31 Mar 2022

Foreign exchange controls were progressively liberalised over several years, commencing in 1995 and culminating in the complete abolition of all exchange control regulations on February 9, 1999.

Minister of Finance and Economic Development Ms Peggy Serame said this when responding to a question in Parliament on Wednesday.

She explained that in so doing, Botswana acceded to Article VIII of the International Monetary Fund (IMF) Articles of Association.

Ms Serame indicated that the first controls to be lifted were on payments for imports of goods and services including current account controls in November 1995 while the last exchange controls to be removed were on the transfer and acquisition of foreign assets by Botswana residents including capital account controls. 

She said exchange controls were originally introduced in 1976 as an administrative and transitional measure designed to ensure prudent use and preservation of the foreign exchange at a time when the country’s official foreign reserves were low, with the view to support the stability and public confidence in the newly introduced domestic currency (Pula and thebe) as well as encourage investment in the domestic economy. 

“This was a common feature in that era and at that stage of development. However, it was always understood that exchange controls constrained economic activity, were administratively cumbersome, and reflected a weakness in broader economic management and performance,” she said.

She said from the early 1990s, robust export and economic growth, strengthening macroeconomic management and institutional arrangements resulted in the accumulation of significant foreign exchange reserves, attainment of durable macroeconomic stability, growing and sound financial sector, public confidence in the national currency and, generally positive business and investor sentiment. 

“In this environment, it was no longer necessary to support the currency through administrative controls, while there was an opportunity to remove an administrative burden, for which the costs of administration and compliance requirements to domestic firms and households were substantial and increasingly outweighed the marginal benefits of maintenance of administrative exchange controls,” she said. 

She added that such costs were incurred across the economy by the exchange control authority, Bank of Botswana, commercial banks who were the authorised dealers, as well as the applicants or users including businesses and individuals. 

“These included the financial, processing effort and inefficiencies in conducting international transactions (time or delay) costs,” she added. More practically, she explained,  maintenance of administrative judgements and resource allocation for business and personal financial and investment decisions was constraining to economic activity and, therefore, limiting prospects for economic performance and social welfare enhancements. 

Ms Serame added that among others, residents had limited freedom of choice regarding offshore investments due to restricted amounts they could place in external assets while at the same time, they were constrained in making trade payments, as well as discharging business and personal expenses abroad. 

“Such controls, generally, have a negative signalling effect that deters potential foreign investors from participating in our economy, as they suggest deficient economic management and prospects, while there are concerns about restrictions constraining the ability to freely deploy legitimately earned business returns and employment income (after paying for production inputs, for example, labour, suppliers and services providers, as well as government taxes).”

She further told MPs that Botswana competed in the global market for investment, placement of production plants and skills transfer, hence the need to maintain attractiveness and relative competitiveness with respect to policy effectiveness and predictability, as well as ease of doing business.

“Against this background, removal of foreign exchange controls became imperative for enhancing prospects for attracting inward investments, economic diversification, and growth and, at household level, welfare enhancements,” she said.

The minister further said abolition of exchange control regulations made it easier for Botswana residents, including businesses and households, to access financial and physical capital, raw materials, services and other inputs for production, franchising, and related business relationships, as well as consumption goods. 

“It also facilitated the ability of Botswana firms to invest outside of the country and diversify their operations geographically, thereby earning investment returns that contribute to the balance of payments,” she said, adding that all such elements and factors were important ingredients for economic growth and development and enable Botswana to participate in global production and service value chains and consumption trends to the benefit of enhanced production, market opportunities and household living standards, overall, key to export-led industrialisation strategy, incidentally, identified as being key to attainment of high-income status and the Vision 2036 goals. 

In terms of economic management, she said the absence of exchange controls helped to focus and foster discipline and prudence in macroeconomic policy making, institutional arrangements as well as financial sector development and regulations towards business and market-friendly indirect influences on economic decisions. 

Thus, she added that made an overall contribution to the ease of doing business, at a level that matched peer and competitor countries as the country transitioned towards high-income status. 

“In view of the foregoing, it would be inopportune and a regressive step to consider re-introduction of exchange controls, as it would take us back in terms of our economic development aspirations and communicate negative signals, to the global investor community that Botswana’s macroeconomic and other policies are inadequate to anchor a viable economy.” 

In particular, she said, reintroduction of exchange controls would harm Botswana’s Global Competitiveness Rankings as it would add another layer to the cost of doing business and adversely affect investor sentiments.She added that sovereign credit agencies would possibly lower Botswana’s sovereign credit ratings on institutional strength. 

Further, she said with the advent of technology, especially e-commerce, digital payments, blockchain, visa-badged ATM and credit cards, internet banking and other digital means of payments for goods and services, exchange controls were porous and can, unwittingly, breed corruption and overburden the crime mitigation and control systems. 

