After BoB forex move, banks tap their P21bn pile
Mbongeni Mguni | Tuesday August 5, 2025 09:28
Inflation is likely to overshoot the 2.7% average originally projected by the Bank of Botswana (BoB) for this year. This is largely due to the July 11 changes to the Pula exchange framework which made access to the official foreign exchange reserves costlier for banks to access from the BoB.
Other changes which include weakening the Pula at a quicker pace this year, are playing a lesser role, as the local currency continues to drift within the ranges seen prior to the July 11 changes.
Rather, analysts have noted, the challenge has been the decision by the central bank to increase its margins for foreign currency trade with banks from +/- 0.5 percent to +/-7.5 percent as a way of protecting further erosion of the official foreign exchange reserves which are managed by the BoB.
The central bank has also raised the minimum threshold at which it will trade foreign exchange with banks, from $1 million to $5 million.
And the official reserves have been sliding since late 2023, due to the downturn in diamond sales, a situation that now threatens the value of the Pula which is directly supported by the reserves.
As at May, the reserves managed by the BoB were pegged at P47.2 billion down from P65.3 billion a year earlier, the result of frequent withdrawals to meet the country’s import bill, at a time when diamond sales continued to weaken.
“Between January 2024 and December 2024, the BoB sold foreign currency equivalent to P56.6 billion to commercial banks,” Finance Minister, Ndaba Gaolathe told Parliament last week. “This translated to average monthly and weekly outflows of foreign currency equivalent to approximately P4.7 billion and P1.2 billion, respectively. “These outflows were drawn from the country’s official foreign exchange reserves during a period of declining inflows from the diamond sector. “This situation is not sustainable and cannot be left unattended.”
For years, long before the ongoing depletion of reserves, the BoB pushed for greater inter-bank trading of foreign currency, a secondary market where margins and thresholds would be set and innovative products developed to encourage funds from businesses.
Botswana does not have foreign exchange controls and businesses are free to bank their proceeds earned locally, anywhere in the world. The Financial Intelligence Agency also picked P30.1 million suspected acts of externalisation between January and June 2024, which indicate that some rogue businesses are illegally transferring foreign exchange out of the country.
Traditionally, banks prefer the BoB for their foreign currency needs as it is not only a cheaper source but also bears a statutory mandate to make these funds available on request by banks. The rates the BoB publishes every day for different foreign currency are essentially a promise to make these available to banks on request, a situation that is becoming more difficult as diamonds continue in their slump.
As the July 11 moves reverberate through the market, however, banks have increased their foreign currency rates far beyond the BoB’s prompts, a cost that businesses have quickly passed onto their customers with prices of up to 10% and even higher.
The central bank says banks are being disingenuous in their fledgling efforts to establish an inter-bank foreign exchange market and wean themselves off reliance on the BoB.
“Are the price increases justified?” asked BoB deputy governor, Lesego Moseki at a briefing last week. “Immediately, we moved, the next day, banks increased prices. “But you will find that on that next day, the banks did not come to us to buy foreign currency. “So, I think it is disingenuous for banks to trade FX that they already had, and then at much higher prices, and then for retailers to immediately increase their prices for stocks that they had in their warehouses, saying the exchange rate has gone up.”
According to the BoB’s data, local commercial banks are holding P21 billion in their own foreign exchange reserves, or nearly 45% of what the central bank is holding on behalf of the country. In addition, nearly 30% of commercial bank’s deposit liabilities of P109 billion are in foreign currency.
The numbers confirm statements made by Gaolathe and BoB executives that commercial banks have alternative pathways to accessing and trading in foreign currency, outside of the central bank.
And, according to the BoB, there are emerging signs that interbank trading is improving, although the rates are still inflated and driving prices up in the economy.
“Before the decision was taken, commercial banks were coming here to the bank and weekly, they were taking about P1.2 billion in forex,” Moseki said. “But since the decision was implemented, we have seen in a week around P260 million. “You can see the difference and so basically, one could say, yes, this is working.”
While they have reduced their purchases from the central bank, the fact that the secondary market rates are yet to settle at stable levels, means prices continue to face north, putting pressure on consumers in an already difficult year.
BoB insiders say besides persuading banks to find a more reasonable middle ground, there are tougher measures that can be taken. These could conceivably include allowing certain firms which are most exposed to foreign currency needs to directly access the official reserves, thus sidestepping banks and their rates completely.
Gaolathe also hinted at measures that could be taken to guide the market to stability.
“These include the potential introduction of caps on the mark-up applied by commercial banks to their foreign currency trading margins, the potential introduction of asymmetric trading margins for the Bank's own foreign currency operations with commercial banks, and other targeted regulatory measures,” he said.
Consumers will be hoping rates reach a reasonable equilibrium soon to prevent a snowball effect in prices, as the dust settles from July 11.