Last week, the Bank of Botswana adjusted the exchange rate policy parameters, increasing the downward rate of crawl and widening the foreign currency trading margins while maintaining the currency basket weights.
Why were these changes made by the apex bank, and what do they mean for the everyday Motswana and business?
Bose Mathanjane, a finance professional with 8 years of experience in financial markets analysis, breaks down and provides context on the developments.
The recent adjustments to Botswana's foreign exchange policy, effective July 11, 2025, represent a strategic shift by the Ministry of Finance and the Bank of Botswana to bolster the nation's economic resilience amidst a challenging global and domestic landscape. These changes, while seemingly technical, will have tangible effects on households, businesses, and the broader economic activity in Botswana.
Understanding the Policy Changes in Layman's Terms
At the heart of Botswana's exchange rate policy is a "crawling peg" system. Imagine the Pula (Botswana's currency) as being tied to a basket of other major currencies, like the South African Rand, the US Dollar, the Euro, the Japanese Yen, and the Chinese Renminbi. This peg isn't static; it "crawls" or adjusts slightly over time to account for differences in inflation between Botswana and its trading partners. The goal is to keep Botswana's goods and services competitively priced on the international market.
The recent adjustments involve three key areas:
- Increased Downward Rate of Crawl: Previously, the Pula was set to depreciate at an annual rate of 1.51% against its currency basket. This has now been increased to 2.76%. In simpler terms, the Pula will weaken a bit faster against other currencies. Think of it like this: if you're trying to sell a product, and your currency gets slightly cheaper relative to others, your product effectively becomes cheaper for international buyers.
- Wider Trading Margins: The Bank of Botswana used to buy and sell foreign currency from commercial banks within a narrow band of ±0.5% around the central exchange rate. This margin has been significantly widened to ±7.5%. This means there's a much larger allowable difference between the price at which the Bank buys foreign currency and the price at which it sells it. Additionally, the minimum amount for foreign currency trading with commercial banks has been raised from USD1 million to USD5 million. This encourages commercial banks to trade more among themselves rather than relying solely on the central bank for foreign exchange.
- Maintained Currency Basket Weights: The composition of the currency basket remains unchanged, with 50% weighted towards the South African Rand and 50% towards the IMF's Special Drawing Rights (SDR). This ensures stability against individual currencies and maintains competitiveness, especially with South Africa, a key trading partner.
Why These Changes Now? The Economic Context
Botswana is facing significant economic headwinds. The economy contracted in both 2024 and 2025. A major factor is the sharp decline in diamond mining output, which historically has been the backbone of the economy. Coupled with low growth in other sectors, this highlights Botswana's continued dependence on mining and a lack of economic diversification. Consequently, official foreign exchange reserves have decreased substantially due to lower export earnings, while import demand remains high. These policy adjustments are a direct response to these challenges, aiming to boost the competitiveness of domestic industries, promote economic diversification, and safeguard the nation's foreign currency reserves.
Impact on Households
For the average household in Botswana, these changes will likely manifest in several ways:
- Cost of Imported Goods: With the Pula depreciating at a faster rate, imported goods will become more expensive. This includes everything from electronics and vehicles to certain food items and consumer durables. Households may find their purchasing power for these items reduced. For example, a car imported from Japan will now cost more Pula than before the adjustment.
- Inflationary Pressures: The increased cost of imports can contribute to inflationary pressures. Businesses that rely on imported raw materials or components will pass on these higher costs to consumers, potentially leading to a general increase in prices for goods and services within Botswana. The Bank of Botswana aims to maintain inflation within its 3-6% objective range, but this will require careful monitoring and potentially other policy interventions.
- Encouragement of Local Consumption: As imports become pricier, there's an inherent incentive for households to opt for locally produced goods and services. This could be a positive outcome, supporting local businesses and industries. For instance, if imported milk becomes significantly more expensive, consumers might shift to locally produced dairy products.
- Impact on Travel and Overseas Spending: For those planning international travel or sending money overseas, the weaker Pula means that more Pula will be needed to acquire foreign currency. This will make overseas education, vacations, and international remittances more expensive.
