The central bank last year was able to generate high profits amid volatile markets, enabling it to provide some support to the Botswana government that has turned to the foreign reserves to fund its expenditure.
According to the Bank of Botswana’s recently released 2020 annual report, foreign reserves last year declined by 18.1 percent to P53.4 billion. The central bank manages the official foreign exchange reserves through two portfolios, the Liquidity Portfolio and the long-term investment portfolio (Pula Fund).
The Bank uses selected international fund managers to manage 50 percent of the foreign exchange reserves, funding the investment managers through strategic asset allocation of 45 percent for equities, 50 percent reserved for bonds while 5 percent of the funds are invested in high yield asset classes.
The Liquidity portfolio, which contains short term investments from money market instruments and bonds fell from P17.7 billion to P6.6 billion. The Pula fund, intended to generate returns and maintain the purchasing power of reserves through long term investments in foreign financial instruments like bonds, equities and derivatives, contracted slightly to P45 billion from 2019’s P46 billion.
The central bank was able to earn P9.57 billion from its investments in 2020, lower than the prior year’s P9.8 billion. But thanks to expenses falling from P2.9 billion to P762 million, Bank of Botswana was able to realise net income of P8.8 billion, higher than the P6.9 billion in 2019.
After transferring non-distributable currency gains of P3 billion to the Currency Revaluation Reserve and market valuation gains of P2.9 billion to the Market Revaluation Reserve, the net distributable income to government was P2.9 billion, lower than the P4.1 billion in 2019.
“Financial markets were volatile in 2020, but generally rallied against a backdrop of the COVID-19 pandemic, which prompted central banks to increase liquidity, while governments increased fiscal spending,” the central bank’s annual report said.
“This supported equities, which returned 14 percent according to the Morgan Stanley Composite Index (MSCI), while bonds gained 9 percent according to the Bloomberg Global Aggregate Index.”
The Government Investment Account (GIA), which was established in 1997, representing the government’s share of foreign exchange reserves in the Pula Fund and Liquidity Portfolio, had its worst decline last year, falling from 2019’s P18.3 billion to end last year with a paltry P3.3 billion.
The decline follows government’s P14.9 billion withdrawal from the buffers, with the funds used to plug budget deficits and other government expenditures at a time when the diamond sales were depressed, which meant less revenue for government that relies heavily on diamond exports.