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Botswana’s central bank says planned electricity tariff adjustments and public transport fare increases are expected to add upward pressure on inflation in 2026, even as the economy emerges from a year of contraction and subdued price growth.
In its 2026 Monetary Policy Statement, the Bank of Botswana said inflation is projected to remain within the medium-term objective range of 3–6%, but risks are tilted to the upside, partly due to expected administered price increases, including electricity tariffs and public transport fares.
The warning comes after a year in which inflation averaged 2.7% in 2025, below the lower bound of the Bank’s target range for much of the year before returning within the band from September. The subdued outcome was supported by lower fuel prices and earlier reductions in water and electricity tariffs for low-consumption households, alongside weak domestic demand amid recessionary conditions.
The economy is estimated to have contracted by 0.4% in 2025, an improvement from the 2.8% decline recorded in 2024, but still reflective of ongoing weakness in the diamond sector and modest growth in non-mining activities.
Monetary policy remained broadly accommodative for most of 2025. The Bank held the Monetary Policy Rate (MoPR) at 1.95% through the first four Monetary Policy Committee meetings of the year, before raising it by 160 basis points to 3.5% in October. The central bank described the move as a recalibration rather than a tightening, aimed at improving liquidity management, strengthening policy transmission and supporting foreign exchange reserves. Commercial banks were directed not to raise their prime lending rates further.
Liquidity conditions were strained during the year as weaker diamond revenues reduced fiscal injections into the banking system. Average prime lending rates rose from 6.01% in December 2024 to 7.19% in December 2025, while annual commercial bank credit growth slowed to 3.3% from 6.5% a year earlier.
Externally, foreign exchange reserves declined to an estimated P47.4 billion in December 2025, equivalent to six months of import cover, down significantly from levels seen a decade earlier. Exchange rate parameters were adjusted in July 2025, including an increase in the annual rate of crawl to 2.76% and wider trading margins, contributing to a 1.1% depreciation in the real effective exchange rate.
On the fiscal front, the 2025/26 budget deficit was revised upward to P25.5 billion, or 9.3% of GDP, amid lower mineral revenues. Total government debt, including guarantees, stood at an estimated P90 billion (33% of GDP) as of December 2025 and is projected to rise further.
Despite the challenging environment, the financial system remains sound, with non-performing loans at 3.3% in December 2025 and capital ratios above prudential thresholds.
For 2026, however, the central bank cautions that while inflation is expected to remain within target, upward adjustments to electricity tariffs, public transport fares and other administered prices could test price stability, particularly in a context of fragile growth and elevated unemployment.