The central bank has reduced the Primary Reserve Requirement (PRR) for banks from 2.5 percent to 0 percent, as banking liquidity approaches critical levels.
Banks are required to hold a certain percentage of their deposits in reserve, known as the PRR, to ensure they have sufficient funds in the event of a bank run. This is a monetary policy tool used by the central bank to manage structural liquidity, requiring banks to deposit a portion of their funds with the central bank. The PRR can be adjusted depending on liquidity conditionsโreduced when there is a structural liquidity shortage, or increased when there is excess liquidity in the market.
According to the October 2024 Monetary Report, average daily market liquidity in the banking system decreased to P5.66 billion in October, down from P5.93 billion in September (about P12 billion in February). The report attributed this decline to a slowdown in government spending and ongoing outflows due to foreign exchange sales. The government has also been increasing its borrowing through bond sales. Banks have reportedly faced liquidity challenges after each monthly auction, as the government absorbs liquidity to meet its funding needs.
From April to September 2024, the government raised P6.3 billion through bond sales, out of a projected P9 billion (net) for the financial year, according to Econsult. The Monetary Policy Committee (MPC) noted that the decline in market liquidity has constrained the effectiveness of the current accommodative monetary policy stance, which includes a 1.9% policy rate.ย
By reducing the PRR, the central bank is freeing up cash to boost liquidity, aiming to stimulate economic activity by enabling banks to lend more. This is against the background of depleted government coffers.ย
The Government Investment Account (GIA) in Botswana has seen a dramatic decline of 90 percent, dropping from P12.6 billion in September 2023 to just P1.2 billion in the same period this year.ย
This sharp reduction is attributed to significant government expenditure and subdued revenue collection, which have placed increasing pressure on the countryโs fiscal reserves.
The GIA serves as a crucial buffer for government finances, supporting fiscal operations. According to the 2025-2025 Budget Strategy Paper draft, the balance in the GIA was P6.5 billion in July 2024, a sharp decrease from P19.1 billion in July 2023. As of September 2024, the GIA stood at a mere P1.2 billion, compared to P12.6 billion a year earlier.
The decline in government cash balances is largely due to persistent budget deficits over the past years, leading to increased reliance on debt to finance government operations.ย
This has resulted in a significant reduction in the governmentโs net financial assets. Additionally, weaker-than-expected activity in the diamond market has placed further pressure on fiscal revenues, particularly in the mineral sector.
The budget deficit for the 2024/2025 financial year is projected to widen significantly, reaching P18.68 billion (6.75 percent of GDP) from the earlier estimate of P9.1 billion (3 percent of GDP). This is more than double the approved threshold of -4 percent of GDP. The overall fiscal outturn for the 2024/2025 financial year is expected to be much worse than initially anticipated, with a deficit of P4.2 billion (-1.52 percent of GDP) recorded in the first half of the year.
Botswana’s foreign reserves, though still strong, have also been impacted by the decline in diamond receipts. As of September 2024, reserves stood at P52.8 billion, compared to P57.8 billion in September 2023. The level of reserves was sufficient to cover 6.7 months of non-diamond import cover, down from 8.8 months in September 2023. However, this figure is expected to weaken in the short term due to continued weak global demand for diamonds and lower export earnings.
For the 2024/2025 financial year, total revenues and grants are estimated at P77.2 billion, largely impacted by a significant drop in mineral revenue, which has been revised downwards to P8.7 billion from the original P25.2 billion. On the expenditure side, total expenditure and net lending are expected to amount to P95.7 billion, reflecting a 4 percent cut in the recurrent budget and a 22 percent reduction in the development budget as part of the governmentโs strategy to manage the unfavourable revenue outlook.
The latest preliminary data shows that mineral revenue as of September 2024 amounted to P3.84 billion, falling short of the original estimate of P12.59 billion by P8.75 billion, or 69.5 percent. This is a significant shortfall compared to the first half of 2023/2024. Additionally, development spending for the year stood at 44 percent of expectations, primarily due to delayed project commencements linked to slow preparations.
With these challenges, the government is expected to continue facing significant fiscal pressure in the short term, with the GIA at historically low levels and the fiscal deficit widening.
