Thursday, October 1, 2020

Botswana’s Foreign Reserves continue to fall

The Botswana government will try to keep away from dipping into reserves which have come under pressure recently, forcing the administration to seek funding elsewhere that will inject over P40 billion in the economy. 

Bank of Botswana’s statement of financial position for the year ended June 2020 shows the country’s reserves at P63.6 billion, 3.8 percent lower than the previous month’s P66.1 billion, and lower than P71.8  billion recorded in June 2019, reflecting a 11.4 percent fall in an annualised rate. 

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. Much of the decline in foreign exchange reserves during June was due to slight 16 percent decrease in the Transactions Balances Tranche, falling from P4.1 billion to P3.4 billion, caused by domestic foreign exchange demand and net capital outflows.

The Liquidity Investment Tranche retreated plunged by 31 percent to P5.7 billion, while the Pula fund, the largest contributor to foreign reserves grew by 1.6 percent P52.6 billion. About 26 percent of the P63.6 billion in foreign reserves  is held through the Government Investment Account (GIA), established in 1997, representing government’s share of the reserves in the Pula fund. The government’s portion has been falling in recent times. 

The GIA in June was P13.7 billion, down by 8.6 percent from the previous month’s P15 billion, which was also a 19.7 percent drop from April’s P18.8 billion. On a yearly level, the government’s funds have dried up 37.6 percent from P22.1 billion registered in June 2019. The decline has been attributed to withdrawals by the government to fund deficits caused by lower revenues against high expenditure.

The budget that was presented by the country’s Finance ministry in February has since been revised after Covid-19 outbreak containment measures negatively affected the country’s revenue streams. Restricted movements led to cancelled diamond sales, while tourism came to a grinding halt. The bottlenecks in global supply chains have added downward pressure on expected import revenue.

The government has recently unveiled an ambitious Economic Recovery  and Transformation Plan (ERTP) to jumpstart the sluggish economy, which is said to be operating below its potential, averaging 3.7 percent in gross domestic product (GDP) growth rate instead of the desired 6 percent growth rate. The Finance ministry officials say the pandemic has sharply reduced economic growth and national income, worsening the country’s fiscal and balance of payments positions.

The ministry’s Mid-Term Review of the eleventh National Development Plan (NDP 11), the six-year plan that began on April 2017 and ends March 2023, initially projected domestic GDP growth averaging 4.1 percent a year during the second half of NDP 11. However, post-COVID, average GDP growth over this period is now expected to be less than half of that rate, at 1.9 percent, the officials said. While Matsheka in April had projected the economy to shrink by 13 percent, the officials have now revised the figure to a lower 8.9 percent contraction in 2020, followed by a rebound to 7.7 percent growth in 2021. 

Government revenues are projected to be 16 percent lower in the current 2020/21 financial year than they were when the Mid-Term Review was prepared, and 11 percent lower over the remaining years of NDP 11. The total financing requirement projected for the second half of NDP 11 amounts to P43 billion. With expenditure high and revenues falling, the government intends to raise funds through a combination of increased domestic revenues such as taxes and levies, and borrowing. 

“It is important to note that there is little scope to draw down further on the Government Investment Account – the government’s portion of the foreign exchange reserves – as this needs to be preserved as a financial buffer,” the officials said.

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