Financial investment key for posterity

Mmegi Editor | Tuesday May 27, 2014 14:41

While Botswana has won accolades for prudently managing its diamond miracle, it is unsatisfactory that after 40 years of mineral-led growth, virtually none of the fiscal revenues derived from mining have been saved in the form of financial assets.

From the P400 billion-plus that has been earned since the financial year 1983/4, insufficient funds have been invested in the form of financial assets, with the government balance sheet currently standing in the negative.

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.

Latest figures availed by the Ministry of Finance and Development Planning, show that at the end of the 2013 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 of P7.7 billion.

While it is not unusual for a government to have a negative balance sheet, we 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. The 2008 global financial crisis illustrated how quickly even large financial balances could disappear and 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.

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. Minerals by definition represent a depleting, exhaustible asset, and at some point they will run out. While the current generations benefit from the proceeds of selling those minerals, future generations will not, if the minerals are exhausted.

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.

Financial assets should accumulate to a level where the income earned on those assets provides long-term revenue that continues even when the minerals are depleted.  We call upon fiscal and monetary authorities to craft a multigenerational approach, where minerals are converted to financial assets that will generate income for future generations, and will support future budgets.

                                                Today’s thought

“The Botswana 2014/15 budget should help to rebuild the net financial position of the government, while there is also need to create additional savings from non-renewable resource revenues to transfer diamond wealth across generations.” 

                                             - Lamin Leigh (IMF)