Besides tightening the budget, the diamond downturn is squeezing foreign exchange reserves and could soon result in higher charges for businesses and individuals seeking hard currencies. The Bank of Botswana has asked banks to dig more into their own sources and reduce their reliance on the official reserves, writes MBONGENI MGUNI
Acting governor of the Bank of Botswana (BoB), Kealeboga Masalila, explains that while foreign currency exchange seems like a matter for major firms and entities, many of us interact with it in one way or the other, especially in this modern, Internet-connected world.
“To support you as you subscribe to Netflix and as with firms, oil importing companies and others, the banks come to the BoB and say ‘my clients need foreign currency’ and we are obliged to provide that.
“At the moment, we have a significant decrease in the official foreign exchange reserves and the simple reason is that we are importing more than we are exporting.”
Masalila was speaking on Tuesday at an emergency media briefing called to clarify the December 31 decisions around the foreign exchange policy to be pursued in 2025. Part of the decisions include increasing trading margins around foreign exchange sales by the central bank to local banks.
The central bank is moving to dissuade banks from solely relying on it for their foreign currency needs and rather trading amongst themselves. The BoB has long sought the establishment of a vibrant interbank market where individual banks trade capital, including forex, amongst themselves, setting benchmarks and standardised rates, rather than frequently resorting to the central bank for their needs.
The downturn in diamonds seen since the third quarter of 2023, has reverberated across the economy, tightening the budget and squeezing liquidity in the banking sector. Government spending, which is a major driver of activity in the economy and liquidity in the banking sector, has been constrained, as has another major player, Debswana.
Besides this, the level of foreign exchange reserves has generally been declining over the years as mineral revenues have broadly weakened. The diamond downturn sharpened this decline, with the foreign exchange reserves falling from an import cover of 9.2 months in July 2023 – the last month before the diamond downturn began – to the 7.1 months as at the last available figures.
The BoB, which is statutorily the custodian of the reserves, is required to keep a minimum import cover of six months, which sometimes involves moving funds from the long-term Pula Fund to the more short-term Liquidity Portfolio, both components of the foreign exchange reserves.
In absolute terms, the foreign exchange reserves fell from P70.2 billion in July 2023 to P56.1 billion as at October last year. In October, the Pula Fund fell from P44.6 billion to P39.5 billion presumably due to drawdowns to the Liquidity Portfolio to support imports and other external payments.
The declining reserves are yet another symptom of the diamond downturn and with a recovery in the shiny stones yet to firm up, the central bank is taking action.
Masalila told Mmegi that while the official foreign exchange reserves were in decline, there were large inventories within the economy that banks had access to.
“It is evident that banks themselves have substantial foreign exchange holdings and related to that, there are firms that earn and hold foreign currency.
“Therefore, it means that there is scope to make it more expensive or undesirable for the banks to come to the BoB looking for foreign currency and rather look to the market or firms to say they need that.
“This would also reduce pressure on the official foreign exchange reserves.”
Traditionally, banks prefer the BoB as it is not only a cheaper source of foreign currency but also has bears a statutory mandate to make these funds available on request by banks.
The move would also incentivise the creation of an interbank market as participating banks and firms stand to earn revenues in their trades, while also discouraging speculative foreign currency trades.
The central bank however acknowledges that there are potential disadvantages to the new policy move.
“There are implications that we hopefully will manage because it (this decision) means banks can translate or transfer that cost to consumers,” Masalila 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.”
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.
Meanwhile, ordinary consumers could find themselves being levied more to access foreign currency as the interbank system develops and stabilises, particularly because the local banking sector is divided between the Big Four and the rest of the field.
The diamond downturn is forcing the fast-tracking of new efficiencies in the market.