Bank of Botswana and Ministry of Finance & Economic Development have submitted a proposal to President Mokgweetsi Masisi seeking to increase government domestic borrowing from P15 billion to P30 billion, Minister Matsheka revealed at a press briefing recently.
Domestic borrowing is one of the key instruments used by government to fund budget deficits and national development pursuits, in turn also developing the local capital market. Through Bank of Botswana Government borrows money from the local capital market by issuing bonds and treasury bills on the stock exchange on a quarterly basis.
At the latest Government Bonds and Treasury bill auction held on the 28 February, Bank of Botswana (BoB), on behalf of Government offered additional tranches to existing and listed bonds. BW013 was reopened and P300 million was allotted, increasing BW013 total nominal amount in issue to P1, 576.00 Million. BW014 was also reopened and P400.0 Million was allotted, increasing its total nominal amount in issue to P2, 140.00 Million.
Furthermore BW015 was also reopened and P95.0 Million was allotted, increasing its total nominal amount in issue to P746 Million. Currently Government has seven (7) issued bonds on Botswana Stock Exchange, at market capitalization of P12.7 billion.
Government limit on borrowing from local capital market has been initially set at P15 billion. When lobbying Ministry of Finance to push for a higher limit Bank of Botswana said this would cultivate more activity in the local capital market in turn also reducing the risks of drawing down from reserves and the risk of borrowing externally at exorbitant interest and foreign exchange rates.
Advancing its case Bank of Botswana said fiscal authorities shift their preferred option for funding infrastructure projects and budget deficits from the reserves, to domestic debt.
BOB Governor, Moses Pelaelo explained early this year when delivering February monetary policy statement that borrowing more local capital market offers government a viable avenue for cost effective domestic resource mobilization for long-term investment and funding of government projects.
“Our proposal is premised on designing a transparent and more frequent issuance of a sufficient quantum of domestic government securities in a predictable arrangement that hopefully will attract a larger pool of participants and support deficit financing with lower risks,” said Pelaelo in February this year.
Pelaelo added that this would result in adoption of sound governance architecture around public debt management underpinned by the country’s well established track record of prudent fiscal policy and strong institutions.
Bank of Botswana reiterated that drawing down from reserves erode fiscal buffers especially taking into account the vulnerability of Botswana to trade shocks, climate change and prolonged droughts.
The Central bank underscored that there is need to maintain sufficient fiscal and external buffers explaining that this would require building sufficient resilience to afford the fiscal space to undertake countercyclical stabilization when necessary.
The need for an increased domestic borrowing has escalated due to doubled deficit as a result of COVID 19 economic impacts. Botswana’s budget deficit which was projected around P5 billion for the 2020/21 financial year has now ballooned to P10.8 billion. This will now be around 5.4 % of GDP, breaking the set threshold of 4 %-GDP.
Quizzed on how government will finance the budget deficit Minister of Finance & Economic Development Dr Thapelo Matsheka said Botswana was contemplating engaging global funders, but will not rush into such a decision.
“We have not reached any decision as to how much we would borrow externally from institutions such as International Monetary Fund (IMF), World Bank and African Development Bank, any other funding institution or foreign country,” he said.
Dr Matsheka added that, “My office is currently in talks with Botswana representatives at these institutions and we will look at a number of factors before coming to a decision of who we going to borrow from and how much we going to borrow.” The Minister revealed that a proposal has been submitted to President Masisi for government to increase its domestic borrowing from P15 billion to P30 billion.
“This bond program will present us with an opportunity to borrow more from our local capital market and finance our deficit and projects without drawing down from our reserves or getting expensive credit facilities externally,” he said.
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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”