In a decisive move to address declining foreign exchange reserves, the Bank of Botswana (BoB) has revised the Pula Exchange Rate Framework, widening the trading margin between the buy and sell rates for currencies quoted by BoB.ย
This policy shift aims to foster the development of an inter-bank foreign exchange market, reducing commercial banksโ reliance on the central bank for foreign currency transactions.
The change comes as Botswana faces a steep drop in US dollar earnings from diamond sales, its primary export commodity. Structural challenges in the global diamond market have left the countryโs economy vulnerable, significantly affecting foreign exchange inflows.
Acting BoB Governor Kealeboga Masalila highlighted the trade imbalance as a key factor behind the dwindling reserves. As of September 2024, Botswanaโs foreign exchange reserves stood at P52.8 billion, a sharp 17.4 percent decline from P63.9 billion recorded in September 2023.
โWe are buying more abroad than we are sending abroad,โ Masalila explained.
Traditionally, commercial banks source foreign currency from BoB at rates determined by its exchange rate policy to meet public and business import demands. However, the narrow trading margins encouraged over-reliance on the central bank. By broadening the margins, BoB intends to make it more costly for commercial banks to procure foreign currency directly from the central bank, thereby encouraging inter-bank transactions.
โCommercial banks hold substantial foreign currency reserves, and some local firms also earn and retain foreign currency,โ Masalila said. โThis adjustment means we want commercial banks to look toward each other or these firms rather than relying on the central bank.โ
The policy shift is expected to alleviate pressure on Botswanaโs official foreign exchange reserves. However, concerns remain that commercial banks might transfer the increased costs to consumers.
โBut again, remember, there is pressure on the official foreign exchange reserves. It is becoming costly even for us. This reflects a demand and supply dynamic, meaning it has to be expensive for everyone because there is less foreign currency available,โ Masalila noted.
To ensure smooth implementation, BoB plans to meet with commercial banks to outline expectations. The central bank has reassured stakeholders that sufficient foreign exchange remains available within the market.
Beyond stabilising reserves, the new policy aims to achieve broader financial objectives. By granting financial institutions greater flexibility in covering operational costs through foreign exchange transactions, the policy incentivises inter-bank participation. It also promotes revenue generation for financial institutions while reducing reliance on speculative trading.
Additionally, the policy is designed to improve liquidity management by balancing the supply and demand of foreign currency. This ensures that the market prioritises genuine, investment-related transactions over speculative activities.
With these measures, BoB hopes to strengthen Botswanaโs financial system and mitigate the challenges posed by declining foreign exchange earnings.
