The Ministry of Finance plans to finance the forecast deficit from the domestic capital market, as well as from external funders. The bulk of the funding is expected to be sourced through the domestic note issuance programme, a P55 billion multi-year instrument through which government borrows from the local market via the BoB.
Thus far this financial year, government has raised gross proceeds of P29.3 billion from the domestic capital market, as the prolonged diamond slowdown has eaten into its revenues. However, the high quantum of fundraising – which compares with P17.7 billion in the prior year – has raised concerns of a crowding out of other borrowers, as well as a sucking up of liquidity in the market.
Responding to BusinessWeek enquiries during a briefing last week, BoB governor, Cornelius Dekop, said the “crowding out” out of the private sector due to the anticipated higher borrowings by government this year was unlikely.
“The government bond programme is announced well in time so the private sector knows about it and plans for it,” he said. “Therefore, there will be no crowding out in my view.”
New deputy director, Lesego Moseki, underlined Dekop’s remarks in his response to BusinessWeek. Prior to February 1, Moseki was the director of the Financial Markets Department, whose mandate includes conducting debt auctions on behalf of government.
“The issue of crowding out is not a major concern because the government will announce its strategy but also because government has said they want to drive the economy through Public Private Partnerships. “Government is the biggest consumer of what the private sector produces and because of the PPPs, we cannot say there will be crowding out. “Every project that government is looking at, they will be looking at the private sector. “I think there is enough funding to support any economic activity that the private sector would like to undertake, as long as that project is bankable.”
A paper presented by International Finance Corporation researcher, Pablo Hernando-Kaminsky at the World Bank’s International Finance Symposium in Washington DC last October states that in general, the build-up of government debt brings with it the fear that it will crowd out private firm debt.
“If government issuance is crowding out firm issuance, this will lead to less firm investment and can hinder economic growth,” he said. “During crises, firms need to borrow to keep operating. “If they cannot, many may go under.”
Access Bank Botswana country managing director, Sheperd Aisam, told a panel discussion held at the central bank last week, that there were linkages between the size of the government deficit and the liquidity available to other borrowers in the market.
“The issue is the government deficit and the crowding out of banks and how that creates liquidity risk for banks,” he said during the Monetary Policy Statement launch. “Having a low interest rate environment also facilitates and supports the growth of that nature of lending and we understand what it is for, but it does create liquidity risks. “That has an impact on consumers whether retail or SMEs or businesses because there will not be necessarily sufficient liquidity that can be extended to them to allow their business to grow.”
In a commentary covering the fourth quarter of last year, Econsult also noted that "government borrowing may be crowding out bank lending to the private sector".
The local banking sector is battling to recover from a liquidity crisis that deepened in the fourth quarter of 2024, as the diamond downturn affected government receipts and spending. Government stepped up its borrowings from the domestic market roughly in the second half of the year, moving to a monthly record of P4.6 billion in its January auction.
Responding to the liquidity crunch, the BoB in December reduced the Primary Reserve Ratio or the proportion of deposits banks are required to keep at the BoB, from a rate of 2.5 percent to zero.
The move freed up an additional P2 billion for banks’ lending activities, although different banks received varying amounts.
The central bank has since also noted an increase in competition for deposits amongst banks, as indicated by rising deposit rates.
