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Pula Fund on P4 billion depletion amidst crumbling domestic economy

DR Matsheka

Pula Fund, Botswana’s diamonds investment flagship, is currently whispering economic disaster as it is dallying down the slide with an erosion of P4 billion for March 2020 from the same period of last year.

This is according to the figures in the Bank of Botswana Statement of Financial Position as at March 31, 2020. Last year March, the Pula Fund was at P51 billion and it went down to P47 billion March this year, a deficit of P4 billion.

Pula Fund is Botswana’s long-term investment portfolio established 26 years ago for the perseverance part of the income from diamond exports for future generations. According to Bank of Botswana, foreign exchange reserves that are in excess of what is expected to be needed in the medium term are transferred to Pula Fund and invested according to these investment guidelines. The Pula Fund is a Sovereign Wealth Fund (SWF).

In a review for this year’s first quarter, since January 2020 the Pula Fund has been showing erosion, a trend continuing even towards March 2020 as Q1:2020 closes. The central bank has just offered its financial positon for Q1:2020 and things are looking gloomy for the much coveted Pula Fund. A deficit of over P600 million in the Fund has been recorded between the months of February and March this year according to the recent Bank financial position.

Deeper statistics shows the Pula Fund went on a downward spiral last year between the months of November and December, by a deficit of almost over P10 billion. The Fund did however find its feet, bouncing up by almost P2 billion in January this year after a huge slump last year December.

But that was short lived as February saw things tumbling down again, reminiscing the negative picture of November 2019, a pictorial illustration will show a graph pointing down as a bad sign for the most reliable Fund ever made by this country.  The Pula Fund reached an all-time high of P64.3 billion and a record low of P18.7 billion in April 2003.

According to Bank of Botswana, the Pula Fund has increased substantially in value (when measured in both domestic and foreign currency) in real terms since it was established in 1994. “This reflects both a sustained period of substantial balance of payments surpluses as well as the success of the investment strategy,” said the central bank.

However, according to the Bank, there have been instances of substantial outflow: notably in the period following the establishment of the Public Officers Pension Fund, which resulted in a substantial transfer of assets from Government; while, from late 2008, the turbulence arising from the worsening global economic slowdown resulted in some erosion of the Pula Fund, due to both the adverse market conditions and outflows needed to maintain the Liquidity Portfolio at required levels.

Botswana’s total foreign assets have depleted by P11.5 billion altogether between March 2019 and March 2020. According to the Bank’s financial position, by March when looking at the Liquidity Portfolio fund; Transactions Balances Tranche went down by P5 billion from March last year and the Liquidity Investment Tranche plummeted by P3 billion. However the domestic assets saw a slight improvement.

Total Foreign Liabilities soared up while foreign exchange reserves expressed in US dollars went down by over P1 billion this was almost the same decreased in foreign exchange reserves expressed in SDR.

Botswana’s economy is now grappling with the ripple effects of covid-19 and diamond contribution to the GDP and or the Pula Fund is expected to shrink. Botswana’s story cannot be told better in gloom than when Foreign Direct Investment (FDI) flow will in 2020/21 reduce by 30-40 percent while trade will shrink by about 32 percent, this comes hard for a country which has years of nursing trade deficits.

A bad song in a time of a Pula Fund or diamond reliant economy, the depletion of a depleting government’s current account could be a dawn for much coming trouble. Towards the twilight of last year the government’s current account recorded a mammoth deficit of P6.6 billion compared to a revised deficit of P485 million during the corresponding period in 2018, this cannot be helped by the sting of covid-19 on the local economy.  Furthermore, the end of 2019/2020 financial year, government’s total debt was P27.8 billion, roughly 28 percent of GDP.

Minister of Finance & Economic Development, Thapelo Matsheka recently announced that Botswana’s economy is expected to decline by 13.1 percent going backward against the initial projected growth of 4 percent for the 2020/21 financial year. Matsheka further told the media that due to the effect of covid-19 the global economy will shrink by 3 percent, a reverse mode to the initial expected growth of over 3 percent.

Botswana’s economic response to covid-19 amid a rocking boat of domestic economy

According to the US think tank Milken Institute, in its production of “a hub for information, analysis, and the global response to COVID-19’s impact on Africa” and in its instalment of ‘Africa Watch’, Botswana announced US$163 million which is a 0.9 percent of GDP.

Botswana’s announced healthcare spending to respond to covid-19 is US$ 41 million. The covid-19 healthcare spending as a percentage of general government total expenditure is at 0.8 percent according to Africa Watch.

Botswana not ready to become a beggar

When the economic winds are going against Botswana’s economy, which is heavily reliant on diamond exports and reserves that comes from such precious stones, many pragmatic economists point that this country should ‘swallow her pride’ and queue for aid from monetary donors.

However, Matsheka has suggested that government has so far doubled its domestic borrowing limit from P15 billion to P30 billion. Matsheka hinted that Botswana will first exhaust all the domestic borrowing before going outside.

“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,” Matsheka told journalists in April.

Matsheka also told the media that there will be no rush to approach global funders. But many economists are already discussing the pressure that may come which will inevitably present this country with no option but to seek outside help

“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.

But 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,” Matsheka said in April.

Botswana has better sovereign credit ratings, this puts it in a better position for international lenders. In Moody’s Investor Services-an international rating agency and global think tank based in London-rates that Botswana has maintained the A2 long-term local and foreign currency issuer ratings. A2 rating is the sixth highest rating in Moody’s Long-term sovereign ratings. Countries rated A2 are considered to be of upper-medium grade and are subject to low credit risk.

However Botswana has been going down in renowned credit rating agency charts recently. According to Moody’s, the corona virus has only amplified Botswana‘s already risky and vulnerable economic setup.

Moody’s say Botswana’s vulnerability comes from the limited economic diversification given its heavy reliance on a single commodity for growth, exports and budget revenues, slow progress towards economic transformation, and an increasingly rigid expenditure structure in the budget.

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P230 million Phikwe revival project kicks off

19th October 2020
industrial hub

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.

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IMF projects deeper recession for 2020, slow recovery for 2021

19th October 2020

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.

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Botswana partly closed economy a further blow of 4.2 fall in revenue

19th October 2020

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.

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