Govt prepares bonds for P12 billion deficit

MBONGENI MGUNI
Staff Writer | Friday April 30, 2010 00:00

Given market liquidity at approximately P20 billion and the government's caps and policies on domestic borrowing, the central bank could statutorily approach the market for the entire deficit.

Fiscal rules state that the government cannot borrow, either domestically or abroad, more than 20 percent of the Gross Domestic Product (GDP). Taking into account the five outstanding government bonds worth P5 billion and projected GDP of P99.7 billion for 2010/11, the government is entitled to borrow up to P14.9 billion locally. The Deputy Secretary (Development Programmes) in the Ministry of Finance and Development Planning, Cornelius Dekop, says discussions with the Bank of Botswana (BoB) 'should be done in May'. 'There are technical matters that are being discussed,' he said. 'For instance, the tenures of the different bonds we would like to float. We should be done in May because we need that funding urgently for the financial year that is already underway. But we have not yet finalised how much we will borrow from the local market.'

Dekop was speaking in an interview with Business Week.  Confirming the fiscal rules regarding government debt, he explained that the amount Government could approach the market for would also fluctuate according to the repayments it makes for its existing indebtedness. Issues on the table in the discussions between the government and BoB include sustainability of the proposed debt, quantum of funds to be sought and effects of the bonds. It is expected that the impending bond issue could be the government's largest after the P5 billion for the 2008 programme which ended in February this year.

The issue of the size of the bond issue and its anticipated effects on the market have become topical among local economists and the private sector. Fears have been raised that should the planned bond programme be heavy, the government could crowd out the private sector while simultaneously wreaking havoc on various economic indicators.

A World Bank report released this week warns against heavy domestic capital raising by governments. Citing International Monetary Fund research, the Global Prospects 2010 report released on Monday cautions governments against overly relying on domestic borrowings to finance their deficits.

'As budget deficits remain elevated in 2010, many governments will continue to borrow heavily in domestic markets,' said the World Bank report. 'This is not sustainable. While fiscal stimulus in many developing countries has supported the recovery from the recession, there are risks of crowding out through higher interest rates.

'Recent IMF research shows significant effects of fiscal deficits on interest rates, which could dampen private investment and force governments to spend more on debt service payments and less on social programmes. These effects will be stronger when initial deficits or debts are high.'

The Global Prospects 2010 report recommended 'a gradual tightening of the monetary policy' by countries with high deficits and heavy domestic indebtedness.

Meanwhile, BoB is pursuing a 'neutral' monetary policy stance for this year.