Botswana’s government announced Thursday that it will accelerate the depreciation of its pula currency by 2.76% over the next year.
This move comes as the nation grapples with economic pressures stemming from a prolonged downturn in the global diamond market.
Botswana, often hailed as an African economic success story, has seen its stability tested by the diamond market slump.
This downturn led to a 3% contraction in its gross domestic product last year, with a potential for further contraction this year.
The country typically reviews its exchange rate twice annually, adjusting the pula through a crawling band exchange rate regime tied to a basket of currencies, including the South African rand.
Finance Ministry official Sayed Timuno stated that the recent decline in foreign exchange reserves, exacerbated by the current macroeconomic climate, could “compromise the stability of the exchange rate mechanism.”
President Duma Boko approved this increased depreciation rate, up from 1.51% set in December. Timuno explained that the accelerated depreciation aims to enhance the competitiveness of domestic goods and services.
It should also help moderate demand for foreign exchange and support the preservation of foreign exchange reserves. Another review of the pula’s exchange rate is anticipated by the end of the year.
Botswana has historically maintained foreign reserves equivalent to over 10 months of import cover.
However, these reserves have been declining since 2018, hitting a record low of 5.2 months in February this year, according to a BMI research note from June.
Despite this decline, BMI analysts noted that Botswana hasn’t experienced the severe foreign exchange shortages seen in other African nations like Nigeria and Angola in recent years.