Botswana will permit currency to drop more quickly when the economy is struggling

Botswana’s economy is struggling due to a protracted decline in the world diamond market, therefore the country said Thursday it would permit its pula currency to fall by 2.76% over the next year—a quicker rate than previously declared.

With a creeping band exchange rate regime, the pula is tied to a basket of currencies, including the South African rand, and the country in Southern Africa examines its exchange rate twice a year, changing it either higher or downward.

Long regarded as one of Africa’s economic success stories is Botswana. The decline in the diamond market, however, has put that to the test. It led to a 3% decline in the GDP last year and may cause another one this year.

According to Sayed Timuno, a finance ministry official, “the stability of the exchange rate mechanism has the potential to be compromised by the recent decline in foreign exchange reserves, which has been made worse by the current macroeconomic environment,” he said during a press conference.

Timuno reported that the pula’s yearly rate of depreciation was revised raised by President Duma Boko, from 1.51% in December to 2.76%.

“This is intended to make domestic goods and services more competitive.” The pula’s exchange rate would be reviewed again at the end of the year, he added, adding that this will also help preserve foreign exchange reserves and control demand for foreign exchange.

Botswana has always maintained foreign reserves that cover more than ten months’ worth of imports, but since 2018, reserves have been dropping, reaching a record low of 5.2 months in February of this year, according to a June BMI research note.

Although reserves have decreased, BMI researchers noted Botswana has not recently experienced a severe foreign exchange shortfall similar to that which has occurred in other African nations like Nigeria and Angola.