Thursday, October 22, 2020

Fiscal sustainability under “threat” as Govt Net Financial Assets declines

The Botswana government’s Net Financial Assets (NFA) ÔÇô which is the difference between Government cash balances and net debt, has drastically dropped from P9.5 billion in 2014/15 financial year to P2.3 billion in 2015/2016. 

Economists generally use the NFA as one of the measures of the government’s fiscal sustainability. A positive NFA balance generally reflects low debt levels relative to Government cash balance. Conversely, a negative NFA balance reflects higher debt levels relative to Government cash balances. 

Available economic figures provided by the Ministry of Finance and Development Planning shows that the government’s total debt and guarantees increased since 2009/2010, during the financial and economic crisis period, resulting in the decline in the NFA. 

The Finance Ministry data shows that the government debt to the Gross Domestic Product (GDP) in Botswana averaged 14.43 percent from 1998 until 2015, reaching an all time high of 25.90 percent in 2011 and a record low of 5.98 percent in 2006. In 2015 the government debt to GDP has been pegged at just around 22.70 percent. 

Although Botswana has not yet exceeded the global debts benchmarks, the country risks running into a debt crisis if it continues borrowing at the current pace. Over the past few years, the government has also been engaged in providing its parastatals with loan guarantees for credit obtained from domestic commercial banks. Amongst the guarantees made by government is a debt deal in which the Okavango Diamond Company (ODC) secured a loan from Standard Chartered Bank Botswana.

At the same time, the African Development Bank (AFDB) has come out as the country’s major international creditor, a recent report on the state of Botswana’s economic and social development has shown. In its study conducted mid 2014, the African Economic Outlook (AEO) stated that the bulk of Botswana’s external debt is from multilateral institutions which accounted for 94.8 percent of the debt in 2012/13, with the African Development Bank being the major creditor accounting for 80 percent of the total. AFDB has funded projects such Morupule B amongst others. 

Projections of the government and government guaranteed debt by the Bank of Botswana, for the 2013/14 financial year, have shown that the debt reached over P30 billion. This reflects an upward trend of 4.8 percent given the 2012/13 outstanding amount of which P23.4 billion is said to be accounted for directly by government’s own debt. A breakdown of the government debt shows that its external obligation stood at P22.3 billion while internal debts are at P8.6 billion, including P7.6 billion government securities with the balance consisting of guarantees. 

LACK OF STRATEGY 

At the same time, a 2013 report titled “value for money” prepared by the Parliamentary Public Accounts Committee (PAC) indicates that despite an increase in government borrowing and a drawing down of government’s savings, government does not have in place a strategy to provide strategic direction and focus in the management of debt. 

The report suggested that there is likelihood of breaching limits of both internal and external debt ratio against the Gross Domestic Product (GDP) by government, following revelations that the custodian of public funds, the ministry of finance and development planning, continues to operate without a debt management strategy. 

The PAC says it has noted that there are articulated goals and objectives against which performance in the management of debt could be measured. Information passed on to Sunday Standard indicates that government through the ministry of finance and development planning sought technical assistance regarding the debt management strategy from the World Bank. It has however emerged that the World Bank advised government that Botswana needs to develop a suitable Medium Term Debt Management Strategy (MTDMS). The bank also provided Botswana with a report in which it suggested six strategy options to choose from, which the Accounting Officer is said to have shelved. 

“It was somewhat of a disappointment for the committee to note that for the last three years since the Bank issued its report, the Accounting Officer had not acted on the Bank’s recommendations. He stated that he was going to start working on the strategy in September 2013 and would have it in place by March 2014,”read part of the report. 

Botswana’s terms of borrowing are guided by the Stock, Bonds and Treasury Bills Act, which limits each of internal and external Government debt and Government guarantees to 20 percent of GDP.

The debt levels have put many economies, including developed ones such as the US, at crossroads because cutting debts will undermine efforts to economic recovery, while if countries continue borrowing, then there is a risk of debt crisis.

Botswana government wants to balance its budget in the next three years and runs the risk of debt crisis and equally slow road to recovery if it does not spend.

It is believed that although the Government cash balances recovered between 2012 and 2015, resulting in the increase in NFA, the recent decline, according to is a reflection, in part, of the slight increase in government debt. It has further emerged that for Botswana to cut its internal and external debts in the next three years to balance the budget, it will mean cutting on expenditure.

Botswana has been praised for its expansionary budget that saw lots of development projects being carried around the country, including airport, roads and dams, amongst others.

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