The market dislocation and the price of money
Mbongeni Mguni | Thursday September 18, 2025 09:06
The price of money in the country has become a highly changeable, moving target that has pinched the pockets of ordinary households.
Prime lending rates, the interest rates banks charge their best customers, uncoupled from the Bank of Botswana anchor rate early in May, marking the first time banks exercised their powers since the country’s interest rate regime was liberalised in April 2023. From a prime rate of 6.01%, all banks have added up to 100 basis points and more since May, although in recent months there has been a pause.
The driving factor behind the move was the liquidity crunch, with the prolonged diamond downturn drying government’s coffers, forcing the state to dip more into local borrowing for its needs and thus reducing the amounts available for other borrowers.
Banks found themselves competing more aggressively to attract and retain the deposits needed for loans and so, in raising their deposit rates, they also hiked their lending interest rates to try and cover as much of the cost as possible.
The traditional hand-in-glove movement of the BoB’s anchor rate and the rates charged by commercial banks, suffered a disconnect or dislocation. The central bank maintained an anchor rate of 1.9% under an accommodative monetary policy stance meant to encourage lending and growth, but the banks found that the liquidity crunch meant actual rates had to be much higher to attract and retain deposits.
The price of money increased and a recently released report by the BoB indicates that certain idiosyncrasies within local banks worsened the situation.
“Commercial banks’ reliance on wholesale deposits and short-term funding exposes them to funding liquidity risks,” BoB researchers said. “The wholesale deposits in Botswana are largely short term, with a high turn-over among corporate and non-bank financial institution depositors. “This dynamic leads banks to offer competitive rates to attract and retain these deposits, especially when liquidity conditions are tight, or market uncertainty rises.”
Essentially, local banks are heavily reliant on deposits from institutions, companies and government but these are on a short-term basis and have high turn-over rates. This increases the intensity of the fight for deposits, particularly during liquidity crunches.
As happened in the 2014-2015 liquidity crunch, local banks have publicly stepped up their drive for deposits, with several launching products offering higher rates, tax incentives and even cash prizes.
The competition continues to heat up, with the country’s largest bank, First National Bank Botswana, this week announcing that its corporate deposits fell by 30% in the year to June 2025.
“One of the issues highlighted was the liquidity challenge and there was a decline in the corporate side of deposits which are very price sensitive,” said FNBB treasurer, Tshepiso Mokgethi-Magapa, at the bank’s full year results briefing on Wednesday. “Our liquidity coverage ratio however still remains way above 100% and from a funding perspective, we remain well funded.”
While the BoB has its accommodative monetary policy based on the inflation outlook and the need to support growth, the liquidity crunch has dislocated the pricing of money in the market. In fact, rather than follow the accommodative stance, most banks have not only hiked their prime lending rates, but become more circumspect in their lending, carefully selecting their borrowers while hiking the rates on new and existing loans.
“The credit appetite will be affected by what’s going on in the market and we will lend selectively to ensure that the balance sheet is grown responsibly,” said FNBB acting chief finance officer, Orapeleng Senwelo.
The central bank has a different view of the slowdown in lending, linking this largely to the stiffer economic conditions.
“Developments on credit growth yielded a downward trend, despite an accommodative monetary policy stance, possibly reflecting the timid demand for credit in an environment of tepid economic activity,” the recent report reads.
In previous times, the Bank of Botswana used to have an anchor rate known as the bank rate which would roughly determine the price of money in the local market. Banks would set their interest rates on loans and deposits according to this central anchor as it was essentially the price at which they themselves would access funds from the BoB when needed.
The actual interest rates charged by banks on their loans and deposits fluctuated depending on the category of customer, type of product and duration of the arrangement. The rates also fluctuated amongst the banks themselves in response to factors such as their funding levels and competition.
However, generally, the banks all maintained the same prime lending rate, with certain categories of customers and credit products attracting higher rates. The same obtained with deposits, with the premium wholesale clients enjoying the higher rates.
The market dislocation on the pricing of money has not been limited to mainstream deposits and loans however. Analysts at Ninety One recently highlighted a growing disconnect between the “prices” government is willing to pay at the monthly auction of bonds and treasury bills and the returns bidders want.
Under the P55 billion programme, the BoB, raises short and long term debt for government in the capital market by offering bonds and treasury bills that bidders – exclusively banks – make offers for based on the returns on offer.
While rates have been rising here as well, since last June, all of the monthly auctions have failed to meet their targets due to a mismatch between returns offered and desired, as well as the declining availability of liquidity in the market.
Ninety One head of investments, Alphonse Ndzinge, described the challenge.
“There's been a little bit of a dislocation of what the market wants to price bonds at, or the yields they want, and what the issuer, or the primary issuer being the government, is willing to pay,” he said at a recent market update. “So what we've recently noticed is there's an emerging dislocation or divergence between the primary market and the secondary market for government bonds and it's quite wide, which is something that we are paying particular attention to. “For instance, I'll give you a bond, for example, the 2029 where we have it on a yield of 8.4 percent. “There's trades in the market now at 12.4 percent and that's about a 400-basis points differential, which for bonds is a significant amount.”
Government is relying on its domestic borrowing to finance the bulk of the P22.12 billion deficit for the 2025-26 financial year. However, as the dislocation in the pricing of money continues, the immediate options for government involve either cutting spending, moving closer to the market’s demands or resorting to more – and riskier – hard currency external debt.
Ndzinge said there was need for greater engagements between government and the market on the issue.
“It's important in this environment where a lot of the funding and support for economic activity is going to be coming from the bond market,” he said.
Ideally, government would want more longer-term funding at lower rates from the local market, a situation that would allow it to better manage its cash flow needs while waiting for improvement in the fiscal situation.
Instead, the lion’s share of the funding government has been securing at the monthly auctions has been short term and coming in at increasingly higher costs.
The liquidity crunch has upended the market bringing misery to ordinary households and the government. Banks are not “laughing all the way” to themselves either, as the crunch has slowed lending and increased the cost of deposits, while the economic contraction is raising impairments amongst customers.
All sectors are hoping the new energy pumped into transformation by both government and the private sector, reignites economic engines and initiates new activity towards a more sustainable, diamond-proof future.