Call for clear rules on Pula Fund drawdown
Brian Benza | Friday January 24, 2014 15:58
The Fund, which stands at P48 billion, is a sovereign wealth reserve comprising both national savings built from historical budget surpluses and mineral revenues as well as foreign reserves in excess of the country's medium-term requirements.
A report by the Organisation for Economic Co-operation and Development (OECD), titled: ‘Export Restrictions On Raw Materials: Botswana Experience’ says the fund needs transparent and clear rules.
'In view of future declining revenues from diamond mining, the Government of Botswana will likely feel increasing pressures to use the accumulated reserves in the Pula Fund to finance current expenditures. Increasing transparency and establishing clear rules around the management of the fund should therefore receive high priority,' says the OECD report.
The advice follows previous similar concerns raised by experts surrounding the rules guiding the replenishments and drawdown of government investments in financial assets.
Government investments in financial assets are in the form of the Pula Fund and the Government Investment Account (GIA) both of which represent important financial buffers or cushions.
In a 2013-2014 national budget analysis report, BIDPA’S Professor Roman Grynberg questioned the haphazard manner in which the GIA is drawn or replenished. “The GIA is not a real sovereign wealth fund guided by strict financial rules on what can be put in and taken out. It simply goes up and down depending on whether the government runs a budget surplus or deficit. What will happen when mineral revenues decline or the South Africans decide they have had enough of SACU,” Grynberg queried.
Last year, the Bank of Botswana drew down P21 billion from the fund in order to replenish the country’s import cover and meet external debt obligations.
According to prominent economist, Keith Jefferis, what is needed at the very least is some public debate on what the purpose of the Pula Fund and government’s savings should be.
'Are they simply for budget and balance of payments stabilisation purposes, or are they intended to accumulate financial assets to be bequeathed to the future,' he asked.
In previous missions to Botswana, the IMF has also urged government to move swiftly to cut down its overall expenditure and rebuild the weakened Pula Fund for the benefit of the country’s future generations.
Barring an unlikely major deposit find, diamond revenues are expected to decline significantly after 2030 when the resources will either be depleted or will be too deep to be economically recovered. On the other hand, new negotiations of how to share SACU revenues, which for the second year running have been the largest contributor to the budget, are still ongoing.
In a recent economic review report complied by Econsult, it was revealed that government has invested less than one percent of the revenues generated from diamonds in the past 30 years in financial assets.
Economic pundits believe the amount is insufficient to meet future fiscal commitments for present and coming generations, a report compiled by consultancy firm, Econsult suggests.
According to the authors of the Econsult report, Jefferis and Thabelo Nemaorani, between 1983 and 2012, government received an estimated P334 billion in mineral revenues, but had saved only P3 billion of this in financial assets – net of debt - by the end of 2011. “Of course, some of the revenues have been invested well, in human capital and economic and social infrastructure. But it would seem prudent to have at least retained a significant portion of this income in the form of financial assets, for a ‘rainy day’ if not for coming generations,” reads the 2013 Econsult report.
An analysis carried out by the IMF in 2008 concluded that in order to provide a future income of just over six percent of GDP through to 2050 as a replacement for mineral revenues, government would have to accumulate savings equivalent to 90% of GDP by 2023.
But for Botswana, savings are currently a far cry from the IMF guideline, sitting at as little as 2.6 percent of GDP in 2011. According to the Econsult report, government’s share of the Pula Fund peaked in 1998 when it was equivalent to 89% of the GDP but it has gone down considerably since then.
Other mineral dependent countries such as Norway have kept their sovereign wealth funds at as much as 135% of their GDP.