Member of Parliament (MP) for Gaborone Bonnington South, Ndaba Gaolathe says Botswana needs to vigorously develop the quantum of the debt market to among other things loosen “the stranglehold that commercial banks have over the credit market/financial sector.”
“The government debt market is acutely under-developed in many respects. Government securities are not liquid and cannot be traded or are not available in any secondary market. This limits prospects for price discovery,” says the MP, referring by the latter to a process of determination of market prices through the interactions of buyers and sellers in a free marketplace.
“We need to develop the government debt market because government securities are usually the stepping stone or backbone for development of the private debt/bond market. That is, the financing of large, long-term projects can more easily be financed as government bonds may be used as security or for benchmarking. It is important to note that it is difficult to ordinarily secure long-term funding for business in Botswana.”
As important, he adds, is the need to develop a local debt market because it would assist in avoiding the build-up of foreign-denominated debt, as well as lowering overall borrowing costs. The MP says that if large enough relative to the economy, the government debt market has the added advantage of enhancing implementation and transmission of monetary policy through better attainment of inflation and monetary objectives – by indirect means.
“Complemented by deft debt management, the existence of the government debt market could assist government to reduce risks associated with interest rates, currency and other financial risks.
There are other benefits at micro-economic level, including better competition among financial institutions, development of better intermediation culture and infrastructure [as well as] products and services. Such a market also loosens the stranglehold that commercial banks have over the credit market/financial sector.”
Developing the quantum of the debt market will prepare government for future reality that it can neither evade nor hold off. Gaolathe says that in future the government will have to borrow extensively “out of necessity.” He cites four reasons.
The first is that the traditional and lucrative sources of income (particularly mineral revenues) will stagnate or even wane with time, compared with the growing financial pressures on the government. The second is that the growing population and changing demographics will impose on the government, obligation to build, maintain, coordinate and improve health, security, transport, education and other social infrastructures in meeting national objectives of improving the quality of life among citizens.
“These responsibilities and pressure have in recent years been growing faster that economic or income growth,” the MP says with regard to the latter.
The third is the necessity for Botswana to enhance its capacity and capabilities towards building a highly competitive economy, with new engines of economic growth and higher prospects for higher-paying jobs for the majority of citizens.
Gaolathe says that for this to happen, government should invest significantly in key infrastructure such as water, power, and telecommunications infrastructure. He explains: “These are multi-billion pula projects that cannot ordinarily be financed from current revenues even in high-revenue countries. This means government must borrow money, and do so efficiently and at low cost with a view that, if structured well, the investments will pay for themselves.
Also, please note that even when a government or any entity or person is cash-flush, it does not mean they must not borrow money. Borrowing can be strategic especially in cases where the costs of borrowing are much lower than what government or the entity in question is receiving from increased investments.”
The fourth and final reason the MP gives is that every country goes through economic cycles: in every economy there will be periods of relatively high growth and periods of low growth – recessions.
“Some of these recessions could be as severe as to collapse an economy unless government intervenes extensively through higher expenditure than normal,” Gaolathe says.