Pula reserves squeezed

Good morning! Let’s get into it

What the Reports are Saying

1. Foreign Exchange Reserves are Declining

   • Botswana’s reserves (including the Pula Fund and other FX reserves) have been falling significantly. (Fitch Solutions)

   • For example, import cover dropped to around 5.2 months in February 2025, from well above 10 months in earlier years. (Fitch Solutions)

2. Economic Pressures from Diamonds & Imports

   • Diamond export revenues have been weaker, partly because global demand is falling, and lab-grown diamonds are competing. (Fitch Solutions)

   • At the same time, Botswana is import-dependent for many goods; so when the Pula weakens, import costs go up, putting pressure on prices and inflation. (Reuters)

3. Adjustment of the Pula’s Exchange Rate Mechanism

   • Botswana uses a crawling peg/crawling band system. In simple terms, the Pula is tied to a “basket” of currencies (partly South African Rand and partly other currencies via SDRs), but allowed to slowly adjust (depreciate or appreciate) over time. (Fitch Solutions)

   • On 10 July 2025, the government officially increased the rate of depreciation (crawl rate) of the Pula to −2.76% per year, up from −1.51%. This means the Pula will be allowed to weaken faster than before. (Reuters)

4. Wider Trading Margins & Policy Tweaks

   • Alongside the faster depreciation, the Bank of Botswana widened the trading margins for foreign currency (i.e. the band in which banks can buy/sell FX) and adjusted thresholds/conditions for how foreign currency is accessed. (BW TechZone | Home of Botswana tech)

   • These actions are meant to reduce pressure on the reserves (because more FX demand is met via market mechanisms, not government intervention), and also help maintain competitiveness of Botswana’s exports. (Reuters)

5. Inflation & Cost of Living Risks

   • A weaker Pula means imports cost more. For households, that means food, fuel, certain goods will get more expensive. (Allan Gray)

   • Inflation has actually been low recently, sometimes below the Bank’s target range. But imported inflation and pass-through from higher exchange rates pose a risk. (Allan Gray)

Why These Moves Make Sense (From the Government’s / Central Bank’s View)

To understand whether this is good or bad (or mixed), here are the trade-offs:

• Botswana needs to preserve its foreign exchange reserves. If reserves get too low, the country might not be able to meet obligations (imports, servicing debt in foreign currency, etc.).

• Allowing a gradually weaker Pula helps by reducing the drain of having to support a strong currency via FX interventions.

• It also helps exports (goods or services priced in foreign currency become cheaper for foreigners), which can help diversify beyond diamonds and compensate for lost revenue.

• But there are risks: inflation, knock-on effects on the cost of living, pressure on people who depend on imports (fuel, medicines, etc.).

What It Means for Ordinary People

• Prices of imported goods are likely to go up. This can include food items that are not produced locally, imported components, and so on.

• Inflation may creep up even if it has been low so far. Things like fuel, transport, and consumer goods will feel the pinch.

• Wages and savings may lose value in real terms, especially for those not seeing corresponding increases.

• But there may also be opportunities: if you are producing something locally that competes with imports, you might get demand. Exporters could benefit if they are selling abroad.

What Are the Big Unknowns & Risks

• How far the depreciation (weakening) of the Pula will go. Some analysts believe that further downward adjustment is possible if reserves continue falling. (Fitch Solutions)

• Whether inflation will stay manageable or spiral. If people expect prices to keep rising, that can fuel inflation‐expectation dynamics.

• How budget/fiscal policy will respond. If the government increases spending, borrows more, or doesn’t manage the fiscal side carefully, that could worsen pressures.

• External shocks: global commodity prices, diamond demand, exchange rates of key currencies (like the Rand, USD) will all affect outcomes.

Bottom Line & What to Watch

• The Pula is being allowed to slowly weaken faster than before, because Botswana’s foreign reserves are under pressure, and exports (especially diamonds) are down.

• It’s a deliberate policy move — not a sudden collapse — but it has real consequences for the cost of living and inflation.

• For most people, the short-term effects will likely be more expensive imports and higher prices for certain items. Long-term benefits depend on diversification, stronger exports, and careful policy.

Key Sources

1. Reuters — Botswana to allow currency to depreciate quicker with economy under pressure (10 July 2025)

   • Announces that Botswana will allow its Pula to depreciate by 2.76% over the next year, up from 1.51% previously. (Reuters)

   • Notes that foreign exchange reserves have fallen (import cover declined to ~5.2 months in February 2025). (Reuters)

   • Mentions the downturn in the global diamond market and GDP contraction (~3%) last year. (Reuters)

2. Bank of Botswana / Botswana Finance Ministry — Pula Exchange Rate Adjustment Press Release (10 July 2025)

   • Official press release detailing the change in the crawl rate (rate of allowed depreciation) and related policy adjustments. (Bank of Botswana)

3. Mmegi (local Botswana publication) — “Pula adjusted to support exports, protect reserves” (11 July 2025)

   • More local detail: how trading margins around the central rate were widened, what the thresholds are for banks to access foreign currency, and motives for preserving FX reserves. (Mmegi Online)

4. Central Banking — Botswana increases pula crawl rate to defend reserves

   • Confirms change in crawl rate, context of foreign exchange reserves under pressure, etc. (Central Banking)

5. Business Insider Africa — “Africa’s largest diamond producer to let currency depreciate quicker”

   • Reiterates many of the points from Reuters, including the shift to 2.76%, diamond market slump, etc. (Business Insider Africa)

6. Reuters — Botswana central bank holds rate for sixth meeting as inflationary risks weigh (21 August 2025)

   • Offers data on inflation, central bank policy-rate decisions, and the effects of the widened trading margin. (Reuters)

7. Reuters — Botswana slashes growth forecast amid prolonged diamond market downturn (2 June 2025)

   • Explains broader economic context: how important diamonds are in revenue & foreign exchange, and how the slowing diamond market is hurting forecast and reserves. (Reuters)