Sunday, February 5, 2023

Govt local debt greater than foreign loans

Botswana has more than tripled its domestic debt, surpassing the value of external loans, as the country implements a mixture of funding to cover budget deficits and shore up the financial reserves which had declined to record lows. 

In the latest fund raising by the government, the September bond auction raised P943 million, nearly half of the P2 billion the government wanted from the auction. From the ten auctions this year, the government has garnered P10.1 billion.

In 2020, parliament changed the law to increase the domestic borrowing programme from P15 billion to P30 billion, and further increased the frequency of bond auctions from 4 to 12 auctions each year. This has significantly improved bond market activity, and helped raise the much needed funds for government.

The 12 bond auctions last year raked in P12.9 billion for the government, higher than the P8.5 billion raised from the six auctions in 2020. The four bond auctions in 2019 netted P3.9 billion, and in 2018 the figure was P3.6 billion for the same number of auctions.  

As a result of the frequent bond auctions, government’s domestic debt has risen to P23.4 billion this year, three times than the P6.8 billion in 2015/2016 financial year. In a historic turnaround, the domestic debt in 2020 surpassed external loans in value, in line with government commitment to borrow more locally. As of June 2022, external loans amount to P17.4 billion, bringing total government debt to P40.9 billion. If you include other loans where the government is the guarantor, the total government debt is P47.8 billion.

The increase in government debt was anticipated and planned following the past difficult years characterized by budget deficits and the decline in financial buffers. The diamond dependent economy struggled to reign in the budget deficits in 2017, forced by dwindling revenues as diamond exports fell due to recession in the diamond industry.

For the financial year 2017/2018, the country overspent its budget by P1.9 billion, and got worse in 2018/2019 with a P8.8 billion deficit.  While the budget outruns seemed to be getting better with a P7.9 billion deficit in 2019/2020, the advent of COVID-19 pushed the deficit to P16.41 billion in 2020/2021.

With the outsized budget deficits, the government raided the financial reserves by tapping in the government investment account (GIA), resulting in record lows for the fund. The GIA plunged from 2019’s P18.3 billion to P2.8 billion by end of December 2020, the lowest on record.

The government’s fiscal position appears to be improving, with the budget deficit for 2021/2022 down to P8 million, and the projected budget deficit for the current 2022/2023 financial year is P7.6 billion. The 2023/2024 financial projections show a P163 million deficit, and will be followed by budget surpluses of P355 million in 2024/2025 and P1.2 billion for 2025/2026 financial year. The GIA is also showing signs of improvements, steadily increasing to P5.6 billion in 2021, and staged a strong recovery in the first seven months of 2022, significantly rising to P16 billion.

Still, the finance ministry has cautioned that government’s financing needs are expected to remain moderate over the medium term, mainly reflecting the need to restore fiscal buffers as a precaution against future shocks, and thus the need to accumulate net financial assets, according to the budget and strategy paper released last month.

“With an almost a balanced budget in 2023/24, lower financing requirements are anticipated this time around. However, Government will continue to borrow both externally and domestically in line with its objective of replenishing fiscal buffers and developing the domestic capital market,” the finance ministry said I n the paper.

As debt increases, the ministry says it will continue to monitor the financing cost risk by implementing its fiscal consolidation plan in order to mitigate the risk of higher debt and debt-service costs. With total government debt of P47.8 billion, the debt to gross domestic product (GDP) ratio is 21 percent, lower than the statutory debt ceiling of 40 percent of GDP, hence room for more borrowings by the government. “Going forward, with the current fundamentals, the debt profile point to gradual reduction over the medium-term. The ratio of public debt and guarantees is projected to reduce from 24.6 percent of GDP estimated for 2022/23 to 22.3 percent of GDP in 2025/26. Much of this slowdown is due to an anticipated rebound in GDP growth and primary surplus balances which, combined, are expected to reduce the debt-GDP ratio,” said the ministry.

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