The Botswana government’s share of reserves continues to decline as the country faces its worst contraction in over a decade, with revenue expected to take a dip yet while the country intends to expand its expenditure to boost the sluggish economy.
Bank of Botswana’s statement of financial position at the end of August 2020 shows the country’s reserves at P62.4 billion, lower than P63.6 billion in July and 15 percent lower from the corresponding period last year.
The reserves are made up of the transactions balances tranche, liquidity investment tranche, the Pula fund and the International Monetary Fund tranche. Much of the decline in foreign exchange reserves during August was due to a 50 percent drop in the liquidity investment tranche, falling from P5.7 billion to P2.8 billion. The liquidity investment tranche provides for support for short term funding.
Nearly 17 percent of the P62.4 billion of the 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. In the prior month, the pula fund amounted to 26 percent of total foreign reserves.
The government’s share of reserves in August was P10.5 billion, falling from P13.2 billion in July, and on a twelve-month period, the government’s buffers have lost almost 46 percent from August 2019’s P19.4 billion. The sustained loss in government reserves has been largely due to withdrawals by the government to fund deficits caused by lower revenues against high expenditure. This has brough down government’s reserves to their lowest levels in more than ten years.
The continued fall in government reserves has forced the country’s fiscal officials to consider alternative ways to stimulate the economy while patching up the widening budget shortfalls. The finance ministry had to revise the initial budget presented in February, cutting projected revenue for the 2020/21 financial year from P62.4 billion to P48.8 billion while planned government expenditure was reduced from P67.6 billion to P59.6 billion.
The budget deficit for the 2020/21 budget year that began in March has since jumped from P10.8 billion to nearly P15 billion, according to the finance minister in his presentation to lawmakers in September when requesting for an additional P3.7 billion. The budget deficit has ballooned 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 troubled by budget deficits since 2017/2018, with that year’s deficit recorded at P1.9 billion. The government’s cumulative budget deficits in the last three years is hovering now at P22 billion. Another shortfall of more than P4.4 billion is expected in 2021/22 but will likely be revised too in the coming months.
The government has put in place an ambitious Economic Recovery and Transformation Plan (ERTP) to nudge 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 economy has been forecasted to shrink by 8.9 percent in 2020, followed by a rebound growth of 7.7 percent growth in 2021.
The deterioration in government’s reserves has long been in the making. Prior to the financial crisis of 2008/9, the government investment account amounted to P30.5 billion in December 2008, which was equivalent to 41 percent of GDP. At the current level of P10.5 billion, it represents 5 percent of 2019’s nominal GDP 0f P200 billion. On the back of the significant plunge in government reserves, the minister said it’s best to avoid excessive drawdown from the government investment account in order to preserve it as a financial buffer.
“The danger with substantially reduced financial buffers is that when an economic shock occurs, or disaster descends upon us and adversely affects our economy such as the Covid-19 pandemic currently. It becomes difficult for the country to manage such a shock. This means that as far as possible we should build enough fiscal cushion to be able to resist eventualities such like this,” Matsheka said last month.
The minister warned that drawing down on the country’s cash balances to finance deficits should be an exception rather than the rule. He said the government will need to make more use of borrowing to finance budget deficits in the short and medium term.