Botswana has reduced the projected interest bill on a US$250 million (P3.375 billion) World Bank loan by 47 percent through a restructuring of its repayment terms, saving an estimated US$24.5 million (P330.75 million) over the life of the loan.
According to an account of the transaction by the World Bank Treasury, the government cut the estimated interest payable by shortening the repayment schedule and securing a lower borrowing spread. The restructuring reduced the loan’s grace period from five years to three years and its final maturity from 15 years to 10 years, bringing its average repayment maturity into the World Bank’s shortest category of eight years or less.
Extended through the World Bank’s International Bank for Reconstruction and Development (IBRD), the loan was designed to support Botswana’s economic recovery following the COVID-19 pandemic. The World Bank said its Treasury team worked closely with the Ministry of Finance and Economic Development to tailor the loan’s currency, repayment profile and maturity to the country’s debt management strategy.
The shorter repayment schedule qualified Botswana for a lower maturity premium, reducing the overall cost of borrowing.
The savings came from changing the timing of repayments rather than reducing the principal amount borrowed. Under the original arrangement, Botswana would have had five years before beginning principal repayments, with the loan reaching final maturity after 15 years. The revised terms shortened the grace period to three years and final maturity to 10 years.
The World Bank said the revised structure delayed principal repayments until 2024, when external debt was projected to be on a declining trajectory. The arrangement was intended to align repayments with the government’s projected fiscal position while preserving room to finance other development priorities.
Calculations based on Bloomberg data as of June 2021 put the estimated lifetime interest savings at US$24.5 million (P330.75 million), a reduction of 47 percent. The World Bank also estimated that the restructuring created approximately US$24 million (P324 million) in fiscal space for the government.
The financing was arranged against the backdrop of a severe economic shock caused by the pandemic. A World Bank assessment published in April 2021 estimated that Botswana’s economy contracted by 7.9 percent in 2020 as COVID-19 disrupted key sectors, particularly diamonds and tourism. Unemployment rose to 24.5 percent, while the poverty rate was estimated at 16 percent in 2020, based on the World Bank’s then-used international poverty line of US$1.90 a day in 2011 purchasing-power-parity terms.
The government responded with a relief programme valued at approximately two percent of gross domestic product.
Its Economic Recovery and Transformation Programme sought to protect lives and livelihoods, contain the spread of the virus and support businesses and the banking sector. The World Bank developed its Botswana Programmatic Economic Resilience and Green Recovery Development Policy Financing operation within six months to support recovery, economic diversification and efforts to broaden the country’s economic base.
The loan was significant because it was the first budget-support loan Botswana had requested from the World Bank. It was also intended to be the first of two planned lending operations.
The restructuring also had implications for Botswana’s ability to access further World Bank financing. By repaying the loan over a shorter period, the government could free up part of its IBRD lending envelope sooner, potentially creating room for additional financing for future development needs.
The World Bank said applying similar structuring to subsequent loans could generate further savings that could be redirected towards priority development spending.
Its Treasury team provided the Ministry of Finance with alternative financing scenarios and advice on repayment terms, flexibility and risk-management features before supporting negotiations and the presentation of the loan to the World Bank Board.