Notwithstanding, she said there continued to be scope and ability for appropriate policy and regulatory responses as necessary to address any adverse developments, specific events or transactions deemed questionable. 

“In this regard, Botswana has effectively acceded and implemented the Financial Action Task Force AML-CFT Regime and the UN Sanctions Regime. It is these institutional arrangements and public infrastructure that can deal with any illegal activities,” she said.

In addition, she indicated that Botswana as a member and signatory to the International Monetary Fund (IMF) Articles of Association, had domesticated the country’s obligations and made specific statutory commitments regarding exchange controls, stipulated in Article VIII and Article XIV. 

“Upon joining the IMF on July 4, 1968, Botswana subscribed to Article XIV, which permits a country to maintain exchange control restrictions on current account transactions, and as I alluded to earlier, is seen as a transitionary agreement meant to prepare countries to attain Article VIII compliance, associated with policy maturity and good economic profile,” she said, adding therefore, Botswana, in 1995 upon abolition of controls on current account transactions, subscribed to Article VIII. 

“It permits capital controls as may be warranted, as they are considered a policy and prudential instrument, rather than purely administrative controls that are debilitating to the conduct of economic activity and social responsibilities by businesses and households,” she said.

She further said imposition of restrictions on the ability of residents, whether citizen or non-citizen to externalise after-tax profits or incomes would constitute a current account control, not a capital control, and would, therefore, be inconsistent with Botswana’s subscription to Article VIII of the IMF’s Articles of Association. 

“In essence, we retain the capacity to respond to adverse external sector developments, illegal transfers and transactions, through relevant policy frameworks and legislation, without the need to reinstate administrative exchange controls, while continuing to maintain a conducive environment for investment and economic activity,” she added.

The minister also indicated that a reinstatement of exchange controls on current account transactions would require a renegotiation of Botswana’s position with the IMF and, in turn, entail enhanced monitoring and surveillance and diminution of policy discretion. 

“Therefore, a reversion of that magnitude and impact is considered unnecessary and unwarranted, weighed against the economic and fiscal challenges that the Honourable Member perceives need addressing. Financial flows, as reflected in the balance of payments statistics provided by the Bank of Botswana, indicate that the average annual inflows from investment income (credits), which are returns from investments abroad repatriated to Botswana between 1999 and 2021, amounted to approximately P2 billion.” 

On the other hand, she said average annual investment income outflows (debits), which represented returns on investments in Botswana, were approximately P6.7 billion during the same period while the large outflows were aligned to larger foreign direct investments in Botswana as compared to investments by Batswana and residents abroad. 

“The larger attract larger pay-outs, as repatriation of more funds as compared to foreign direct investments funds coming into Botswana,” she said.

Regarding illicit financial flows (IFFS), Ms Serame said data on IFFS was inherently difficult to measure and/or compile, principally because it involved concealment of the nature of transactions or illegal and unlawful transfers. 

However, she acknowledged that the Global Financial Integrity (GFI) Report titled ‘Illicit Financial Flows from Developing Countries 2003 -2012’ indicated that Botswana, like other countries, lost sizable amounts of money through ‘trade mis-invoicing, bulk-cash movements, smuggling and/or informal arrangements’ evidently intended to avoid tax or hide profits, a matter she said was receiving attention, domestically and through the Southern Africa Development Community (SADC). 

She also indicated that in and of themselves, administrative exchange controls cannot prevent such illegal and/or unfair business practices. “This is where the revised Financial Intelligence Act of 2022, Proceeds and Instruments of Crime Act, Mutual Assistance in Criminal Matters, Double-Tax Treaties Agreements, Banking and other laws of Botswana come in,” she added.

The minister also said external transfers, both inward and outward, including investments, trade payments and other expenses, involved both citizens and non-citizens and were generally legitimate undertakings to promote business viability and livelihoods. 

“It is, therefore, desirable that the deployment of returns from legitimate economic activity and employment income by citizens and non-citizens, which ultimately are the reason for pursuing business and employment, should not be constrained,” she said, adding that was in consideration of the need and benefits of business and personal use, including business expansion and geographical diversification, investment portfolio optimisation, family support remittances, education and medical payments, among others, and would include Batswana pursuing businesses and work opportunities abroad or transferring funds externally for the reasons indicated.

Selebi-Phikwe West MP , Mr Dithapelo Keorapetse had asked the minister to state why in 1999 government decided to abolish foreign exchange controls. Mr Keorapetse also asked the minister to state and clarify economic benefits of the decision and whether such outweigh disadvantages and if government would consider to rescind or at least review the decision.

The minister was to also state the extent of profit repatriation and illicit financial flows since 1999. ends