Impact on Businesses
The adjustments have a multifaceted impact on businesses, depending on their nature:
- Export-Oriented Businesses: This is where the policy is designed to have a significant positive impact. A weaker Pula makes Botswana's exports cheaper and more competitive on the international market. For example, a local textile manufacturer exporting to Europe will find their products more attractive to European buyers, as the same Euro will now buy more Pula, making the Pula-denominated price effectively lower. This can lead to increased sales, production, and potentially job creation in export sectors.
- Import-Oriented Businesses: Businesses that heavily rely on imported raw materials, machinery, or finished goods will face higher costs. This could squeeze profit margins or necessitate price increases for their products, potentially making them less competitive domestically unless they can find local alternatives. For instance, a construction company importing steel will see its material costs rise.
- Businesses Aiming for Diversification: The policy aims to enhance the competitiveness of domestic industries beyond mining. This provides an opportunity for businesses in sectors like tourism, agriculture, and manufacturing to expand their market share both domestically and internationally. The wider trading margins also aim to promote an interbank foreign exchange market, reducing commercial banks' reliance on the central bank for foreign currency. This could lead to more efficient foreign currency transactions for businesses, though potentially with more volatile short-term rates.
- Access to Foreign Currency: While the Bank of Botswana will still provide foreign currency, the increased threshold for direct trading with commercial banks (from USD1 million to USD5 million) means that smaller businesses or those with less frequent large transactions will primarily rely on commercial banks for their foreign exchange needs. This could lead to varying rates and availability depending on the commercial bank. The intention is to foster a more robust private foreign exchange market.
Impact on Economic Activity
The broader economic implications are significant:
- Boosting Economic Growth: The primary goal of these adjustments is to support economic growth by enhancing the competitiveness of domestic producers and promoting diversification away from mining. By making exports more attractive and potentially encouraging import substitution, the policy aims to stimulate local production, investment, and employment.
- Preserving Foreign Exchange Reserves: The decline in foreign exchange reserves is a critical concern. By making imports more expensive, the policy can help curb import demand, thereby conserving valuable foreign currency. The wider trading margins also contribute to this by moderating commercial banks' reliance on the central bank for foreign currency, encouraging more efficient use and development of an interbank market. This is crucial for maintaining economic stability and the Pula's convertibility.
- Inflation Management: While a weaker Pula can lead to imported inflation, the Bank of Botswana's commitment to maintaining inflation within the 3-6% range suggests that it will be closely monitored. Other monetary policy tools may be employed if inflation risks become excessive.
- Structural Economic Transformation: Ultimately, these policy changes are part of a broader strategy to address the "structural issues and policy implementation constraints that hinder productivity, accelerated economic diversification and desirable higher rates of inclusive economic growth". The success of these exchange rate adjustments will depend on complementary government policies and the private sector's response to truly diversify the economy.
Examples of Countries with Similar Exchange Rate Adjustments and Their Experiences
Many countries have used exchange rate adjustments as a tool to navigate economic challenges, with varying degrees of success.
Egypt (2016): Facing a severe foreign currency crisis, a significant decline in tourism, and dwindling foreign reserves, Egypt moved to a floating exchange rate regime. The Egyptian pound lost about half its value against the US dollar. While initially leading to a surge in inflation and hardship for households due to more expensive imports, the depreciation boosted exports, attracted foreign investment, and eventually stabilized the economy. However, the social cost was high, requiring significant social safety nets. (Source: The World Bank, International Monetary Fund reports on Egypt's economic reforms post-2016).
Turkey (Post-2018): Turkey has experienced repeated periods of significant Lira depreciation, driven by concerns about economic management, high inflation, and declining foreign reserves. The impact on households has been severe, with rising living costs, especially for imported goods, and erosion of purchasing power. For businesses, exporters have gained a competitive edge, but those reliant on imports have struggled. The ongoing volatility has made long-term planning difficult and deterred some foreign investment. (Source: IMF Country Reports, various academic papers on Turkish economic policy).
