Sunday, December 5, 2021

Botswana is one of AfDB’s largest exposures

Because it borrows millions from the African Development Bank (AfDB), Botswana now counts as one of the bank’s five largest exposures.

As at the end of last year, the money that Botswana and four other AfDB-member countries (Morocco, South Africa, Tunisia and Egypt) had borrowed accounted for 161 percent of the bank’s adjusted common equity. This figure was 15 percent lower than a year earlier, but still represented a concentration risk that the bank can ill-afford. Loans that are not evenly distributed or are heavily concentrated in certain economic sectors are detrimental to banking operations and played a key role in the financial instability of the banking sector in 2008. Standard & Poor’s Ratings Services’ has recommended that AfDB should manipulate its risk profile to best serve its interests.

“We anticipate that the bank will embark on some innovative portfolio management techniques over the next few years to reduce concentrations,” Standard & Poor says.

Under the new Basel III banking agreement (which will be fully effective as on January 1, 2019) large internationally active banks will be required to hold a minimum of 4.5 percent of their risk-adjusted assets in common equity. In the United States, the Federal Reserve has already decided that all banks need to adhere to this standard, with the largest banks required to hold an extra buffer.

When the global financial crisis hit, diamond prices plummeted and Botswana’s finances were badly affected. In 2010, the government did, for the first time in 17 years, borrow a large sum (P10.5 billion) for budgetary support. The loan covered the larger part of the P13.4 billion deficit that government had incurred in its 2009/10 national budget, with the remainder of the deficit being covered by a P2.2 billion loan that the country got from the World Bank through the AfDB’s Development Policy Lending window. The latter is a fast-disbursing facility intended to assist countries in economic crisis. For the AfDB, this was a development so welcome that its former president, Donald Kaberuka, came to Gaborone for the signing ceremony.

Cooperation between the bank and Botswana dates back to 1972.  The bank has financed 50 operations (41 loan projects, seven institutional support operations, and two studies) valued at approximately US $2.1 billion. Bank-funded projects are primarily in the areas of infrastructure (power, transport, water and sanitation, communication), agriculture, finance and multi-sector. With the Ministry of Finance and Development Planning having forecast a P4.03 billion deficit in the 2016-17 budget strategy paper, it is likely that the Botswana government will once more approach the bank for another budgetary support loan. 

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