* Opposition demand that minister itemise projects to be financed * Loan attracts a total interest rate of 5.81 percent * Bots Debt Service Ratio is 12 percent, while international is a maximum of 20 percent * Total public debt to GDP stood at 18.60 percent
Parliament on Tuesday approved a loan of over P2 billion from the African Development Bank (AfDB) for Economic Recovery Support Programme.
The opposition bench however, had reservations. They impressed upon the Minister of Finance, Peggy Serame who tabled the Bill, to itemise projects for which the loan is sought.
Further, the opposition felt that Government must be circumspect with loans so that it does not burden future generations with repayment obligations.
Presenting the Bill, Serame said the Ministry of Finance approached AfDB for a loan facility amounting to US$179 660 000, which is approximately P2 336 280 884 to finance part of the projected budget deficit.
She said the Bill was published in the Government Gazette Extraordinary on the 12th July, 2023. This follows the first tranche (Botswana Economic Recovery Support Program (African Development Bank (AfDB)) Phase I) which was approved by Parliament.
She said the 2023/24 Financial Year marks the first year of the two years Transitional National Development Plan (TNDP). The 2023/2024 budget supports priorities enshrined in the TNDP and ongoing reforms espoused in the Reset and Reclaim Agenda.
The Economic Recovery Support Program (ERSP) was therefore designed to support Government’s response by assisting to address short, medium and long term macroeconomic challenges.
The reforms to be supported were anchored on the ERSP which outlined short to medium term priorities. These reforms include, improved governance, providing an enabling business environment and real sector reforms for inclusive growth, such as supporting private sector-led agriculture and industrial sector transformation.
As a result, government has employed an expansionary fiscal policy as evidenced by an increase of 27.88 percent in the development budget during financial year 2023/24.
According to Serame, this notable increase strives to fill infrastructure gaps and implement projects that are necessary to unlock constraints to economic growth.
"As I indicated when I presented this year’s budget, the financing of the Financial Year 2023/2024 deficit will be through a combination of domestic borrowing, specifically through the issuance of Government Bonds and Treasury Bills and external borrowing, mainly from the multilateral development banks."
Serame explained that the Budget Speech for the Financial Year 2023/2024 projected a deficit of P7.59 billion or 3.06 percent of GDP. Macro-economic forecasts further predict budget deficits in the short to medium term, before returning to surpluses.
These deficits, together with the significant reduction of the Government Investment Account (GIA) inevitably leave the Government with limited options to finance them.
The global economy continues to face a number of economic challenges, which have adverse implications on various economic jurisdictions.
This mixed picture of recovery emanates from the lingering effects of the COVID-19 pandemic, and the Russia-Ukraine conflict, which could further disrupt trade and investment flows should it intensify.
Serame said although there is evidence of energy price declines globally, both financial and external vulnerabilities remain elevated, and this calls for concerted efforts to continue boosting the domestic economy.
Serame highlighted that the ERSP was designed as a programmatic series of two consecutive budget support operations covering fiscal years 2021/2022 to 2022/2023.
The Economic Recovery Support Program– Phase II (ERSP II) is the second phase of the two-year series, the first being the ERSP I, which was signed on the 3rd February 2022. The objective of ERSP II remains consistent with the original programme of structural reforms.
She said the proposed Programme aims to support the government’s plans for economic recovery and transformation, with a focus on improving Fiscal Efficiency and Sustainability in order to support domestic resource mobilisation, efficiency in public spending and mitigating fiscal risks, including those related to State Owned Enterprises, Private sector-led Agriculture, Tourism and Industrial Sector Transformation to support the strengthening of the policy framework for enhanced private sector investment in agriculture and industrial sector.
This is expected to raise productivity, value addition, and job creation, and enhance economic and social inclusion to support the development of the Micro Small and Medium Enterprises (MSME) Business Development System Framework, social protection and gender empowerment.
Serame said her ministry carried out an analysis of the terms and conditions of the loan and concluded that they were affordable.
Further, that her Ministry therefore submits the following terms and conditions which were agreed with the AfDB, a variable interest rate of USD Secured Overnight Financing Rate which is currently 5.06 percent plus a variable spread (based on African Development Bank funding costs, which is at 0.75 percent) resulting in a total interest rate of 5.81 percent; A commitment fee of 0.25 percent charged on the undisbursed loan balance; A front end fee of 0.25 percent (charged on the full amount of the loan and deductible before disbursement of the loan proceeds); A repayment period of 15 years - excluding grace period, and a grace period of four years.
Serame said as per the terms of the Loan Authorisation Act, the proceeds of the loan are to be adjusted into the Development Fund. Serame said as at the end of June 2023, total public debt to GDP stood at 18.60 percent, comprising of 9 percent in domestic debt and 9.60 percent in external debt.
She said the debt to GDP ratio measure compares a country’s total debt to its total output. It compares what the country owes to what it produces and therefore measures the country’s ability to pay back its debt, without impeding economic growth.
In addition, to ensure further economic prudence, other measures such as the Debt Service Ratio (DSR) can be used as a proxy for sustainable debt levels. Debt Service Ratio measures the country's ability to cover its debt service obligations with proceeds from its exports of goods and services.
Serame said when Botswana’s debt is assessed using the Debt Service Ratio, the results are consistent with those of the debt to GDP ratio suggesting that the country’s debt levels are sustainable by international standards.
As at end of December 2022, the DSR stood at 12 percent, while international benchmark for an ideal DSR is a maximum of 20 percent.
Serame said the current debt levels therefore, are not only within the statutory limit of 40 percent of GDP as set out in the Stocks, Bonds and Treasury Bills Act, 2005, CAP 56:07, but are within what is regarded as low, according to international standards. She reiterated government’s commitment to maintaining sovereign debt at affordable and sustainable levels.
