased oil exports out of the U.S. and record production levels from Iraq and Russia.

Botswana is a net importer of oil which constitute over 60% of the total imports. Surely the falling prices are a plus for the country as it reduces the import bill hence improving the country’s current account. In December 2014 the Government reduced the retail pump prices of petrol, diesel and illuminating paraffin. Retail prices for petrol decreased by 60 thebe per litre, while diesel was reduced by 50 thebe per litre.

While countries like South Africa have experienced numerous fuel reductions in recent months due to the plunging fuel prices, this has not been the case for Botswana.

Moatlhodi Sebabole, a Research Manager with Rand Merchant Bank (RMB) Botswana said the falling oil prices are good news, however the immediate benefits may not be felt by the ordinary consumer.

“Government is likely not to reduce the fuel prices to replenish the backup nest egg that cushions the motorists from fuel hikes the National Petroleum Fund (NPF). It might take longer before we witness a reduction in oil prices like what’s happening in South Africa and the rest of the countries,” said Sebabole.

The National Petroleum Fund is used by government to pay petroleum retailers the difference between the administered and prevailing fuel prices. “The NPF was now under pressure because the oil prices skyrocketed and maintained above $100 the fund cushioned the consumer. Hence the trickle effect from the dropping oil prices is taking long for the gasoline consumer,” he said.

He added that with the plummeting oil prices inflation would be expected to go down however the recent hike in the alcohol levy might upset that. “We would expect inflation to slow down to around 4, 9% beginning of the year due to reduction in transportation inflation rates. However the 10% hike of the alcohol levy to 55% may disturb the trend,” he said.

Sebabole observed that there are high chances that power and water tariffs may be hiked which again rip the consumer of the benefits that they would have enjoyed from the falling oil prices.

 “Botswana Power Corporation (BPC) is currently grappling with power supply woes and chances are high the tariffs will go up. The same goes for water, there are serious water shortages and tariffs may go up in a bid to solve the water shortages,” he said.

The price of Brent crude oil has fallen below $50 a barrel for the first time since May 2009.  It fell more than a dollar to $49.92 a barrel in early trading on Wednesday before edging back above the $50 mark.

“The benefits from the falling oil prices could translate to overall growth of the country GDP and lower inflation rate however factors cited above are likely to erode the benefits,” said Sebabole. He however noted that despite these factors it doesn’t mean the consumer cannot enjoy some of the benefits.

Many observers expect the price of oil to fall further as North American shale producers continue to supply increasing quantities of oil and gas, and the oil-producing group Opec resists calls for cuts in production to support prices.

Analysts observe that with no sign that Opec will do anything about over-production, it seems likely that further declines towards $40 in the coming weeks should be expected.

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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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