There comes a time when one must look to their saving in order to navigate themselves through a period of uncertainty, and for Botswana, the time may have arisen to look to savings from the Pula Fund to mitigate damages brought about by the Covid19 Pandemic.
Botswana has over US$6.7 Billion in reserves called The Pula Fund; simplified, are a piggy bank “for future generations”. Has the time come to use the piggy bank considering the economy is expected to shrink dramatically in 2020!
The country’s GDP is expected to shrink by more than 13% in the current fiscal year, Finance Minister Thapelo Matsheka said in televised address. It’s the largest contraction since the recession that followed the global financial crisis of 2008. The mining sector, which represents one of the most important pillars of Botswana’s economy, is expected to be hit the hardest. “Buyers can’t come and see the stones to purchase them,” Matsheka said of the country’s famous diamonds. The sector as a whole is expected to slump by 33%.
A report from the African Union states that the COVID-19 pandemic has hit almost all African countries and appears poised to worsen dramatically. The disruption of the world economy through global value chains, the abrupt falls in commodity prices and fiscal revenues and the enforcement of travel and social restrictions in many African countries are the main causes of the negative growth. Exports and imports of African countries are projected to drop by at least 35% from the level reached in 2019. Thus, the loss in value is estimated at around 270 billion US dollars. To fight against the spread the virus and medical treatment will lead to an increase of public spending in Africa estimated to by at least 130 billion.
The Pula Fund History
The Pula Fund was established in 1993 and the legal framework was subsequently formalised in 1996 under the revised Bank of Botswana Act (CAP 55:01). While the Bank of Botswana Act does not explicitly specify the purpose of the Pula Fund directly, the main objective of the Fund is to invest proceeds from non-renewable resources (minerals) for the benefit of future generations. The Government of Botswana also invests some of its assets in the Government Investment Account to meet its policy objectives.
The Pula Fund is a long-term fund and forms part of the overall foreign exchange reserves. The accumulation of foreign exchange reserves has stemmed from the general trend of surpluses in the balance of payments, which were generated from the export of rough diamonds. However, in recent years, more subdued global demand for diamond has limited further inflows into the Fund. The amount of assets under management in the Pula Fund is available in the Bank of Botswana website.
The Botswana Government has representation on the Board of the Bank of Botswana which provides for periodic interactions between the Bank of Botswana and the Ministry of Finance Economic Development. There is also annual reporting to Parliament and Cabinet. The Minister appoints the Board while the President appoints the Governor and Deputy Governors. Through the Government appointed Board, which has direct representation for the Ministry, the Bank of Botswana performs its fiduciary role in full compliance with the Bank of Botswana Act. Accordingly, the management of the Pula Fund is subject to a regular review of the entire investment strategy, overseen by the Board. The detailed implementation of the strategy is then delegated to the management of the Bank of Botswana, led by the Investment Committee, which is chaired by the Governor.
Investment objectives of the Pula Fund includes ensuring the safety of the foreign exchange reserve and preserve its value; Maintain liquidity so that funds can be made available in a timely manner and at reasonable prices; Optimize returns through prudent investment and acceptable levels of risk.
The Fund Activities
The Pula Fund activities are subjected to daily, monthly and quarterly risk management monitoring, which is reported to the Bank of Botswana senior management and the Board. In addition, the financial and investment activities of the Pula Fund are reported in the financial statements of the Bank; these are audited by external auditors on an annual basis and submitted to the Minister of Finance and Economic Development, for presentation to Parliament.
The investment policy and guidelines for the management of the Pula Fund are underpinned by the key objectives of preserving the purchasing power of the reserves, maximise return within acceptable risk parameters, and maintenance of adequate liquidity. The Pula Fund invests in developed and emerging markets fixed income and equities. Every five years, the entire investment strategy and strategic asset allocation is subjected to a review to ensure that they are in line with the owner’s risk tolerance and current market environment, including the change in the range of investment opportunities. Proposed changes are then submitted to the Board for review and approval after which the related investment guidelines are drawn and approved by the Investment Committee.
The Looming End of Diamonds
The Pula Fund is one of Africa's largest and oldest SWFs. Named after Botswana's national currency, the Botswana pula (BWP), the Pula Fund was created to preserve and invest the earnings drawn from the nation's diamond resources. To that end, the fund was seeded with foreign currency reserves drawn from the nation's diamond industry, which many experts expect will run out of diamond resources sometime in the mid-2030s.
This looming shortage of diamonds represents a severe threat to Botswana's economy. Between 2000 and 2010, the diamond industry was responsible for roughly 40% of Botswana's economy and 80% of its foreign exchange earnings. The government hopes that by saving and investing these earnings while they are still available, the long-term economic impact on Botswana can be softened.
The governance of the Pula Fund has been a subject of some controversy, with recent reports expressing concern over the transparency of fund management and suspicions that the central bank and finance ministry may have made inappropriate use of the Fund's resources.
The Pula Fund, which is overseen by the governor of the Bank of Botswana along with an unnamed management committee, has withdrawn capital from the Pula Fund several times since 2000. It has justified these withdrawals by claiming they were necessary to fund social welfare programs and to avoid unpleasant political decisions, such as ending tuition-free schools.
Outside observers like the Columbia Centre on Sustainable Investment have expressed scepticism at these claims, citing a lack of documentation for the committee's explanations. They have also criticized fund managers for poor fund performance over recent years, in spite of a booming international diamond market.
The Pula Fund is modelled after several SWFs established by other nations over the second half of the 20th century, the first of which was established by Kuwait in 1958. Countries with particularly valuable natural resource reserves often establish an SWF to provide a cushion for future periods when either resource prices or supplies might decline significantly or suddenly.
Top-performing SWFs, such as those of Norway or the United Arab Emirates, have succeeded by pursuing a policy of setting money aside for overseas investment under rigorous oversight and restrictions on government access to those funds. Botswana's Pula Fund uses a similar asset aggregation and investment strategy but is considerably weaker with respect to fund oversight.
Basic Rules of Withdrawals
The Bank of Botswana says that the Pula Fund is a prudent and yield-maximising investment alternative until such time as opportunities to invest productively in the domestic economy arise and are incorporated in National Development Plans. The management of the Pula Fund must also be considered in relation to the fiscal policy framework and the three-pronged strategy of spending for development, affording stabilisation and saving for future generations.
The Government cannot withdraw more than its share of the Pula Fund, represented by the Government Investment Account, to finance the budget, which has been approved by Parliament. The Pula Fund cannot be used in any quasifiscal/off-budget operation to finance investment, or the purchase of goods and services outside the government budget framework.
If the need arises, to enable the Government to pursue agreed national development objectives, the Pula Fund could be drawn down as the Government draws down its Government Investment Account. That is, if the Government believed the funds in the Pula Fund are needed to be put into productive investment in the country, then the Pula Fund could be drawn down.
The Government has opted for a qualitative approach where any withdrawals are discussed by the authorities and agreed in the context of prevailing fiscal conditions, rather than predefined numerical trigger points for withdrawals or deposits. However, such clear trigger points are established for intra-funds transfers (long-term and short-term funds). This approach has served the country well through different economic cycles.
Source: AU, IP, IFSWF, BoB