Serame said going forward, Government will be more inclined to domestic borrowing as part of the efforts to develop, grow, and deepen the domestic capital market, while being cognisant of the associated borrowing costs.
The opposition bench however, had reservations. They impressed upon the Minister of Finance, Peggy Serame who tabled the Bill, to itemise projects for which the loan is sought.
Further, the opposition felt that Government must be circumspect with loans so that it does not burden future generations with repayment obligations.
Presenting the Bill, Serame said the Ministry of Finance approached AfDB for a loan facility amounting to US$179 660 000, which is approximately P2 336 280 884 to finance part of the projected budget deficit.
She said the Bill was published in the Government Gazette Extraordinary on the 12th July, 2023. This follows the first tranche (Botswana Economic Recovery Support Program (African Development Bank (AfDB)) Phase I) which was approved by Parliament.
She said the 2023/24 Financial Year marks the first year of the two years Transitional National Development Plan (TNDP). The 2023/2024 budget supports priorities enshrined in the TNDP and ongoing reforms espoused in the Reset and Reclaim Agenda.
The Economic Recovery Support Program (ERSP) was therefore designed to support Government’s response by assisting to address short, medium and long term macroeconomic challenges.
The reforms to be supported were anchored on the ERSP which outlined short to medium term priorities. These reforms include, improved governance, providing an enabling business environment and real sector reforms for inclusive growth, such as supporting private sector-led agriculture and industrial sector transformation.
As a result, government has employed an expansionary fiscal policy as evidenced by an increase of 27.88 percent in the development budget during financial year 2023/24.
According to Serame, this notable increase strives to fill infrastructure gaps and implement projects that are necessary to unlock constraints to economic growth.
"As I indicated when I presented this year’s budget, the financing of the Financial Year 2023/2024 deficit will be through a combination of domestic borrowing, specifically through the issuance of Government Bonds and Treasury Bills and external borrowing, mainly from the multilateral development banks."
Serame explained that the Budget Speech for the Financial Year 2023/2024 projected a deficit of P7.59 billion or 3.06 percent of GDP. Macro-economic forecasts further predict budget deficits in the short to medium term, before returning to surpluses.
These deficits, together with the significant reduction of the Government Investment Account (GIA) inevitably leave the Government with limited options to finance them.
The global economy continues to face a number of economic challenges, which have adverse implications on various economic jurisdictions.
This mixed picture of recovery emanates from the lingering effects of the COVID-19 pandemic, and the Russia-Ukraine conflict, which could further disrupt trade and investment flows should it intensify.
Serame said although there is evidence of energy price declines globally, both financial and external vulnerabilities remain elevated, and this calls for concerted efforts to continue boosting the domestic economy.
Serame highlighted that the ERSP was designed as a programmatic series of two consecutive budget support operations covering fiscal years 2021/2022 to 2022/2023.
The Economic Recovery Support Program– Phase II (ERSP II) is the second phase of the two-year series, the first being the ERSP I, which was signed on the 3rd February 2022. The objective of ERSP II remains consistent with the original programme of structural reforms.
She said the proposed Programme aims to support the government’s plans for economic recovery and transformation, with a focus on improving Fiscal Efficiency and Sustainability in order to support domestic resource mobilisation, efficiency in public spending and mitigating fiscal risks, including those related to State Owned Enterprises, Private sector-led Agriculture, Tourism and Industrial Sector Transformation to support the strengthening of the policy framework for enhanced private sector investment in agriculture and industrial sector.
This is expected to raise productivity, value addition, and job creation, and enhance economic and social inclusion to support the development of the Micro Small and Medium Enterprises (MSME) Business Development System Framework, social protection and gender empowerment.
Serame said her ministry carried out an analysis of the terms and conditions of the loan and concluded that they were affordable.
Further, that her Ministry therefore submits the following terms and conditions which were agreed with the AfDB, a variable interest rate of USD Secured Overnight Financing Rate which is currently 5.06 percent plus a variable spread (based on African Development Bank funding costs, which is at 0.75 percent) resulting in a total interest rate of 5.81 percent; A commitment fee of 0.25 percent charged on the undisbursed loan balance; A front end fee of 0.25 percent (charged on the full amount of the loan and deductible before disbursement of the loan proceeds); A repayment period of 15 years - excluding grace period, and a grace period of four years.
Serame said as per the terms of the Loan Authorisation Act, the proceeds of the loan are to be adjusted into the Development Fund. Serame said as at the end of June 2023, total public debt to GDP stood at 18.60 percent, comprising of 9 percent in domestic debt and 9.60 percent in external debt.
She said the debt to GDP ratio measure compares a country’s total debt to its total output. It compares what the country owes to what it produces and therefore measures the country’s ability to pay back its debt, without impeding economic growth.
In addition, to ensure further economic prudence, other measures such as the Debt Service Ratio (DSR) can be used as a proxy for sustainable debt levels. Debt Service Ratio measures the country's ability to cover its debt service obligations with proceeds from its exports of goods and services.
Serame said when Botswana’s debt is assessed using the Debt Service Ratio, the results are consistent with those of the debt to GDP ratio suggesting that the country’s debt levels are sustainable by international standards.
As at end of December 2022, the DSR stood at 12 percent, while international benchmark for an ideal DSR is a maximum of 20 percent.
Serame said the current debt levels therefore, are not only within the statutory limit of 40 percent of GDP as set out in the Stocks, Bonds and Treasury Bills Act, 2005, CAP 56:07, but are within what is regarded as low, according to international standards. She reiterated government’s commitment to maintaining sovereign debt at affordable and sustainable levels.
Serame said going forward, Government will be more inclined to domestic borrowing as part of the efforts to develop, grow, and deepen the domestic capital market, while being cognisant of the associated borrowing costs.
