Govt balance sheet P7.7 bn in the red
Brian Benza | Friday May 23, 2014 15:12
The situation, argues experts, exposes the country to financial shocks.
Latest figures availed by the Ministry of Finance and Development Planning, show that at the end of the 2012/13 financial year, Botswana had a net debt of P28.3 billion against cash balances of P20.6 billion leaving the country in a precarious negative net financial position.
This was a significant decline to the pre-recession level where the country balance sheet was constantly in the positive peaking at P28 billion in 2008. While it is not unusual for a government to have a negative balance sheet, analysts believe that the current position is not ideal for a mature mineral producer such as Botswana whose economic backbone, diamonds, are seen running out in 15 years time. “Most governments have negative net financial assets with their debt greater than their financial assets,” said prominent local economist Keith Jefferies.
He said, “the difference is that Botswana is a mineral economy with a mineral resource that is running out, and in this case, many analysts suggest that the country should be accumulating positive net financial assets as the mineral resources run out. From this perspective, as a mature mineral producer, it could be argued that the government of Botswana should have positive net financial assets at this stage in the mineral cycle.
This is to provide a buffer in case of fluctuations in mineral earnings as in the global financial crisis, when the government did have a positive net financial position. This will also help smooth the adjustment path as diamonds eventually run out.” 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.
The current situation is that the financial assets accumulated by government are also insufficient to fulfill the inter-generational savings objective that Sovereign Wealth Funds (SWFs) in mineral economies are often designed to achieve.
Analysts also believe that the financial assets are too small to provide an effective stabilisation function. Furthermore, the government accumulated financial assets are effectively funded by borrowing rather than by savings.
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, Botswana’s current highest revenue contributor, SACU, is under threat as negotiations for new revenue sharing formulae among the union members are still on going. According to Jefferies, the 2008 global financial crises illustrated how quickly even large financial balances can disappear and the government needs a medium to long term objective as to the size of the financial assets it wishes to have, and a plan to get there.
“At present the size of financial balances is entirely passive, driven by budget and expenditure decisions and not by an active financial asset accumulation strategy.
“It needs to more actively pursue financial savings, and be prepared to withhold finance from low-priority or low-return demands on public expenditure. Furthermore, government needs to recognise that it is not sufficient to just have a policy that invests mineral revenues in asset accumulation as with the Sustainable Budget Index, but to recognise that some historical investment in physical and human capital assets has been extremely inefficient, and the country would have been better off if the money had been saved instead,” he said. In a previous economic review report compiled by Jefferies’ consulting firm, 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.
According to the report, 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. 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 percent of GDP by 2023. But for Botswana, net financial assets are a far cry from the IMF guideline, as they currently sit at a negative 6.8 percent of GDP in 2013. Other mineral dependent countries such as Norway have kept their sovereign wealth funds at as much as 135 percent of their GDP.