The usual cash flush Botswana government is facing increasing pressures to seek funding anywhere else but the financial buffers, which have now fallen to historic lows due to government withdrawals used to smooth economic fluctuations.
The country’s foreign reserves have for years been a symbol of pride for the diamond rich country, praised for its financial prudence in having a fund that cushion the country in worst economic times. However, the government’s share of the reserves is smaller than most people believed for a long time and has significantly declined in over a decade.
Faced with weak economic prospects, complicated by soaring unemployment and budget out runs, the government is seeking at least P43 billion to be used in the next three years through the implementation of Economic Recovery and Transformation Plan (ERTP), and this happens at a time when government revenues have significantly declined due to slowdown in global and domestic economies.
“As a result, larger budget deficits are expected in the short term, which is the current financial year 2020/21 and in the medium term, which is financial years 2021/22 and 2022/23. It is important to point out that unlike in previous economic crisis such as that of 2008/9, the 2020 Covid-19 induced economic crisis, comes at a time when the country’s net position is not strong,” said Dr Thapelo Matsheka, the country’s finance minister.
“In particular the balance in the Government Investment Account (GIA) has decreased over the past years. It is therefore not advisable to draw down from the government investment account as the main source of financing for the anticipated deficits as has been done in the past.”
Bank of Botswana’s statement of financial position for the year ended May 2020 shows the country’s reserves at P66.1 billion, down from the previous month’s P68.9 billion, and lower than P75.3 billion recorded in May 2019, marking a 12.2 percent fall. The reserves are made up of the transactions balances tranche (TBT), liquidity investment tranche (LIT), the Pula fund and the International Monetary Fund (IMF) tranche.
From the total P66.1 billion reserves, the government’s share is only 23 percent of total reserves, and this is held through the government investment account, established in 1997, representing government’s share of the reserves in the Pula fund. The account had P15 billion in May, a 19.7 percent drop from April’s P18.8 billion. On a yearly level, the government’s funds have dried up by nearly 40 percent from P25.1 billion registered in May 2019.
The decline goes back further. Prior to the financial crisis of 2008/9, the government investment account amounted to P30.5 billion in December 2008, which is equivalent to 41 percent of GDP. As of December 2019, it stood at P18.3 billion, only 9 percent of GDP.
On the back of the significant plunge in government reserves, the minister said it’s best to avoid excessive drawdown from the government investment account in order to preserve it as a financial buffer.
“The danger with substantially reduced financial buffers is that when an economic shock occurs, or disaster descends upon us and adversely affects our economy such as the Covid-19 pandemic currently. It becomes difficult for the country to manage such a shock. This means that as far as possible we should build enough fiscal cushion to be able to resist eventualities such like this,” he said.
Matsheka warned that drawing down on the country’s cash balances to finance deficits should be an exception rather than the rule. He said the government will need to make more use of borrowing to finance budget deficits in the short and medium term.