We examine three situations, where the domestic interest rate is higher than the Baseline assumption by one percentage point, 2 percentage points and 3 percentage points for the entire Plan-period.

Our analysis shows that, as far as the Plan period is concerned, higher domestic interest rates would cause a relatively small impact on the overall fiscal position, reflecting the relatively small domestic debt stock (Table A2. 5). However, in the longer term, when domestic public debt grows towards the prescribed debt ceiling, the impact of the higher domestic interest would be felt more significantly.

**Table A2. 5.  Sensitivity Analysis:  Domestic Interest Rate**

||2010/11|2011/12|2012/13|2013/14|2014/15|2015/16|
|---|---|---|---|---|---|---|
|**Net domestic interest payment**|**(in percent o**|**f GDP) /1**|||||
|Baseline|0.4|0.3|0.2|0.3|0.4|0.4|
|1percentage pointhigher|0.5|0.3|0.3|0.4|0.5|0.5|
|2percentage pointshigher|0.5|0.3|0.3|0.4|0.5|0.6|
|3 percentage pointshigher|0.6|0.4|0.3|0.5|0.6|0.6|
|**Fiscal balance (in percent of G**|**DP)**||||||
|Baseline|-10.2|-7.1|-4.3|-2.1|-0.9|0.3|
|1percentage pointhigher|-10.2|-7.1|-4.3|-2.2|-1.0|0.2|
|2percentage pointshigher|-10.3|-7.2|-4.4|-2.2|-1.1|0.1|
|3 percentage pointshigher|-10.3|-7.2|-4.4|-2.3|-1.2|0.0|
|**Cumulative fiscal balance (in**|**billions of 200**|**8/09 Pula)**|||||
|Baseline|-20.0|-26.6|-30.9|-33.1|-34.1|-33.8|
|1percentage pointhigher|-20.0|-26.7|-31.0|-33.3|-34.4|-34.2|
|2percentage pointshigher|-20.1|-26.7|-31.1|-33.4|-34.6|-34.5|
|3 percentage pointshigher|-20.1|-26.8|-31.2|-33.6|-34.9|-34.9|
|Author’s calculation.<br>1/ Net of inaterest payments on|public domest|ic debt and in|terest receipt|s on PDSF an|d RSF loans.||

# **A2.5 Cost of New External Borrowing**

Next, we turn to the government’s external borrowing cost. In view of the growing fiscal deficit, external creditors may impose a higher interest rate on the government’s new borrowing. Sensitivity results suggest that, as far as the NDP10 period is concerned, a higher cost of new external borrowing would have virtually no impact on Botswana’s fiscal position. This is because of the fact that, faced with the external debt and guarantee ceiling, the government could engage in only a very limited fresh external borrowing during the Plan.

Since its borrowing of US$250 million and provision of guarantees for external debt payable by BPC in 2010/11 would raise the stock of debt and guarantees to 20 percent of GDP in 2010/11, thereafter the government would be able to borrow only a limited amount externally every year, as GDP growth and principal repayments create room for additional external borrowing. However, in the long run, the higher external borrowing cost would pose a significant negative impact on Botswana’s fiscal position. As GDP grows and existing external loans are repaid (especially the amortization of the US$1 billion AfDB loan that will start in 2015/16), the government would be able to borrow externally, or put it another way, the government would have to seek roll-over financing for the amortization. Then, the pain of higher external borrowing costs on the budget would be felt more acutely.

# **A2.6 Size of Government Establishment**

35