Botswana’s long-standing currency arrangement is under mounting pressure as foreign exchange reserves fall to historic lows. Analysts at BMI warn that unless exports improve, “policymakers will probably be forced to adjust the currency peg within the next two years.”
The latest BMI review highlights instability in Botswana’s external sector. The country’s diamond-driven growth model, once a pillar of resilience, is no longer generating enough foreign currency to maintain the exchange rate peg.
“We believe that Botswana’s currency arrangement will likely come under threat due to the rapid depletion of the country’s foreign reserve holdings,” the report said. “Unless foreign exchange receipts increase, we believe that the Bank of Botswana (BoB) will be compelled to induce a devaluation of the currency.”
As of February 2025, Botswana’s foreign reserves had fallen to just 5.2 months of import cover—the lowest level on record. That’s well below the BoB’s usual cushion of more than 10 months and close to the International Monetary Fund’s minimum recommended threshold of three months.
“Foreign reserves have been falling sharply since 2018 following a series of wide current account deficits,” BMI analysts noted. Reserves briefly recovered in 2022, supported by post-pandemic diamond demand and IMF disbursements, but the decline resumed in 2024 at an accelerated pace.
The latest collapse is being driven by continued weakness in Botswana’s primary export: natural diamonds. Depressed global demand has sent reserves to record lows, limiting the central bank’s ability to intervene in the foreign exchange market.
“The emergence of lab-grown diamonds is weighing heavily on natural stone prices and export earnings,” BMI said. De Beers recently confirmed that diamond production in Botswana contracted by 8.0 percent year-on-year in the first quarter of 2025, a sign of sustained global softness.
With liquidity shrinking, BMI said the BoB has resorted to drawing from the Pula Fund—Botswana’s sovereign wealth fund—to meet forex obligations. This move breaks from the bank’s long-standing framework on reserve use. The BoB structures its foreign reserves in three tranches: the Liquidity Portfolio, the Pula Fund, and assets held with the IMF.
“According to the BoB’s own guidelines, the only fund that should be used to service foreign exchange demand is the Liquidity Portfolio,” BMI highlighted.
Yet since 2009, policymakers have routinely tapped the Pula Fund to meet local foreign exchange demand. As of February 2025, the fund’s value had dropped to its lowest point in two decades.
“Without a steady and reliable source of foreign exchange, this practice is not sustainable,” analysts warned.
Botswana’s reserves are also under pressure from capital outflows triggered by diverging interest rates. While peer economies in the pula’s currency basket—most notably South Africa and the United States—have raised rates, Botswana has kept its policy rates relatively low. This widening rate differential has made the country more vulnerable to capital flight.
“Botswana Often Bucks the Trend,” the report remarked, referencing the BoB’s historically independent approach to monetary policy. Large foreign reserves previously allowed the central bank to deviate from the monetary stance of basket peers. However, BMI warned that such independence may no longer be viable in the next two to three years without stronger reserves.
“In recent years, however, the central bank’s ability to intervene in the foreign exchange market has come under threat,” the report stated.
Adding to the strain is Botswana’s sluggish economic performance, especially compared to its main trading partners.
“Botswana’s economic growth is likely to underperform that of its trading partners,” BMI forecasts.
Botswana’s economy has traditionally tracked the growth of the U.S. and South Africa, which together account for 75 percent of the pula’s currency basket. But with natural diamonds now relegated to a smaller segment of the luxury market, BMI believes that pattern is unlikely to continue.
BMI said events like the recessions of 2015 and 2024—unique to Botswana—may become more frequent. The firm said such pressures make the current peg system unsustainable and will likely force the government to devalue the currency, abandon monetary independence, or impose capital controls.
Faced with falling reserves, a weak export base, and underwhelming growth, BMI said devaluation is the most likely policy option—rather than restricting capital flows or relinquishing monetary flexibility.
“The central bank is likely to choose currency devaluation,” the report explains.
BMI noted that capital controls would deter foreign direct investment, which Botswana is trying to attract under its economic diversification strategy. In addition, a tighter monetary policy aligned with South Africa or the U.S. would worsen the domestic slowdown.
“The benefits of pula devaluation are two-fold: it would reduce the pressure on foreign reserves and boost the competitiveness of Botswana’s non-diamond exports, supporting policymakers’ diversification goals,” the report said.
Unlike the sharp currency crashes in Nigeria (2016) and Angola (2018), Botswana is expected to manage a more modest and orderly devaluation. The country has a functional foreign exchange market and a competent central bank. BMI emphasized that the pula is not grossly overvalued and doesn’t trade on a parallel market—signs that the forex market remains functional.
BMI said the BoB also has the technical expertise to manage devaluation. Between 1980 and 2005, the central bank carried out seven successful devaluations, typically in response to commodity shocks. Since the introduction of the crawling peg in 2005, large one-off adjustments have stopped. Still, BMI believes the bank will likely act early, before a full-blown currency crisis develops.
The research firm projects a devaluation of 10 to 15 percent, which would shift the exchange rate from the current P13.4/USD to between P14.9/USD and P15.7/USD.
BMI ruled out a steeper 30 to 50 percent devaluation, saying such a move is highly unlikely. The pula is not significantly overvalued, and historical devaluations have averaged 8.5 percent.
However, with reserves falling at a rapid pace and structural challenges mounting in the diamond sector, BMI warned that this devaluation could be larger than average.
