31 Jul 2022

The establishment of foreign exchange reserves management framework will help provide savings for future generations since diamonds are not forever.

Briefing the media during the release of the reserve bank annual report, Bank of Botswana director of financial markets, Mr Lesego Moseki cautioned the country against over dependency on diamonds for foreign earnings. 

Mr Moseki said prudent foreign exchange reserves management was essential, hence the need to put measures in place to preserve the reserves so as to enable the country to pay for its imports.

“Prudent reserve management would maintain the reserves purchasing power by cushioning the effects of inflation emanating from the increase in food and oil prices, as a result of the Russia/Ukraine war, which is severely impacting the return reserves assets,” he said.

He explained that the main sources of foreign exchange reserves were exports, mainly diamonds and quarterly SACU revenue tariffs as well as external borrowings.

Mr Moseki said the reserves were used for the purchase of foreign asserts, particularly by institutional investors as well as for protecting the economy from shocks. He said they also supported the country’s sovereign credit ratings, which were important in the process of accessing international financial markets.

Furthermore, he said there was need to have organic growth on the country’s foreign reserves through attainable investment decisions, to enable the growth of reserves in value without diamond funding.

Mr Moseki said the liquidity portfolio remained the primary international reserve as stipulated in the Bank of Botswana Act and it was a requirement that it should at least be six months of import cover.

He, nonetheless, said the liquidity portfolio had declined to only three months of import cover due to challenges brought by the Russia/Ukraine war. 

Mr Moseki further said there was need to develop domestic capital markets as they could become an important avenue for government funding in both local and international currencies.

“The bank has liquidated a lot of assets in the Pula fund to keep the economy going, in terms of foreign exchange, hence the need to rethink the foreign reserves management framework and consider other export earning revenue streams,” he said.

Mr Moseki said the reserves had been declining since 2015, owing to depressed diamond sales against continuing strong domestic demands for foreign exchange and net capital outflows.

 

“The level of foreign exchange reserves amounted to P56 billion in December 2021, an increase of 4.6 per cent from P53.4 billion in December 2020,” said Mr Moseki.

He, therefore, said it was evident that a remedial action needed to be taken to address the structural current account and balance of payment as well as budget deficits.

Mr Moseki pointed out that there was urgent need for economic and export diversification to further boost export earnings, adding that the country might also need to externally borrow capital  aimed at impactful economic activities to relief pressure on the foreign exchange reserves. 

“We also need to develop a liquid domestic bond market, which will include issuing green bonds solar energy and attract foreign investors to the domestic bond markets,” he said. 

Regarding domestic capital market, he said government remained committed to developing a robust capital market as evidenced by the increase in the bond programme from 15 to 30 billion in 2022, while the outstanding government securities amounted to 22.44 billion at the end of 2021 compared to 17.2 billion in 2020. 

He said it was important to channel resources towards economic developments to reduce the import bill and broaden the economic base, which would reduce the burden on foreign exchange reserves. Ends