The Bank of Botswana (BoB) is advising government to raise the P15 billion note issuance programme for domestic bonds and increase the frequency of auctions from quarterly to monthly, as a way of triggering local growth.
The central bank, as policy advisor to government, is leading the review of the Medium Term Debt Management Strategy, which initially ran from 2016/17 to 2018/19.
The BoB and other experts believe government’s traditionally conservative approach to raising debt, particularly domestically, is limiting opportunities for enhanced infrastructural growth led by the private sector and in turn impacting on job creation.
The BoB recently issued a paper on how to fund the country’s industrialisation, which included government tapping into the domestic capital market, even via infrastructure bonds for specific projects. Amongst other provisions, the debt strategy limits government to taking on debt only up to 40% of gross domestic product (GDP), split equally between externally and domestic sources. Most of government’s domestic debt is via the issuance of bonds and treasury bills which by the end of the 2018 financial year, were approximately P11 billion or about 5.5 percent of GDP.
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.
The local private sector, by comparison, is estimated to be sitting on high levels of savings amidst a shortage of local domestic issuance, due largely to limited borrowings by government. Government’s conservative approach 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.
When government did need emergency funding in 2009, it opted for an US$1.5 billion external loan from the African Development Bank (AfDB), which it says offers better rates and conditions than the local market.
As a result of the loan, of the estimated P26 billion or so in total government debt by the end of 2018, external debt accounted for about P15 billion. Experts say external borrowings nearly always haunt African states, as the preference to borrowing in a foreign currency weakens the domestic currency and exposes the borrower to unstable interest payments.
The BoB has noted the rising cost of external debt over the years since the AfDB loan, due to the pula’s slide against the US dollar.
“The way to grow the private sector is through long term financing and lowering of infrastructure gaps which can be done by seeing the development of domestic capital markets as an opportunity,” explained Michael Antigi-Ego, executive director of Macroeconomic and Financial Management Institute of Eastern and Southern Africa. He was speaking at the Botswana Bond Market Association’s conference held recently.
“I’m very concerned about the youth unemployment bomb that is happening all over our continent. “When we opt for external borrowing just because the rates are better, these are the second round effects which we should consider.” Moemedi Phetwe, the deputy director of the BoB’s financial market’s department, said the central bank was advising government to revise the domestic note issuance limit and the frequency of bond issuances.
“As the bank, we are the adviser to government and the agent for the bond programme, but the responsibility for the policy and decisions to borrow rest with the government,” he said. “Historically debt has been low because of our healthy fiscal balances, but Singapore also had no need to borrow but still committed to developing their markets, issuing up to 25% of GDP in domestic debt.
“Our challenge is inadequate supply of debt instruments from government and non-government. “As adviser to government, we continue to make the case for an expanded borrowing programme with a large line of bonds in order to develop capital markets and improve liquidity.” Phetwe said the advice on adjusting domestic issuance caps and frequency of auctions would be part of the revision of the medium term debt strategy.
“We stand a good chance of issuing debt and developing the market because of our macroeconomic environment.
“Other countries cannot do that because they have high inflation and unsustainable public debt,” he said.