Thursday, May 28, 2020

Foreign Reserves & public debt….walking the tight line

Botswana’s multibillion sovereign fund, otherwise known as foreign exchange reserves, has been declining over the past four years as government continues to dig in the funds to fund deficits, and the trend is expected to continue as government revenues comes under pressure, while the new administration has vowed economic reforms that will need funding. 

Bank of Botswana’s most recent financial statistics brief shows that foreign reserves were at P73.4 billion in August, a decrease of 5 percent from the previous year’s corresponding period. The year began with foreign reserves at P73 billion and touched their highest level so far this year at P76.5 billion in April, and plunged to P71 billion by June, with the decrease corresponding with beginning of the country’s financial year when the country’s budget allocation takes effect. 

The central bank says the decrease mainly reflects the drawdown on foreign exchange reserves to fund government expenditure and imports. The use of the once sacred sovereign fund is now becoming common following the government’s 2016 decision to fund the Economic Stimulus Package (ESP) by drawing about P3 billion from the reserves. 

With the government’s to revenue earner, diamond exports, facing a challenging year, and dragging down economic growth, the government will be relying on other funding alternatives to finance some of President Mokgweetsi Masisi’s priorities, which include job creation and investments in unconventional sectors. 

In an ironic twist, Masisi inherits the economy at a time when it appears to be under pressure, similar circumstances experienced in 2009 when former president Ian Khama had to navigate the 2008 financial crises, and it’s all the result of diamond sales falling due to waning demand. Masisi recently cruised to victory in October general elections, promising reforms to the economy, which among other things includes increased government expenditure. However, he will be against a stubborn economy, characterised by widening deficits. 

In the first quarter of the year, the country recorded a massive trade deficit of P2.1 billion but recovered slightly in the second quarter with a trade surplus of P58.3 million. Still, the first two months of the third quarter have both recorded massive deficits, signalling that third quarter will fare badly once the data becomes available.

As revenue shrinks against the government’s increased expenditure, the budget deficit has ballooned, adding to the successive deficits the country has been running. In the 2017/2018 financial year, Botswana recorded a P1.98 billion deficit, and this expected to top P6.35 billion in 2018/2019, with the country continuing to feel the pressure as they anticipate other deficits in the future, with

about P7.79 billion forecasted for 2019/2020 before slightly retreating to a budget deficit of P6.94 billion for the 2020/2021 financial year.

The Botswana government says it will fund these massive deficits through both domestic and external government debt as well as drawdown of foreign reserves. Fortunately for the country, it can afford to take on more debt given that its debt and guarantees averaged about 28 percent of GDP, which means the government exposure remains within the legal limit of 40 percent of GDP and poses minimal risk to financial stability.

Since assuming the presidency through automatic succession in April 2018, the country’s foreign reserves were at P74 billion, and their growth has been frustrating, failing to garner the growth experienced between 2014 and 2016. While the government continues to dig in the sovereign fund, it does so with caution knowing what the funds mean for Batswana, which they are told is money kept for the worst-case scenarios. 

As such, Masisi has been globetrotting, not only to attract foreign direct investment (FDI) but also to seek funding for some of the country’s major projects. The Ministry of Finance and Economic Development told parliament that in 2018 the country submitted road and rail projects for possible financing under the China Concession Loan Facility. The projects consist of the planned Francistown – Nata – Maun –Mohembo road, the Palapye – Martins Drift Road, and the Mosetse – Kazungula railway line. The projects costs have been pegged at P12.5 billion.

Upon Masisi’s state visit to China which coincided with the 3rd summit of the Forum on China-Africa Cooperation (FOCAC), he revealed a month later that Botswana had secured a P10.2 billion loan from China. 

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Sunday Standard May 24 – 30

Digital copy of Sunday Standard issue of May 24 - 30, 2020.