Botswana’s financial system stabilises, but the harder economic test begins

Botswana’s financial system is beginning to emerge from its recent turbulence, with foreign-exchange reserves rebuilding, banking liquidity improving and pressure on government funding easing.

But economists say the recovery now faces a more difficult test: whether a rebound in diamond production can translate into sales, export earnings and the private investment needed to put the economy on a stronger footing.

Botswana’s economy grew by 3.5 percent year-on-year in the first quarter of 2026, marking only the second quarter of positive growth since 2024. Despite the improvement, Standard Bank Group Senior Economist for Africa Regions Research Godfrey Mwanza cautioned that the headline growth figure masks weaknesses in the underlying economy.

Mining and public administration were among the main contributors to growth, but household expenditure and private investment contracted during the quarter, while inventory accumulation supported the GDP figure.

Economists generally regard this as weaker-quality growth than an expansion driven by household spending or private-sector investment.

DIAMONDS THE NEXT TEST

The recovery in diamond production provides an important test of whether the improving macroeconomic picture can translate into broader economic gains.

Production at Jwaneng and Orapa increased in the first quarter of 2026 after a weak fourth quarter in 2025, when Jwaneng was shut down for maintenance. Production continued to grow in the second quarter.

But Mwanza said the increase in production would provide a stronger boost to the economy only if it translates into sales, exports and foreign-exchange earnings.

The global diamond market remains weak. De Beers’ dollar-per-carat prices remain well below levels seen in recent years, with Mwanza noting that prices only ticked up slightly in the second quarter.

Botswana recorded an improvement in diamond exports in 2025, while diamond imports also declined. But in the first quarter of 2026, diamond sales cooled as imports began moving back towards historical levels, resulting in a decline in the country’s net diamond export position.

Mwanza said the next set of diamond trade figures would therefore be a key indicator for businesses planning over the next 12 months.

“Most of the indicators that have stabilised are not going to reverse. The main vulnerability lies in the next trade numbers, whether the production that has been increasing can turn into sales,” he said.

He said diversification away from diamonds remained important, but would be a medium- to long-term process. In the short term, Botswana still needed diamond sales to generate dollars and cushion the economy against other external pressures.

OIL SHOCK

One of those pressures is oil.

Brent crude prices ended 2025 at around US$61 per barrel before climbing to about US$112 in 2026. Prices later fell to around US$71, allowing Botswana to reduce pump prices in July, but subsequently rose again to above US$90.

Mwanza expects the effects of the oil shock to remain in the economy until at least the second quarter of 2027. So far, he said, the impact has been concentrated mainly in transport rather than becoming deeply entrenched across the wider inflation basket.

The positive development, Mwanza said, was that underlying inflation outside transport had not been too far out of control. This could allow the central bank to “see through the shock” if oil prices eventually decline, rather than respond with aggressive interest-rate increases.

The duration of the shock, however, remains a concern, with transport continuing to be the major driver of inflation.

BORROWING COSTS

The pressure is also being felt through borrowing costs.

The seven-day BOBSI has risen to 5.5 percent, while overnight rates in the banking system have also increased. Prime lending rates have remained flat, but average lending rates have continued to rise as spreads above prime have widened.

Mwanza said this remained a challenge for households and businesses, particularly as unsecured household lending declined during the first four or five months of 2026.

On the external position, Mwanza said Botswana’s current account remained in a better position than in 2024, when the country recorded large trade deficits. The improvement over the past 12 months, however, has slowed over the last six months.

Diamonds and copper remain the main exports, with copper performing relatively well, while food and fuel imports have increased. Mwanza said reducing imports, particularly of food and energy, through import substitution would help improve the trade balance and reduce pressure on foreign-exchange reserves.

RESERVES REBUILD

Despite the weaker trade position, foreign-exchange reserves have improved substantially, reaching close to US$4 billion and more than six months of import cover.

Mwanza attributed much of the improvement to financial flows, particularly the repatriation of foreign assets by resident banks and institutions. He said these entities had reduced their offshore foreign assets by about US$5.4 billion, bringing more dollars back into the domestic financial system.

Banking-system liquidity has also improved. Around 15 months ago, the banking system was effectively relying on borrowing from the central bank, but that is no longer the case. Government Treasury bill and bond auctions have also attracted stronger demand.

Interest rates have fallen by almost 200 to 300 basis points from crisis levels, while government securities auctions that previously struggled to attract sufficient demand are now clearing.

“Macro stability is a necessary but not sufficient condition for building competitiveness in the long term. But because it is necessary, it is something that we should celebrate, that the worst looks like it is certainly over when it comes to at least this part of the financial system in recent times,” Mwanza said.

FISCAL PRESSURE EASES

The fiscal position has also become less concerning.

For the 2025/26 financial year, Botswana had feared a deficit of around P24 billion to P25 billion, but the deficit came in closer to P13 billion.

However, excluding a large one-off Bank of Botswana dividend paid to the government, Mwanza said the deficit would have been closer to P21 billion.

For 2026/27, the increase in the government debt ceiling from 40 percent to 60 percent of GDP, together with potential foreign borrowing, provides additional room for the government to finance its budget.

Mwanza said he was therefore much less concerned about the government’s ability to fund itself, although mineral revenue remained an important indicator to watch.

FROM STABILITY TO GROWTH

The risk, he said, has shifted.

The immediate concerns are no longer primarily whether Botswana has enough foreign currency, whether the banking system has sufficient liquidity or whether the government can fund itself.

The bigger question is whether Botswana can use that restored financial stability to attract private investment, diversify away from diamonds, increase exports and productivity, and execute its transformation plans.

Mwanza highlighted the Botswana Economic Transformation Programme (BETP), which he said was directionally correct and provided a credible framework for economic transformation.

But execution remains the real test.

Botswana, he noted, has historically had plenty of strategies and ideas. The challenge is turning those plans into actual investment, production, exports and productivity gains.