The Finance Ministry and the Bank of Botswana (BoB) are advancing discussions over government digging deeper into the capital market for infrastructure development and deficit funding, BusinessWeek has learnt.
Going deeper, for government, is expected to involve increasing the current P15 billion domestic bond limit and the frequency of issuances beyond the current quarterly arrangement.
The discussions follow the central bank’s recommendations, as government’s chief economic adviser, that fiscal authorities shift their preferred option for funding infrastructure projects and budget deficits from the reserves, to domestic debt.
Traditionally, government funds budget deficits from a combination of drawdowns from the reserves managed by the BoB, domestic bond issuance under the P15 billion bond programme and to a lesser extent, external borrowings. Successive deficits under NDP 11 have however led experts, including the IMF, to worry about the depletion of buffers such as the reserves. The 2019/20 and 2020/21 financial years carry combined budget shortfalls of P13.1 billion.
On Tuesday, BoB governor, Moses Pelaelo told an audience that included Finance Minister, Dr Thapelo Matsheka, several other ministers and Members of Parliament, that the low level of government participation in capital markets was a concern.
At present, government’s outstanding domestic debt is P12.9 billion, or about seven percent of GDP, far lower than the overall 20% of GDP limit for domestic borrowings government set itself some years ago. By comparison, domestic bond issuance in South Africa, Namibia and Mauritius as a percentage of GDP is more than 55% on average, with private sector investors such as pension funds being given plenty of vehicles to pump money into via strong local borrowing by those governments.
“In other countries a vibrant and highly liquid government securities market provides a source of funding for government spending including local authorities and other public sector entities,” Pelaelo said.
“This option is currently limited in Botswana and therefore its development offers a viable avenue for cost effective domestic resource mobilisation for long-term investment and funding of government projects. “Going forward therefore, policy consultations involving the Finance Ministry and the BoB are focussed on designing a transparent and more frequent issuance of a sufficient quantum of domestic government securities in a predictable arrangement that hopefully will attract a larger pool of participants and support deficit financing with lower risks.
“This would be premised on the adoption of a sound governance architecture around public debt management underpinned by the country’s well established track record of prudent fiscal policy and strong institutions.”
Hinting at the erosion of fiscal buffers by successive budget deficits, Pelaelo added: “Given the vulnerability of the country to trade shocks, climate change and prolonged droughts, there is need to maintain sufficient fiscal and external buffers. “This means building sufficient resilience to afford the fiscal space to undertake countercyclical stabilisation when necessary.”
In previous years, government used the reserves to spend its way out of economic slumps, known as countercyclical policy, such as in the 2009 and 2015 financial years, the latter being via the Economic Stimulus Programme.
On Wednesday, Pelaelo told BusinessWeek that while details of the discussions with government were under wraps, the issue was about leveraging the opportunity presented by low sophistication of the capital market and size of current issuances versus the needs of players such as pension funds and others.
“What we are doing is to make sure that there’s some type of arrangement that would have elements of transparency in terms of calendar of bond issuance programmes and sufficient quantum from the current ceiling,” he said. “There’s a caveat though. It is one thing to talk about borrowing but it’s very important to have the right governance architecture to say ‘once you raise the funds, where do you spend them to make sure the capacity is there in the economy, for growth’.
“The other point to consider is domestic resource mobilisation. You see that the budget has a deficit and in funding we must look at cost effective ways.
“We are saying there are resources available to do that but there must be a programme to help us.” Deputy governor, Andrew Motsomi said the Bank’s recommendations were around expanding the existing domestic debt programme. “There’s considerable scope to improve the depth of the market to make sure there’s more optimal financing of government deficits and the like, versus draw downs of reserves,” he said.Government’s conservative approach to domestic debt has been influenced by the country’s lower need to borrow over the years due to strong diamond savings and a fear of falling into a debt trap. Experts however say growing the private sector requires long term financing and lowering of infrastructure gaps that can be done by seeing the development of domestic capital markets as an opportunity.
Central bank experts in different platforms have pointed out that countries such as Singapore, which also had no need to borrow, committed to developing their markets, issuing up to 25% of GDP in domestic debt.