Foreign reserves at a record low
There is need to rebuild them - Serame
The Minister of Finance and Economic Development, Peggy Serame says foreign reserves have fallen in the past four years and there is a need to rebuild them.
She said at 31st December 2017, the value of the foreign exchange reserves was P73.7 billion, equivalent to USD 7.5 billion. She revealed that the amount of foreign exchange reserves as at 31st December 2021 was P56 billion or USD4.8 billion.
She said while the foreign exchange reserves have fallen, especially in the advent of COVID- 19, there is a need for them to be rebuilt, as they have and continue to serve the purpose for their maintenance, that is affording uninterrupted access to foreign exchange for sustained economic activity and consumption needs and, generally, for stabilisation purposes and discretion in the conduct of macroeconomic policies. “During the period 1st April 2018, to 31st December 2021, the decline in foreign exchange reserves of Botswana or net withdrawals were as follows: 2018: P7.1 billion; 2019: P14.5 billion; 2020: P22.3 billion; and 2021: P10.6 billion. “The net withdrawals of the foreign exchange reserves ( or net foreign exchange outflow) in any year, as was the case for the four consecutive years of 2018 to 2021, means that the amounts paid for import of goods and services in foreign currency as well as investments abroad made by residents of Botswana exceeded the amount of foreign currency receipts ( export earnings) and inward investment by non- residents,” revealed Minister Serame. She stated that in general, changes in the level of foreign exchange reserves result from surpluses or deficits on the balance of payments which, in turn, are driven mainly by the level of foreign trade ( imports and exports). Foreign exchange reserves are, by definition, assets or funds held by central banks denominated in foreign currency, used to finance international transactions, the minister said. She explained that such transactions include payments for goods and services ( imports) that can be used for production, consumption and/ or supply of essential services, outward investment by residents in foreign markets and servicing of external obligations on behalf of the government, businesses and households.
“As an example, the procurement of raw materials or equipment for infrastructure projects, essential food and medical services by both private companies and government ministries from outside Botswana are paid for in foreign currency. “Similarly, regular allocations for Government embassies abroad, repayment of foreign currency denominated debt, and similar external obligations consume foreign exchange.
“Furthermore, the purchase of electricity by BPC from Eskom in South Africa, consumption and construction goods by large retailers like World Group, Choppies, Spar, building material merchants, oil imports by oil companies and import of cars by the general car dealership industry are supported by the country’s foreign exchange reserves.” The minister told Parliament that there is also the import of capital goods required by contractors undertaking infrastructure projects and manufacturing entities.
The infrastructure projects would include key projects such as the North- South Water Carrier, the Kazungula and Mohembo bridges and BOFINET backbone infrastructure, she said, adding that furthermore, asset managers and pension funds require foreign exchange to discharge their mandates to their clientele by investing a significant portion of their portfolios in foreign markets. According to Serame the foreign exchange reserves held at the Bank of Botswana are not exclusively for use by Government. In addition to Government’s external obligations, she said a large portion of the foreign exchange reserves is used to support payments for private sector imports and other productive economic activities by residents.
The minister pointed out that in this instance, businesses and individuals sell their own Botswana Pula to the Bank of Botswana and/ or commercial banks to get foreign currency.
She reminded Parliament that major foreign exchange inflows comprise receipts from SACU and diamond revenues.“In total, the inflows were much lower in the advent of COVID- 19 due to subdued economic activity and, therefore, lower export earnings. “In general, the accumulation and preservation of foreign reserves would be supported by enhanced economic diversification and export- oriented production, resulting in an increase in the sources and value of export earnings and relative reduction in the range and value of imports. “The cumulative drawdown of the country’s foreign exchange reserves, over the four years, was used to undertake productive economic activities and fund investments and other welfare- enhancing activities for Botswana residents,” Serame emphasised. She indicated that notably, the availability of foreign exchange reserves enabled the government to purchase essential supplies and procure the much- needed COVID- 19 vaccines and related supplies at a time when diamond and tourism receipts had virtually dried up.
Such use of foreign exchange reserves, according to Serame is to fund expenditure as approved by Parliament through the annual and supplementary budget submissions.