Vietnam (Past "Crawling Peg" Adjustments): Vietnam has historically managed its exchange rate through a "crawling peg" similar to Botswana's, often adjusting its reference rate to manage trade balances and inflation. When the Vietnamese Dong was allowed to depreciate, it generally supported export-led growth by making Vietnamese goods more competitive. However, managing imported inflation was a constant challenge, and the success depended heavily on the country's ability to attract foreign direct investment and develop domestic production capabilities to reduce reliance on imports. (Source: ADB reports on Vietnam's exchange rate policy, academic research on Southeast Asian economies).
Zambia (Recent Devaluations): Zambia has seen its Kwacha depreciate significantly in recent years due to factors like declining copper prices, high national debt, and limited foreign exchange inflows. This has led to increased cost of living for households, particularly for imported food and fuel. Businesses importing goods or raw materials have faced higher operational costs. While a weaker currency can make exports more attractive, Zambia's limited export diversification has meant that the benefits have been somewhat contained, while the negative impact on inflation and debt servicing has been pronounced. (Source: IMF Country Reports on Zambia, Bank of Zambia publications).
Academic References and Theoretical Underpinnings
The rationale behind Botswana's exchange rate adjustments is rooted in established economic theories:
- Purchasing Power Parity (PPP): The concept of the "rate of crawl" directly relates to PPP, which suggests that exchange rates should adjust to equalize the prices of a basket of goods and services between countries. By approximating the inflation differential , the policy aims to maintain the international competitiveness of Botswana's goods and services. (See: Cassel, G. (1922).
- Elasticities Approach to the Balance of Payments: The expectation that a depreciation (or faster crawl) will improve the current account (by making exports cheaper and imports more expensive) is based on the elasticities approach. This theory posits that if the sum of the elasticity of demand for exports and the elasticity of demand for imports (in absolute terms) is greater than one (Marshall-Lerner condition), then a depreciation will improve the trade balance. (See: Marshall, A. (1923). Money, Credit & Commerce. Macmillan; Lerner, A. P. (1944). The Economics of Control: Principles of Welfare Economics. Macmillan).
- Sterilization and Reserve Management: The widening of trading margins and the increased threshold for foreign currency trading with commercial banks are mechanisms for improving foreign exchange reserve management. By encouraging an interbank market, the central bank reduces its direct intervention in the market, thereby conserving reserves. This relates to the literature on central bank operations and the management of foreign exchange liquidity. (See: Obstfeld, M., & Rogoff, K. (1996).
- Dutch Disease and Economic Diversification: The current economic environment in Botswana, characterized by heavy reliance on mining (diamonds) and low growth in non-mining sectors, points to elements of the "Dutch Disease." This phenomenon describes how the booming of one sector (often natural resources) can lead to the appreciation of the domestic currency, making other sectors less competitive and hindering diversification. The exchange rate adjustment aims to counter this by enhancing the competitiveness of non-mining sectors. (See: Corden, W. M., & Neary, J. P. (1982).
Conclusion
The Bank of Botswana's recent foreign exchange policy adjustments are a proactive and necessary response to Botswana's current economic realities, particularly the decline in mining revenue and the need for greater economic diversification. While a faster depreciation of the Pula will likely lead to higher costs for imported goods for households and businesses that rely on imports, the overarching goal is to stimulate export-oriented industries, encourage local production, and safeguard the nation's vital foreign exchange reserves.
The success of these measures hinges not only on the technical aspects of exchange rate management but also on complementary fiscal policies, structural reforms to improve productivity, and a concerted effort from all stakeholders – government, private sector, and households – to foster a more diversified and resilient economy. The experiences of other countries demonstrate that while exchange rate adjustments can be powerful tools for economic rebalancing, they often come with short-term challenges and require careful monitoring and adaptive policymaking to achieve long-term benefits. Botswana's ability to leverage these changes to foster sustainable growth and reduce its reliance on a single sector will be the true measure of its success.