Tuesday, October 20, 2020

Foreign Reserves take a knock

Botswana’s share of foreign reserves exchange continues to decline at time when the country is planning a huge expenditure to boost the economy.

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. Much of the decline in foreign exchange reserves during May was due to a sharp 45 percent decrease in the transactions balance, falling from P7.5 billion to P4.5 billion, caused by domestic foreign exchange demand and net capital outflows.

The liquidity investment tranche retreated slightly by 1 percent to P8.3 billion, while the Pula fund remained the largest contributor to foreign reserves at P51.8 billion. 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 (GIA), established in 1997, representing government’s share of the reserves in the Pula fund.

The government’s share of reserves in May was P15 billion, 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 account has been declining due to withdrawals by the government to fund deficits due to lower revenues against high expenditure.

While the reserves are on the decline, 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 plan which will run from 2020/21 to 2022/23 is supposed to spearhead Botswana’s economic transformation through private sector led economy, anchored by exports and citizen participation. The ERTP centres around accelerated development of facilitative infrastructure, support for increased agriculture and manufacturing output, growth of the creative industry, improving the business environment and accelerating regulatory reforms.

However, the plan requires at least P40 billion in government expenditure at a time when the country has been running deficits, with revenues expected to fall in the medium term. In April, Botswana’s finance minister Dr. Thapelo Matsheka revised his initial February budget, cutting projected revenue for the 2020/21 financial year from P62.4 billion to P48.8 billion. The planned P67.6 billion government expenditure was reduced to  P59.6 billion.

According to the finance ministry data, the projected budget deficits are expected to grow in size. The budget shortfall for the 2020/21 is now estimated to be P10.8 billion, ballooning from the P7.9 billion deficit registered in 2019/20 financial year, which was a slight reduction from 2018/2019’s massive P8.8 billion budget shortage. 

The government has been running budget deficits since 2017/2018, with that year’s deficit recorded at P1.9 billion. Another shortfall of  more than P4.4 billion is expected in 2021/22 but will likely be revised too in the coming months.

To raise the billions of pula needed for the economic recovery plan, the government economic advisors have proposed drawing money from the government’s portion of the foreign reserves, taking on more external debts and increasing domestic borrowing, while also disposing some government properties, including privatisation of some institutions. The government also plans to raise revenue generation through increased taxes and other levy charges.

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The Telegraph October 21

Digital edition of The Telegraph, October 21, 2020.