Of rising prime lending rates, the private sector and FDI
MPHO RABOLOKO | Wednesday September 3, 2025 10:25
On April 1, 2023, the Bank of Botswana liberalised the Prime Lending Rate (PLR), giving commercial banks the freedom to set their own rates. The intention was to enhance competition, improve pricing for borrowers and ensure that lending rates reflect market conditions rather than a uniform central directive.
The PLR is the benchmark rate banks charge their most creditworthy clients and it transmits through the pricing of personal loans, mortgages and business credit. Recently, commercial banks in Botswana have adjusted their PLRs upward, although the magnitude of increases has varied across banks.
As of the second quarter of 2025, all nine commercial banks in Botswana raised their prime lending rates. These changes come at a time when the Bank of Botswana has maintained an accommodative monetary policy stance with the Monetary Policy Rate (MoPR) at 1.9 percent. This divergence between policy intent and market lending conditions reflects structural pressures in the financial system.
Why did banks raise PLRs in 2025?
Three main drivers stand out:
1. Liquidity Constraints in the Banking Sector – Commercial banks have reported heightened liquidity pressures, primarily due to increased government borrowing. Government stepped up domestic borrowing (about P4.6 billion in January 2025), draining funds from the local market. At the same time, uneven liquidity distribution among banks and a reliance on offshore assets worsened the squeeze. Some banks were forced to bid aggressively for deposits, raising wholesale deposit rates and ultimately passing the cost to borrowers.
2. Higher Funding Costs – To secure deposits and wholesale funds, banks paid more, increasing their cost of funds. Those with weaker liquidity positions faced sharper pressures, leading to steeper PLR increases.
3. Regulatory Autonomy Post-Liberalisation – Since the 2023 reform, each bank has had freedom to set its PLR based on its balance sheet, risk appetite and strategic positioning. This explains the varying PLR adjustments across banks. Some banks, such as Absa, raised PLRs more moderately (+75 basis points) to stay competitive while others like BSB, increased them more aggressively (+200 basis points) to manage funding risks.
The broader economic context
The PLR increases come against a weaker real economy. Botswana’s GDP contracted by 3% in 2024 and a further 1.7% in the twelve months to March 2025. Mining contracted sharply, while non-mining sectors remained subdued. This has raised questions about whether market-set PLR is delivering the intended macro outcomes, especially when the economy is already under strain.
Meanwhile, inflation dynamics complicate the picture: • Headline inflation was 1.1% in July 2025, below the 3 – 6% Bank of Botswana objective range. • However, it is projected to average 3.5% in 2025 and 5.9% in 2026, temporarily breaching the upper bound in the second quarter of 2026. • The pressures are mainly supply-driven (exchange rate adjustments, utility tariff increases and import-related costs) rather than demand-driven.
Policy responses from the Bank of Botswana
In response to the prevailing liquidity constraints, the Bank of Botswana has implemented several measures to support market liquidity: • Primary Reserve Requirement cut to 0%, releasing P1.8 billion into the banking system. • Repo maturity extended up to 30 days, allowing banks to borrow from the central bank for up to 30 days instead of 7 days. Gives banks more room to manage their finances, meet withdrawals, and keep lending to businesses and customers without pressure to repay the central bank too quickly. • Encouraging onshoring of foreign funds – by bringing back funds held abroad by local entities (banks, corporations, investors), more capital is available in Botswana’s banking system thereby boosting domestic liquidity. • Foreign exchange trading thresholds raised and margins widened, to promote interbank trading and preserve reserves. • Active consultations with banks to discourage rate hikes inconsistent with the accommodative policy stance.
These interventions have already had some stabilising effect, with evidence of a pause in further PLR hikes and increased uptake of longer-term repos.
Implications for the private sector
Rising lending rates directly increase the cost of borrowing for businesses, particularly micro, small, and medium-sized enterprises (MSMEs) that depend heavily on bank financing. This development may lead to:
• Delays or cancellations of investment plans • Reduced working capital liquidity • Increased financial distress, particularly among highly leveraged firms
Furthermore, higher interest rates discourage risk-taking and entrepreneurship, especially in sectors such as manufacturing, retail, and agribusiness that rely on external financing to scale operations amongst other things.
