The government’s share of reserves has fallen to its lowest level in over 20 years, caused by the increase in government expenditure amid a pandemic that found the economy already faltering.
Fresh information from Bank of Botswana shows that foreign exchange reserves fell by 18 percent in 2020, closing the year with P53.3 billion, down from 2019’s balance of P65.3 billion, which was also a decline from P71.4 billion registered in 2018.
Botswana’s foreign reserves are made up of the liquidity portfolio, the Pula Fund and the International Monetary Fund (IMF) reserves. According to the central bank which manages the foreign reserves, the liquidity portfolio is a money market and fixed income fund that provides a buffer for short-term trade and investment requirements.
The portfolio is further split into the Liquidity Investment Tranche (LIT) and the Transaction Balance Tranche (TBT). The TBT caters for any short-term needs for foreign currency while the LIT provides further support for medium term funding.
Last year’s decline in foreign reserves was due to significant reductions in the TBT which decreased from 2019’s P9.2 billion to P2.9 billion, while the LIT dropped to P2.7 billion from 2019’s P8.4 billion balance.
The nation’s foreign reserves have for years been a symbol of pride for the diamond rich country, praised for its financial prudence in having a fund that cushion the country in worst economic times. However, the government’s share of the reserves is smaller than most people believed for a long time and has significantly declined in over a decade.
The funds that can be withdrawn and used by the government are held through the Government Investment Account (GIA) – part of the Pula Fund established in 1994 as a long-term investment portfolio. The fund is used to preserve part of the income from diamond exports for future use. Prior to the financial crisis of 2008/9, the government investment account had a healthy balance of P30.5 billion in December 2008. This has since reduced by 90 percent in the last two years.
From the current P53.3 billion foreign exchange reserves, the GIA has plunged to P2.8 billion from 2019’s balance of P17.8 billion, indicating that 84 percent or P15 billion was used in 2020. The funds were withdrawn by the government to plug the budget deficits caused by high spending.
Between 2017 and 2019, budget shortfalls have added to P21.8 billion, while projections for 2020/2021 financial year points to an all-time high budget deficit of P21 billion.
The Finance and Economic Development ministry has projected further budget outruns for the financial years 2021/22 and 2022/23. However, unlike in previous years, the country’s net position is not strong, and will not be advisable to draw down from the government investment account as the main source of financing for the anticipated deficits as has been done in the past, according to the finance minister Dr. Thapelo Matsheka.
“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,” he said in February when delivering the budget for 2021/2022 financial year which commenced beginning of April.
Matsheka added that the government will need to make more use of borrowing to finance budget deficits in the short and medium term. In September 2020, the finance minister got authorisation from parliament to raise Botswana’s domestic bond issuance programme from P15 billion to P30 billion. However, the finance ministry has recently expressed disappointed at the suppressed appetite to lend the government money.
“A further issue that I need to draw attention to is the disappointing response from the pension and asset management sector to the increased government bond issuance programme,” said the Deputy Director of Insurance and Pension, Batane Matekane, who delivered the opening remarks at the Botswana Pensions Society’s Annual Conference held in March. The remarks were made on behalf of Matsheka who could not make it to the virtual event.
“Despite the fact that there have been calls for more bond issuance over the years, it has proven difficult to sell the bonds on offer at recent auctions, even at higher yields. There is clearly a need for dialogue between government, the Bank of Botswana – who handle bond auctions on behalf of Government – pension funds and the asset managers, to address this blockage and ensure that the assets of the pension fund sector are deployed to finance crucial public investments,” the statement said.
Each month the central bank raises money for government through issuance of bonds to institutional investors and commercial banks. Though government bonds are usually considered risk free, capital markets players have been observing the country’s deteriorating financial position, marked by significant decline in government investment account and the ever-increasing budget deficits.