Saturday, November 26, 2022

Pula Fund muscles up, but still a long way to go

The dwindling Botswana foreign reserves had a reprieve last year, marked by slight growth and improvement to the national buffers, according to data from the financial statements released by Bank of Botswana on Thursday.

Total foreign assets were valued at P56 billion in December, up from P53.3 billion registered in December 2020, reflecting a 5 percent growth after two years of steady decline.

The Bank of Botswana manages foreign exchange reserves through two portfolios; the Liquidity Portfolio and the long-term investment portfolio know as Pula Fund.

According to the statement of financial position by the central bank, the Liquidity Portfolio – made up of the Liquidity Investment Tranche (LIT) and the Transaction Balance Tranche (TBT), recorded lower funds compared to the previous year.  The TBT, used for any short-term needs for foreign currency, declined to P1.8 billion from P2.9 billion. The LIT, which provides further support for medium term funding, plunged from P2.7 billion to P4.8 million.

However, the Pula fund which accounts for a large portion of foreign reserves was resilient as it increased its holdings to P49.2 billion in December, compared to the balance of  P46 billion last year December. The improved performance in the fund was due to an increase in the Government Investment Account (GIA), which represents the government’s share of funds in the Pula Fund and Liquidity Portfolio.

After two years of rapid decline in the GIA, the Pula fund ended 2021 with an enhanced balance of P5.6 billion compared to the record low balance of P2.8 billion in December 2021. Botswana’s fiscal position was compromised in 2020 after the COVID-19 pandemic forced the government to raid the GIA, leading to a massive decline – plunging from 2019’s P18.3 billion to P3.3 billion by end of December 2020.

The funds were used to plug budget deficits and other government expenditures at a time  when the diamond sales were depressed, which meant less revenue for government that relies heavily on diamond exports. Prior to the financial crisis of 2008/9, the government investment account had a healthy balance of P30.5 billion in December 2008.

The government is hoping the GIA will be replenished in the next two years as they project strong economic growth. The country’s ministry of Finance and Economic Development has pegged economic growth to 9.7 percent in 2021.

The upward revision in growth projections comes after the economy shrank by 8.5 percent, the deepest contraction in more than two decades,  as the diamond industry floundered amid the outbreak of COVID-19. This was on the back of a 3 percent growth in 2019, which was followed by a contraction of 7.9 percent in 2020.

The Finance ministry officials forecast GDP to grow by 4 percent in 2022 and 2023, helped in part by the Economic Recovery and Transformation Plan, which is expected to inject around P14 billion in the economy.

Besides the rosy economic growth projections, the finance ministry said budget projections point to a surplus in the coming years after a litany of budget deficits. Part of surpluses are used to replenish the GIA.

The diamond dependent economy has been struggling to contain the budget deficits since 2017, which have grown in size. For the financial year 2017/2018, the country overspent its budget by P1.9 billion, which then grew to P8.8 billion 2018/2019 and retreated slightly to P7.9 billion deficit in 2019/2020, and then ballooned to P16.41 billion in 2020/2021 .

According to the national budget delivered in February, the finance ministry has projected a deficit  of P10.16 billion for the financial year 2021/2022, while the overall budget deficit for the current financial year 2022/2023 is estimated at P6.98 billion. Budget surpluses are only forecasted for 2023/2024, bringing in gains of P3.9 billion before doubling to a surplus of P7.7 billion in 2024/2025 financial year.

 In her maiden budget speech, Finance and Economic Development minister Peggy Serame said the primary task with regard to fiscal sustainability is to improve revenue collection and contain expenditure so as to prevent the emergence of growing and unsustainable fiscal deficits.

“Ideally, however, we should return to a position of budget surpluses in order to rebuild fiscal buffers. The Government Investment Account is a critical financial buffer that is needed to smooth out cash flow fluctuations, given that government revenues are susceptible to economic shocks, and are hence volatile,” she said in February.

Serame added that the objective is to restore the GIA to its pre COVID-19-crisis levels to rebuild this fiscal buffer and the need to contain expenditures in order to manage the fiscal deficit, which is the main driver of the declining GIA.

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