Implications for Foreign Direct Investment (FDI)
According to the 2024 World Investment Report (WIR), Botswana experienced a significant surge in FDI inflows, which rose to US$4.67 billion in 2024 from US$1.98 billion in 2023, more than doubling year-on-year. One of Government priorities is premised on attracting one hundred-billion-pula worth foreign investment and creation of a one hundred thousand jobs.
The recent hikes in prime lending rates could impact investors, especially those financing projects locally, as higher interest rates erode profit margins and elevate project costs. Botswana’s competitiveness relative to other emerging markets with lower financing costs may be adversely affected. Uncoordinated shifts in credit market conditions signal policy inconsistency and may create uncertainty about the investment climate.
Investors often consider macro-financial stability a critical determinant in location decisions. Furthermore, while higher domestic interest rates can strengthen the local currency, they may also suppress export competitiveness, indirectly affecting export-driven FDI.
The potential impacts are summarised below for ease of reference:
Foreign Direct Investment: Foreign investors often benchmark capital costs. Higher local borrowing costs may make Botswana slightly less attractive compared to neighboring countries with lower rates. Domestic Investment: Limited access to financing for capital-intensive projects can slow domestic investment growth. Higher PLR can be a deterrent for investors seeking local financing for operations, making entry or expansion less attractive. Consumer Spending and Market Demand: Lower domestic demand can reduce expected returns on local investments, which may make certain sectors (retail, real estate, services) less appealing to both domestic and foreign investors. Policy considerations
If liquidity pressures persist, rate hikes might deepen, prolonging the negative impact on private credit growth and FDI inflows. Corporates may become more risk-averse, reducing hiring, investment in machinery, or expansion into new sectors.
In the long-run, the squeeze might encourage policy reforms, enhanced liquidity tools, capital markets development, or incentives for investment, that could help mitigate damage and bolster economic diversification. The divergence between the BoB’s policy rate and commercial lending rates could potentially reflect weaknesses in Botswana’s monetary policy transmission mechanism. Improving the structure and depth of financial markets, particularly bond and interbank markets, would enhance policy effectiveness.
A more transparent and structured dialogue between the BoB and financial institutions can help align market behaviour with policy objectives, especially during periods of liquidity stress. Developing non-bank financial institutions, fintech platforms, and public-private credit guarantee schemes can reduce the private sector's reliance on traditional commercial bank credit. Conclusion
The liberalisation of the prime lending rate has increased competition and pricing flexibility but has also exposed structural weaknesses in Botswana’s financial system. While short-term interventions have stabilised markets, long-term resilience requires broader reforms to improve liquidity flows, strengthen monetary policy transmission, and ensure credit remains affordable to support growth.
The recent increases in Botswana’s prime lending rates, in contrast with the central bank’s accommodative stance, present significant challenges to the country’s private sector and FDI attractiveness. The resultant tightening of credit conditions could undermine growth, private investment, and long-term diversification efforts.
Coordinated policy responses are essential to restore alignment between monetary policy and financial market outcomes, and to safeguard Botswana’s reputation as a stable and competitive investment destination.
Therefore institutions such as Botswana Investment and Trade Centre will continue to proactively track both investor confidence and the country’s competitiveness in light of the current market conditions like the rising prime lending rates, tight liquidity, and global economic shifts through market intelligence platforms to capture investor sentiments and identify emerging concerns before they affect project viability; strengthening aftercare and facilitation to troubleshoot operational or financial challenges; ensuring tax incentives, regulatory efficiency, trade facilitation offset hire borrowing costs; and continue to promote alternative financing through capital markets, private equity firms and venture capital. (Botswana Investment and Trade Centre Business Intelligence Unit)
*Raboloko is Manager, Advocacy at the Botswana Investment and Trade Centre