Sunday, December 3, 2023

The ‘mini-rise’ and ‘deep-fall’ of Botswana’s Foreign Reserves

The government’s share of foreign reserves continues to dwindle, putting the diamond producing nation in a tight fiscal position as it seeks to stimulate the economy and reign in the budget outruns.

Bank of Botswana’s statement of financial position at the end of September 2021 shows that the country’s foreign reserves have contracted.

Total foreign assets were valued at P52 billion in September, down from P53.9 billion registered in August. In a 12-month period, the foreign reserves declined by 11.5 percent from the P58.8 billion recorded in September 2020.

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 released on Thursday by the central bank, the Liquidity Portfolio – made up of the Liquidity Investment Tranche (LIT) and the Transaction Balance Tranche (TBT), led to the fall in foreign reserves. The TBT, used for any short-term needs for foreign currency, declined to P377.9 million from P849.4 million. The LIT, which provides further support for medium term funding, plunged from P1.5 billion to P407.9 million.

The Pula fund which accounts for a large portion of foreign reserves slightly retreated from August’ P46.5 billion to P46.8 billion in July. The decline was due to the fall in the Government Investment Account (GIA), which represents the government’s share of funds in the Pula Fund and Liquidity Portfolio.

The GIA decreased to P3 billion, from the previous month’s P3.9 billion. The current figure is the lowest in over two decades. Botswana’s fiscal position was compromised in 2020 after the COVID-19 pandemic forced the government to raid the GIA, leading to the account’s worst decline – plunging from 2019’s P18.3 billion to a paltry P3.3 billion by end of December 2020, which was a historic low at the time until recently.

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, according to the finance Minister Peggy Serame during the Budget Pitso held this week.

The upward revision in growth projections comes after the economy bounced back in the second quarter, picking up the momentum from the previous quarter which had begun the long road to recovery 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.

Serame said they 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 years 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 a massive P8.8 billion 2018/2019 and retreated slightly to P7.9 billion budget deficit in 2019/2020, and the ballooned to P14.5 billion in 2019/2020.

According to the 2022 Budget Strategy Paper released in September, the finance ministry anticipates a lower deficit P6 billion for the financial year 2021/2022. However, a bigger shortfall is expected to reach P8.4 billion in 2022/2023. Budget surpluses are only forecasted for 2023/2024, bringing in gains of P3.9 billion before doubling to a budget deficit of P7.7 billion in 2024/2025 financial year.


Read this week's paper