Finance Ministry weighs options for P3bn IMF windfall

Growing needs: The SDR allocation could be used to purchase more COVID-19 vaccines
Growing needs: The SDR allocation could be used to purchase more COVID-19 vaccines

The Finance and Economic Development ministry is weighing various options around how to access and use the P3 billion in additional reserves allocated last month by the International Monetary Fund (IMF).

Botswana, along with other IMF member states, received an additional allocation of Special Drawing Rights (SDR) reserves from the IMF on August 23, which the country can access to boost its budget, rebuild reserves or spend fighting COVID-19.

SDRs are an international reserve asset created by the IMF to supplement the official reserves of its member countries. Each country has a share of the SDRs and earlier this month, the IMF board made fresh allocations to boost liquidity among all countries, as a way of fighting the pandemic’s impact on economies.

Botswana received SDR 189 million (P3.02 billion), which can be converted to hard currency through an agreement with another IMF member and thus fund budget gaps and COVID-spending. The reserves can also be used to pay down foreign debt or left unconverted as a boost to the country’s foreign reserves position.

Finance and Economic Development minister, Peggy Serame told BusinessWeek the Bank of Botswana could provide a loan to the government for some or all of the value of the SDR allocation.

“This loan would be credited into the government’s account at the BoB, and provide additional resources for government to spend,” she said in a recent written response to BusinessWeek enquiries. “This would, therefore, increase public debt.”

Serame stressed that SDRs are not a currency and cannot be spent directly.

“If a country wishes to spend the SDR allocation, it has to exchange them for hard currencies such as the dollars or euros, with another IMF member, on a voluntary basis,” she said. “It should be noted that, as the IMF makes clear, the SDR allocation is not a transfer of wealth. “Rather, it is more akin to a credit line that can be drawn upon by members should they need it.”

Recently, IMF officials explained to BusinessWeek that while the SDRs are not treated as loans by governments, converting them into hard currency or lowering them in any way may attract interest charges from the IMF.

If a country’s SDR holdings fall below the allocation from the IMF, a country is required to pay an interest rate of about 0.05 percent on the difference between the two. For countries such as Botswana, where domestic bond yields on the longest-term papers available recently hit eight percent, converting the SDR could be a cheaper avenue for funding, even though the interest is charged in hard currency.

Serame said the additional SDR allocation had come at an opportune time for Botswana, whose reserves were depleted to record low levels last year due to additional spending for COVID-19 mitigation measures.

“The SDR allocation will benefit Botswana indirectly by addressing the long-term global need for reserves, building confidence, and fostering the resilience and stability of the global economy. “The SDR allocation will also benefit Botswana directly by helping to rebuild the foreign exchange reserves that have been drawn down as a result of the COVID-19 shock. “It also provides an additional financing possibility for budget deficits and hence extends the range of available fiscal options. “In both respects, therefore, the timing of the additional SDR allocation is appropriate,” she said.

Botswana has secured loans amounting to $250 million from the World Bank and a further $137 million from the African Development Bank as part of budget support measures this year. The additional borrowings, however, have not risen above the fiscal rule which limits foreign debt to 20% of the Gross Domestic Product.

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