Foreign reserves’ drop threatens pula value
Mbongeni Mguni | Monday June 16, 2025 14:09
The prolonged decline in diamond receipts, coupled with steady imports and the lack of other strong foreign currency earners, has meant a slide in the reserves over the months.
In January, the Bank of Botswana (BoB) increased the trading margin used for foreign exchange transactions to banks, from 0.125 percent to 0.5 percent, as a way of pushing the banks to trade amongst each other and with firms that are holding foreign currency.
However, the slide in the official foreign reserves has continued, leading to concerns about support to the pula’s value.
Prominent economist and former BoB deputy governor, Keith Jefferis, told BusinessWeek that the pula was about “one to two years away” from a crunch point, if the current rates of decline in foreign reserves continue.
“The rule of thumb is that for a country to have a pegged and not market dependent currency, the reserves have to be around three months of import cover,” he told BusinessWeek. “That’s not a hard and fast rule. “We currently have just under six months of import cover and we are still some way from that crunch point, but the reserves have been declining in terms of cover and if that rate continues, the crunch will come in one to two years’ time.”
Jefferis explained that the pula’s crawling peg system means that the central bank quotes its rates every day and is obliged to make foreign currency available to banks at the rate that it quotes. The rate under the crawling peg is calculated daily based on a basket of other currencies and inflation on those countries.
“The rate does not depend on the local market or supply and demand. “The BoB needs reserves to back up the promise that it will buy or sell to banks at the rate it has published,” he explained.
Other analysts told BusinessWeek the rate of decline in the reserves could mean a slide towards free float of the pula where the currency, unsupported by the reserves, could see its value plummet to even P30 to the dollar. Some countries around the world have suffered currency crises that have collapsed their economies into unmanageable debt, hyperinflation and runaway unemployment.
Analysts have also said some international hedge funds are taking major bets on the pula approaching free float very soon.
Jefferis pushed back on the warnings and analysis, but said action towards an alternative system for the pula was appropriate.
“It’s not an immediate crisis but you can see this thing coming,” he said. “If you can see the problem, prepare for it now. “When that point comes, the exchange rate mechanism will have to change and the pula will have to be more flexible and market determined. “The central bank and government should be working on some type of transition to a more flexible exchange rate and there are different forms that the pula could change to. “There’s no immediate crisis and there is a one to two-year window, which also depends on a number of factors.”
The factors that could negate or delay the need for a transition include a strong recovery in diamonds, robust external borrowing to shore up the foreign reserves as well as slowing down spending and minimising the budget deficit.
Finance ministry permanent secretary, Tshokologo Kganetsano, recently told a Parliamentary committee that part of the problem in the foreign reserves was that citizens continued to spend, without regard for the broader economic slowdown.
“The two biggest consumers of our foreign reserves, at the top is fuel and that’s us as Batswana when you look at our roads and the cars running about taking children to school. “In developed countries where people are financially literate, they see the signs and say ‘we need to adjust’. “The second largest consumer of the reserves is retail which includes shopping outside the country,” he said.