World Bank loan: Inside the Ts and Cs

Mbongeni Mguni | Friday June 18, 2021 15:45

The loan, announced over the weekend, is the first time Botswana has tapped the World Bank for funding and also marks a rare request for the government, which traditionally leans on its reserves in lean fiscal times. The traditional reluctance to borrow has protected government from conditions set by international financiers, which at times have been criticised bitterly by other African governments who have had to adjust their economic policies in order to secure loans.

“For the Bank, this marks an important opportunity to strengthen the policy dialogue in a country where we have not had policy-based lending in the past,” the World Bank stated in a concept note it released ahead of its decision to approve the loan.

However, unlike other African countries which have had tough conditions such as structural adjustment programmes imposed ahead of funding, concept notes and other documents from the World Bank suggest the conditions of the $250 million are largely supportive of the government’s own stated plans.

The documents filed by the World Bank note that it wants the loan used to support the government’s Economic Recovery and Transformation Plan (ERTP) in three areas which include strengthening of the social protection system in the event of future shocks, supporting SMMEs’ access to finance and speeding up the country’s transition to a green economy through increased renewable energy capacity.

One key development the World Bank is hoping to see is the development of a Single Social Registry and other reforms to improve targeting of social spending. In previous engagements, the World Bank and IMF have urged Botswana to tighten its subsidies such as those on electricity and social support, to ensure that only deserving Batswana benefit, rather than the broad-based approach used at the moment.

“Potentially strong positive poverty impacts are also expected from the new social protection framework which is expected to improve the efficiency and effectiveness of the delivery of social programmes, an important step for response to future shocks,” the Bank’s documents read.

The World Bank also believes that reforms around SMMEs will also contribute to creating an enabling business environment for increased job creation and economic diversification, while accelerated green economy initiatives such as establishing solar power generation will help attract private sector investments, contribute to diversified exports and increase job opportunities.

Local World Bank officials this week declined to specify other terms of the loan such as interest rates and duration. However, information gathered by BusinessWeek suggests any loan by Botswana from the World Bank would attract interest rates of between LIBOR plus 0.53% and LIBOR plus 1.43 percent depending on the loan’s duration. LIBOR is the most commonly used international benchmark interest rate, used in global sovereign lending. As of Wednesday, the overnight dollar LIBOR rate was 0.06%.

Botswana may also have to pay a 0.25% front-end fee and a 0.25% commitment fee, although the latter can be waived.

The rates have been used as an argument by some that government, in funding its P6 billion budget deficit for this year, should ramp up its external borrowings and rely less on local borrowings where the market is pushing for higher yields.

However, the government is wary of racking up high foreign currency debt as this would put the country in danger of the Original Sin, a phrase coined by economists to describe a situation where foreign exchange fluctuations mean countries get stuck in a debt trap.

Botswana last requested external budget support in 2009, when a $1.5 billion loan was secured from the African Development Bank. Other support from external financiers had gone directly to certain projects or parastatals, with the government, in the case of the latter, underwriting the loans.