• Govt, Bank of Botswana dip willy-nilly into Pula Fund
• No transparency whatsoever in running of fund
• If policy makers don’t act now youth will bear the brunt of high taxes
Diamonds are not forever. It was that realisation that motivated the Botswana government in 1993 to do something politicians rarely do; provide for a future beyond their own time in office.
The Pula Fund was created to make sure that Botswana, a country heavily reliant on diamonds, would still be able to pay its bills once those revenues ran out.
According to the Bank of Botswana website on the Fund, it has two mandates; stabilisation of foreign reserves and saving so that future generations will benefit from the current diamond boom.
A 2016 budget strategy paper of the finance ministry reveals that the fund started off with an initial saving of about 40 percent of forex and tax earnings from diamond sales, to be invested in it on an annual basis. Over the years, diamond prices and exports increased steadily.
Two thirds of the fund belongs to the government, while a third is owned by the central bank – the Bank of Botswana.
Bank financial statistics released in November last year show that 20 years after its creation and with another 20 years to go before Botswana’s diamond reserves are expected run out, the Fund’s value stands at P61 billion.
Growth has been sluggish, given bullish gem prices over the past two decades. With diamonds accounting for 80 percent of the country’s forex earnings and 39 percent of public revenue, the Fund is not large enough not enough to keep the economy ticking beyond the end of the decade.
One reason for its less than stellar performance is that the Bank of Botswana and the finance ministry have the drawn on the fund repeatedly.
The bank’s financial statistics highlight the fact that there were draw-downs in 2002, 2003, 2005.2008, 2012 and last year.
Many of the withdrawals appear to have been opportunistic and short-term. In some cases, no reason is given.
Reasons supplied by Governor Linah Mohohlo and in the budget speech, as well as in strategy papers and mid-term reviews, include financing the pensions of public servants, covering budget deficit, boosting liquidity reserves, and avoiding unpopular decisions such as increasing taxes, doing away with free education and freezing public servants’ wages.
The fund is managed by the Bank of Botswana through a secretive committee headed by Mohohlo.
The Bank of Botswana Act does not specify other members, but a bank insider said they included deputy governor Oduetse Motshidisi, University of Botswana labour economist Happy Siphambe, and a representative from the ministry of finance.
Emeritus Professor of African Economies at Oxford University Paul Collier is also understood to be a member.
According to the Bank of Botswana, the institution’s financial markets department manages 50 percent of the Fund, while nine foreign fund managers take care of the other 50 percent.
In its August 2013 Resource Governance Report, the Columbia University Centre for Sustainable Investment criticised the Pula Fund for low governance standards and gaps in regulation, comparing it unfavourably with sovereign wealth funds such as those of Qatar and Norway.
In a formal ranking contained in the report, the centre also rates the Pula Fund well below lacklustre performers such as Libyan and Chinese funds In contrast with successful funds; the Pula Fund has not increased in real value since 2008, according to Bank of Botswana figures that show the draw downs. In fact it now has a value equal to Botswana’s annual budget – despite a more or less steady increase in diamond revenues over the past two decades.
In 2008 the Fund subscribed to the Santiago Principles, a voluntary set of guidelines that enshrine best practice in sovereign wealth funds to promote openness and financial accountability.
It has not been able to live up to many of these principles. Critically, it lacks clear rules for oversight and transparency in regard to policy, funding and withdrawals.
Both the Columbia Centre and the Santiago Principles have found the Fund to be fraught with “unclear, confused and overlapping” objectives that “keep changing over time”.
Secretive draw-downs
The Bank of Botswana is known for keeping its work out of the public eye. An example is the Monetary Policy Committee, which is sworn to secrecy and whose composition and decisions are closely guarded secrets – unlike those of South Africa’s MPC.
Similarly, the Pula Fund’s approach to withdrawal and general spending operations is known by few, even at the bank.
The heightened transparency on spending and withdrawals called for in the Santiago Principles could be spelt out in legislation, a charter or other constitutive documents.
At the moment, it is unclear who makes the final call on how often, and how heavily, the government may dip into the Fund.
The only rules regulating withdrawals is that the government cannot withdraw more that its share of the fund – represented by the government investment account – to finance the budget, and that the Fund cannot be used in any quasi-fiscal or off-budget operations to finance investment.
Theban of Botswana Act is similarly vague; it does not explicitly set out the funding procedure, except that the governor may make a recommendation to the finance minister for a draw-down.
Other sovereign wealth funds operate in far stricter and more transparent manner. In Russia withdrawals are approved by federal budget laws, while in Singapore, the constitution determines how much the government can spend of investment returns on its reserves.
Bank of Botswana financial statistics reveal a steady stream of draw-downs since the fund was established, some unexplained.
In 2002, a draw-down of P8 billion was made to float a government employees’ pension fund. A further P5.2 billion was withdrawn the following year for reasons that were not disclosed. In 2005, an additional P11 billion was withdrawn.
An increase in diamond exports was reflected in an increase in the value of the fund, from P39.7 billion in 2007 to P51.6 billion in 2008.
However, during President Ian Khama’s first year in office, P8.1 billion was withdrawn to compensate for the effects of the 2008 recession. Another draw-down of P2 billion was made in September 2010 to finance back-pay for civil servants as required by the amended Public Service Act, while in 2012 a huge draw-down of P18.1 billion was effected between the months of August and September in what the Ministry of Finance said was for greater import cover.
The fund vests significant implementation powers in the governor, who doubles as chairperson of the Bank of Botswana Board. The board decides on policy and delegates implementation powers back to the chairperson without putting in place clear oversight and accountability measures.
In contrast, the Australian Board of Guardians of the Future Fund is bound by legislation to collectively pursue investment in good faith, and is held accountable through requirements imposed by legislation, with civil and criminal penalties applying for violations.
A former researcher at Botswana Institute for Development Policy Analysis, Roman Grynberg said that Qatar and Norway succeeded in avoiding unsustainable investments in infrastructure, unlike many other countries with abundant natural resources.
“You can’t touch the Qatar or Norwegian funds,” remarked Grynberg, now an economics lecturer at the University of Namibia. He likens the Pula Fund to a slush fund.
That there is a need for a sovereign fund to secure Botswana’s economic future is not in doubt.
Decades of geological surveying confirm that the gems are becoming scarcer. And with no new major sources of supply on the horizon, some predict that Botswana will run out of diamonds in just over 20 years.
The immediate reaction of policy makers will be to increase taxes. VAT currently stands at 12 percent, lower by than of Botswana’s neighbours. Income tax is also much lower than in South Africa.
Higher taxes would not only lower living standards, but in the longer term weaken Botswana’s reputation as a magnet for investors.
Diamond revenues have created a heavily subsidised education system from pre-primary level to university – that would also have to disappear.
Most Batswana live within 10km of a free health clinic, and all HIV-positive citizens have free access to life-giving antiretroviral therapy. Cut-backs in the programme would affect more than 300 000 people.
If Botswana does not wean itself from its diamond dependency, personal income tax, which stands at 25 percent, would rise to South African levels.
The longer the policy makers wait before fully cushioning the economy from future liabilities, the greater the pain will eventually be, particularly for young people.
