Will Botswana join Africa's scramble for IMF loans?
Mbongeni Mguni | Thursday April 30, 2020 14:49
Although generally the names of applicants appear a shielded affair, numerous African states are known to have added their names to the list, with many already having their applications approved.
Thus far, countries ranging from Mozambique to Rwanda to Nigeria and Tunisia, have successfully applied for IMF relief, availed under a fast-tracked coronavirus initiative called Rapid Credit Facility. In total, according to information gathered by Mmegi, African states have successfully applied for $7.7 billion in the past two months.
Nigeria and Ghana top the list with $3.4 billion and $1 billion disbursed respectively, while others such as Cote d’Ivoire ($886.2m), Tunisia ($745m) and DRC ($363m) are also on the high end. Sao Tome and Principe ($12m), Comoros ($12m), Cabo Verde ($32m) and Central African Republic ($38m) are on the lower end.
Many of the countries on the list and others besides those on the list have also qualified for the IMF’s coronavirus-inspired debt relief programme that will further free up their constrained revenues to fight the pandemic.
Will Botswana submit an application anytime soon? Government is directly spending at least P5 billion from its own pocket on various COVID-19 relief initiatives, at a time when the budget deficit for 2020-2021 has been revised upwards to P10.8 billion, the largest in more than a decade.
Some estimates by local economists suggest at least P10 billion will be required to invigorate the economy after the current interventions led by government. Much of that amount will be required from government, whose revenue taps such as foreign reserves, including the Pula Fund, are under strain.
Finance and Economic Development minister, Thapelo Matsheka sounds non-committal or at least less than enthusiastic about approaching external funders.
“IMF, World Bank and others, we are still looking at all of them,” he said in a recent televised briefing.
“We will not be borrowing for consumption, like to purchase food hampers, but to kick-start activities that have been impacted by the coronavirus.
“The borrowing should be for productive purposes.”
Responding to Mmegi enquiries in a previous briefing last month, Matsheka again said government would consider external borrowing, including the IMF’s Rapid Credit Facility.
Matsheka’s approach keeps in line with government’s traditional conservativeness when it comes to external borrowings. Besides guarantees to some parastatals over the years, government has generally been reluctant to approach external funders for loans. The last major approach was to the African Development Bank (AfDB) for $1.5 billion in 2009, at the height of the global recession. Last year, government also accessed P1.5 billion from the World Bank, for various water projects.
In that year, 2009, the economy shrank 7.7 percent but this year, government expects a record contraction of 13.1%. Still, it is unclear whether the Finance Ministry will break its traditional reluctance and reach across borders.
One of several reasons for the traditional reluctance is the fear of the ‘original sin’ a term coined by economists to roughly describe a situation where countries find themselves stuck with high foreign debt obligations.
The AfDB debt, for instance, is payable in dollars annually and official figures show the obligation has fluctuated over the years due to exchange rate movements. The last available figures show Botswana owed the AfDB P11.4 billion by the end of 2018-2019, nearly 10 years after the original loan was signed.
“The cost of external debt has been rising over the years because the pula has been falling against the dollar over those years,” Moemedi Phetwe, the Bank of Botswana’s (BoB) deputy director of financial markets, explained previously.
“This is a case for improving the domestic market borrowings.”
From the early post-Independence period where government budgets were largely supported by international grants and other types of funding, the country has steadily built up its own reserves from mineral revenues and budget surpluses. The accumulated mineral revenues and budget surpluses over the years are housed in the Pula Fund, one of Africa’s oldest and biggest sovereign wealth funds, which was estimated at P55.6 billion by November 2019.
The situation has meant that despite having one of Africa’s best sovereign credit ratings, Botswana has generally tapped its own reserves and domestic borrowings for budget support in difficult times. The size of the IMF loans are also based on Special Drawing Rights quotas from the IMF, of which Botswana has a healthy balance. Mmegi estimates, from IMF figures, suggest Botswana could borrow $266 million at 100% of its quota. The IMF allows members to borrow up to 145% of their quota, meaning Botswana could seek nearly $386 million in funding or nearly P4.7 billion.
Matsheka, however, has already signalled that for this year, government will largely look internally to plug the holes in the economy caused by the coronavirus. As exclusively reported by Mmegi previously, plans are underway to double the limit for domestic borrowing from the current P15 billion to P30 billion.
The finance minister said his ministry and the Bank of Botswana had already tabled a request to increase the domestic borrowing limit to President Mokgweetsi Masisi.
Another reason for the reluctance to borrow externally is the classification of Botswana’s economy.
“We are also still looking at where else we could possibly source funds externally, but remember we are classified as an upper middle income economy and may not receive the concessional conditions offered to other economies,” Matsheka told journalists at his most recent briefing.
While the Ts and Cs of the IMF’s loans are currently unclear, it has been reported in South Africa that the interest could be, in certain cases, as little as one percent. South Africa was reportedly wrestling with whether to approach the IMF, but has recently indicated it would have no choice as it seeks to fund a R500 billion coronavirus recovery package.
The Ts and Cs are yet another reason for the reluctance, analysts say. Countries that have thus far received the IMF loans are required to undertake certain levels of reforms, including enhanced monitoring, although the specific terms have not been made public.
African states are traditionally wary of the terms attached to IMF’s loans, which have been heavily criticised as unrealistic and blamed for the enduring economic challenges in many countries. Previous IMF bailouts have required deep structural changes in benefiting economies, with African governments told to abandon social-leaning economic agendas and adopt austere policies that leave many of the poorest worse off.
Matsheka’s plan to look internally for the coronavirus funding will sit well with many local analysts who have long been pressuring government to increase its domestic borrowing in order to provide more investment vehicles for local funds and further develop the capital market.
Government domestic borrowings, via bonds and treasury bills, are the most preferred asset class for local investors, being virtually risk-free and also offering sound returns. By January, pension funds, which are the primary investors in the country, had savings of more than P94.3 billion of which about 60% were held offshore. Local investment opportunities, which could include public infrastructure development, are scarce.
“In terms of government financing needs and complementary to the bond issuance programme, there is an option to float infrastructure bonds for financing specific infrastructure projects of public interest,” a Bank of Botswana paper submitted to government in May last year reads.
“A potential benefit is that this could be linked to project evaluation in relation to viability, which could also align development costs to cost recovery and user charge options.”
The Botswana Bond Market Association has also weighed in.
“The Botswana capital markets are awash with liquidity but in the past decade the government has struggled with financing infrastructure projects and its budget due to tough economic conditions,” the Botswana Bond Market Association said in a brief published last year.
“These two factors provide a great incentive for government to find new innovative ways of accessing capital markets for capital.”
The BBMA argues that the recent P1.5 billion loan the government received from the World Bank for various water projects could have taken the form of a local currency infrastructure bond.
“The government could have alternatively tapped into the local market and issued infrastructure bonds to raise the amount needed.
“The government has for some time been contemplating issuing infrastructure bonds and inflation-linked bonds, but to date, that has not materialised.”
The deep deficit, traditional aversion to external funding and signals from Matsheka suggest the Coronavirus could inadvertently provide the stimulus for accelerated development of the domestic capital sector.
The IMF, meanwhile, may or may not hear Botswana knocking on its door anytime soon.