Falling reserves raise fears of pula framework change
Lewanika Timothy - Mbongeni Mguni | Monday August 11, 2025 12:54
The countries foreign exchange reserves reached $3.5 billion in April in comparison to record highs of $10.3 billion in 2008. This steep downfall has meant that the country’s fiscal planners have less wiggle room to sell the pula and buy other currencies in an attempt to defend the value of the pula and maintain constant supply of foreign currency to banks and traders.
In their second quarter economic review, researchers at Econsult, a local firm led by prominent economist Keith Jefferis, warned that the trajectory of the foreign reserves suggested a review of the crawling peg system that is currently being used to give the pula nominal value.
“If the decline in reserves continues, which is likely, the pula exchange rate mechanism will need to move towards a more market-determined arrangement, which would be very different to the current state of affairs,” the researchers said.
The economists have also warned that the country is flying close to the sun as current import cover stood at five months, close to the three months level which is a minimum threshold too close to being disastrous in economic terms.
“By the end of 2024, import cover had declined to just over five months, from a peak of 40 months in 2001. There is no hard and fast rule about the level of reserves needed to support a pegged exchange rate, but the common rule of thumb is that below three months of reserves, the peg may become unsustainable” the economists noted.
Under the crawling peg exchange rate system, the pula’s value and movements are tied to a basket of currencies being the South African Rand and the IMF’s Special Drawing Rights (SDR) currencies which include the British pound, US dollar and others.
To maintain the system, the Bank of Botswana uses its foreign exchange reserves to intervene when market forces push the pula outside its target range. If the pula comes under pressure, the bank can sell foreign currency to buy pula and bolster its value, or alternatively buy foreign currency to prevent it from appreciating too quickly. This intervention however hinges on having adequate reserves.
As reserves continued to dwindle, government and the Bank of Botswana (BoB) announced several measures to dissuade banks from resorting to the official reserves for their foreign currency needs. Commercial banks held more than P21 billion of their own reserves as at April, but prefer the BoB as it is cheaper and bears the statutory duty of making foreign currency available.
Despite the intervention by fiscal authorities, economists as Econsult believe the moves are inadequate to stop the decline in reserves.
“Will the changes help to slow down (or even reverse) the decline in the reserves? This is unlikely. “Yes, there may be some reduction in imports, which are now more expensive that will reduce the demand for foreign exchange,” the economsits noted .
According to Econsult researchers, the amount of foreign currency held at the central bank will shrink as exporters will be incentivised to keep cash outside the country and pay for imports with accounts held outside the country in order to bypass currency conversation which would yield less pula for them.
“At the same time, BoB will receive smaller inflows of foreign currencies into the reserves. “Exporters now have incentive to keep funds offshore, perhaps to sell directly to importers, or to keep in foreign currency accounts at Botswana banks. “Exchanging their foreign currency for pula, which would support the reserves, is now less attractive,” the researchers opined.
BoB officials told Mmegi that the options for the pula were between a fixed and a floating system, with the crawling peg being closer to the latter in terms of flexibility. Analysts however said in terms of the costs of maintaining the system, the crawling peg system is closer to a fixed system, with both being equally punitive on the foreign reserves.
Central bank deputy governor, Lesego Moseki said the urgent requirement was for the official reserves to be protected, in order to defend the pula’s value.
“If those reserves are falling, the pula cannot remain static,” he told BusinessWeek during a recent briefing. “A question that probably you need to ask yourself is, if the pula was floating, what would have happened, given, one, the economy, and then, by implication, the level of the foreign exchange reserves? “The pula could probably have fallen much, much lower. “If we don't act, we may not be able to support this currency, not even in the long term or in the very short term, and we may have to let it go.”
He continued: “That would be a very painful adjustment for individuals, for corporates, and for the country.”
The suggestion of a market-driven currency can be seen in countries such as South Africa and the United States which operate a floating exchange rate system. Their currencies fluctuate daily in response to economic conditions and investor expectations, without being anchored to a fixed value or basket.
An alternative exchange rate system, according to data extracted from the BoB’s website, could be a managed float which is a “hybrid framework where currency values are primarily determined by market forces, but the central bank intervenes periodically to stabilise excessive fluctuations”.