Saturday, June 19, 2021

Reserves: Gov’t makes another ‘dip’

The government is back at it again, dipping into the foreign reserves just as they were showing signs of improvement. 

Foreign reserves fell to P55 billion in February compared to the P58 billion in the previous month, and on a yearly basis, the reserves have declined by 15 percent. The fall in buffers is the result of the drawdown from the reserves to finance imports, mainly fuel, power, equipment, food and government financial obligations, such as external loan servicing, payment for construction of two major bridges and funding of embassies as well as outward investments by pension funds and other institutional investors.

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. 

The funds that can be withdrawn and used by the government are held through the Government Investment Account (GIA) – part of the Pula Fund established in 1994 as a long-term investment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. 

In 2020, the fund had its biggest fall, ending the year with P2.8 billion, lower than the P20 billion it began the year with, indicating that P17.2 billion or 86 percent of the funds was used in 2020. The depletion was attributed to frequent withdrawals 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.

In the latest update from the central bank, which is the custodian of foreign reserves, the Pula Fund reduced slightly to P6.5 billion, down from January’s P7.4 billion, which was an improvement after many months of successive declines.

The improvement in the buffers in January was attributed to strong recovery in the diamond industry, with diamond sales in the first quarter of 2021 returning to pre-Covid-19 levels. Last week, De Beers disclosed it that it will likely earn $440 million from diamonds sold in the third sales cycle – which ran from 22 March to 6 April. The estimated figure is lower than the second sales cycle that netted $550million and the first sales cycle which brought in $663 million.

Still, the Finance and Economic Development ministry has projected further budget outruns for the financial years 2021/22 and 2022/23. Unlike in previous years, the country’s net position is not strong, and has been advised not 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, said the then Finance and Economic minister Dr. Matsheka who was last week replaced from the ministry by Peggy Serame.

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