Mmegi

BoB pushes banks as forex reserves tighten

Taking action: Masalila PIC: MORERI SEJAKGOMO
Taking action: Masalila PIC: MORERI SEJAKGOMO

The Bank of Botswana (BoB) has made it more expensive for banks to access foreign currency from the central bank, pushing them to instead trade amongst themselves, as the prolonged downturn in diamonds weighs on the country’s reserves.

According to the last official figures, the country’s foreign reserves managed by the BoB declined to P56.1 billion in October 2024 from P64.9 billion in October 2023, due mainly to the decline in rough diamond sales.

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, triggering the BoB’s latest actions.

The central bank increased its trading margin used for foreign exchange transactions to banks, from 0.125 percent to 0.5 percent, to push the banks to trade amongst each other and with firms that are holding foreign currency.

“The simple reason is that we are importing more than we are exporting,” acting governor Kealeboga Masalila told BusinessWeek at a media briefing. “It is evident that banks themselves have substantial foreign currency holdings and related to that there are firms that earn and hold foreign currency. “This means that there is scope to make it more expensive or undesirable for the banks to come to the central bank looking for foreign currency and instead look for that in the market.”

Separately, BusinessWeek has established that whilst the BoB has long been advocating for the growth of the interbank market, generally, banks prefer to source their foreign currency requirements from the central bank.

The interbank market theoretically involves trades between banks and firms holding foreign exchange inventories with those seeking them, reducing the recourse to the central bank.

However, traditionally, banks prefer the BoB as it is not only a cheaper source of foreign currency but also bears a statutory mandate to make these funds available on request by banks.

The central bank is scheduled to meet with banks soon to appraise them on the latest decision, amidst concerns that the decision will increase their costs of accessing foreign exchange.

Masalila said the BoB was alive to the concerns.

“There are implications that we hopefully will manage because it (this decision) means banks can translate or transfer that cost to consumers,” he told Mmegi. “However, there’s pressure on the official foreign exchange reserves and it also becomes expensive even to us, which is a manifestation of the demand and supply situation. “It has become expensive for everyone because there’s less of it available.”

Nenguba Chakalisa, deputy director of financial markets, told BusinessWeek that within the broader financial market, some banks and firms hold large amounts of foreign exchange.

“In addition, the rationale for increasing the trading margin is that it can provide revenue generation for market participants like banks and others. “It also incentivises participants in the foreign exchange market which is the interbank market. “The wider margin also helps manage the demand and supply of foreign currency by discouraging speculative trading activities and ensuring that only genuine trades are taking place.”

The decision on foreign exchange sales is the latest intervention by the country’s central bank in response to declining rough diamond sales. In December, the BoB lowered the primary reserve requirement for banks in order to ease a liquidity crunch in the sector caused by lower government revenues and spending.

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