Botswana’s Vice President and Minister of Finance, Ndaba Gaolathe, has revealed that the government’s recent, controversial adjustments to the Pula exchange rate framework were driven by a single, pressing concern: the Pula had become overvalued, posing a growing threat to the country’s economic stability.
Addressing Parliament on Tuesday, the Vice President explained that a joint mid-year assessment by the Ministry of Finance and the Bank of Botswana found that the local currency was between 5% and 10% stronger than it should be, relative to trading partners. This overvaluation made Botswana’s exports more expensive and imports artificially cheap, undermining competitiveness and rapidly draining the country’s foreign reserves.
“Keeping the Pula overvalued was eating into our savings,” he told MPs. “Eventually, those reserves would run out, and we would be unable to pay for essentials like fuel, food, and medicine.”
Why an Overvalued Pula Became a Problem
While Botswana has long maintained a crawling peg exchange rate to ensure gradual and predictable changes to the Pula’s value, the Vice President said this system depends heavily on strong foreign exchange inflows. In the past, booming diamond exports masked the overvaluation by propping up reserves.
But that dynamic has changed.
“Diamond markets have weakened. Prices have fallen. Revenues have dropped. We no longer have the cushion we once did,” he said.
To prevent a depletion of foreign reserves—which would threaten the country’s ability to pay for critical imports—the government acted preemptively by adjusting key parameters of the exchange rate framework.
The Specific Changes
The most significant change was increasing the annual crawl rate from -1.51% to -2.76%, allowing the Pula to gradually depreciate and realign with market fundamentals. This should, over time, correct the overvaluation and improve the global competitiveness of Botswana’s goods and services.
Other adjustments included widening the trading margins between the Bank of Botswana and commercial banks from ±0.5% to ±7.5%, encouraging more market-based foreign exchange transactions while also retaining the Pula currency basket at 50% South African rand and 50% IMF Special Drawing Rights, to guard against volatility and maintain competitiveness in key markets.
The impact has been immediate. Foreign currency purchases by commercial banks from the Bank of Botswana have dropped from P1.2 billion a week to P290 million, reducing pressure on the official reserves.
While the depreciation of the Pula may raise the cost of imports, the Gaolathe stressed that the policy was carefully calibrated to keep inflation within the 3–6% target range. He also cautioned that price increases by some businesses were not justified, and thanked the Competition and Consumer Authority for acting against opportunistic behaviour.