Higher inflation, weaker growth
The Middle East conflict is likely to exacerbate Botswana’s existing macroeconomic challenges stemming from a prolonged diamond-sector weakness. We now expect a more subdued recovery in the diamond sector, Botswana’s key growth driver, as the conflict weighs on global growth and discretionary spending in key diamond end- markets. Higher energy prices are also feeding into domestic inflation, lowering real incomes. At the same time, limited policy space – reflecting eroded fiscal buffers – constrains the authorities’ ability to offset the external shock. As a result, a larger share of the shock is likely to hit the real economy, prompting us to lower our growth forecasts to 3.0 percent in 2026 (from 4.5 percent) and to 3.5 percent in 2027 (from 3.9 percent).
We raise our average inflation forecast to 10.0 percent for 2026 (from 5.3 percent) and 4.3 percent for 2027 (3.7 percent), driven primarily by fuel price pass-through. With imported tradables accounting for c.42 percent of its CPI basket, Botswana is particularly vulnerable to a price shock. Headline CPI inflation accelerated to 10.3 percent y/y (6.7 percent m/m) in April from 4.2 percent in March, following a sharp rise in pump prices. Transport contributed 7.4ppt to the headline print, reflecting its outsized CPI weight. Core inflation – which had already been rising ahead of the energy shock – reached its highest level since July 2023 in April. Planned tax increases in the 2026 budget will add to inflationary pressure. We see inflation moderating in 2027 on base effects.
BoB is likely to raise its policy rate by 300bps more under its current hiking cycle
We raise our end-2026 and end-2027 policy-rate forecasts to 8.5 percent (from 3.5 percent) and 7.5 percent (3.5 percent), respectively. The Bank of Botswana (BoB) resumed its hiking cycle at its April MPC meeting, raising the monetary policy rate (MoPR) by 200bps after holding rates steady at the three previous meetings. The BoB has signalled that the recent rate hikes are a technical realignment of the MoPR with already tighter domestic money-market conditions, rather than the start of outright tightening. It has directed commercial banks not to raise lending rates in response. We think a further 200bps rate hike may be needed to correct the misalignment. However, we then expect the BoB to move beyond recalibration and tighten policy with a further 100bps hike to limit the risk of inflation expectations becoming de-anchored amid rising core inflationary pressures. We then see room for 100bps of cuts in H2-2027 as inflation risks recede.
The authorities are likely to maintain the 2026 downward crawl rate despite the external shoc
We do not expect the authorities to accelerate the pace of pula depreciation against the currency basket (50 percent ZAR:50 percent SDR) at the mid-year review despite the energy shock. Botswana’s crawling peg targets REER stability by adjusting the nominal crawl in line with expected inflation differentials versus its trading partners. Botswana’s high transport weight in CPI and limited fiscal space to cushion the energy shock suggest the positive inflation gap is likely to widen, particularly against SDR countries (developed markets). Under the exchange rate framework, this would point to a need for faster nominal depreciation to maintain external competitiveness. A steeper downward crawl rate could also ease FX reserve pressure by supporting external adjustment.
Our base case, however, is that the authorities will maintain the current 2.76 percent downward crawl rate through 2026, allowing a temporary deviation from REER equilibrium. Given already-elevated inflation and the risk of second-round effects, policymakers are likely to prioritise price stability over strict adherence to the REER target in the near term. Furthermore, the 2025 changes to the exchange rate parameters (Botswana – FX regime shift not imminent), including the significant widening of the BoB’s FX intervention band, give the central bank added flexibility.
We revise our current account (C/A) forecasts to 0.0 percent of GDP in 2026 (from -0.6 percent) and to 0.7 percent in 2027 (from -1.1 percent), primarily reflecting a stronger-than-expected starting point. Updated data indicates the C/A returned to a sizeable surplus in 2025 (c.3.6 percent of GDP), driven by a sharp narrowing in the services deficit – likely due to a slowdown in mining-related services – alongside lower import of diamonds for aggregation. We expect the trade balance to deteriorate in 2026 due to a higher energy import bill – fuel accounted for c.21 percent of imports in 2025 – and only a subdued recovery in diamond exports (c.73 percent of total exports). However, continued strong SACU transfers, the key anchor of the external position, are likely to offset this drag. Rising external government borrowing should also ease pressure on the financial account, helping to stabilise FX reserves and support the exchange-rate peg in the near term.
A slower fiscal adjustment would put Botswana’s investment grade rating at risk
We raise our FY27 (ending March) fiscal deficit forecast to 10.3 percent of GDP (from 4.5 percent). Our wider deficit forecast than the government’s 8.9 percent target largely reflects a more conservative view on revenue mobilisation. While new tax measures – including a 3ppt increase in corporate income tax, higher income tax for top earners and fewer zero-rated VAT items – are due to be implemented this fiscal year, weaker domestic economic activity is likely to limit the yield of these measures. In addition, a muted recovery in the diamond sector is likely to weigh on mineral revenues, which averaged c.26 percent of total revenue over the past five years.
Further negative rating actions seem likely in the near term. With the authorities yet to implement key structural reforms to ease fiscal pressures (such as wage-bill rationalisation and SOE reforms), large fiscal deficits are likely to persist and public debt is unlikely to stabilise near-term. Elevated interest rates and weaker growth also worsen debt dynamics. In March, parliament approved a bill increasing the statutory debt ceiling to 60 percent of GDP (from 40 percent) to accommodate higher borrowing. The authorities expect public debt to reach 44.7 percent of GDP in FY27 from c.34 percent in FY26. The IMF expects the higher debt ceiling to be breached by 2030 in the absence of corrective measures. With both Moody’s (Baa1) and S&P (BBB-) maintaining negative outlooks after downgrades in October and March, respectively, we see a high likelihood of at least one downgrade at the September reviews, most likely by Moody’s. An S&P downgrade would strip Botswana of one of its investment-grade ratings for the first time since its initial rating in 2001.
