The Story Behind the Reserve Recovery

The government has retained the weaker Pula regime introduced during last year’s foreign-exchange reserves squeeze, preserving a policy that raises the cost of foreign currency for commercial banks and funnels more trading into the interbank market.

In its latest review, the Ministry of Finance confirmed that the Pula will continue its 2.76 percent annual downward crawl, while the currency basket remains split equally between the South African rand and the IMF’s special drawing rights (SDR) unit. The Bank of Botswana ( BoB ) will also maintain the wider margins applied when trading foreign currency with commercial banks.

According to the government, the arrangement is designed to make the Pula more competitive, protect official reserves, and encourage banks to trade more foreign currency among themselves rather than relying heavily on the central bank.

The decision sustains the policy architecture first adopted in July 2025, when the Ministry of Finance and BoB responded to falling reserves by allowing a faster Pula depreciation and widening the bands around the official exchange-rate peg. The twin goals were to boost currency competitiveness and reduce commercial banks’ dependence on BoB for foreign currency, thereby forcing greater activity into the interbank market.

On the surface, the policy appears to have strengthened reserves. BoB’s June 2026 balance sheet shows foreign-exchange reserves at $4.16 billion, up from $3.37 billion a year earlier—a recovery of about 23 percent after a prolonged decline linked mainly to weaker diamond receipts.

That rebound, however, remains contested. Keith Jefferis, former BoB deputy governor and current head of Econsult , says the reasons behind the recovery are “not entirely clear,” given that detailed balance-of-payments data explaining reserve movements have yet to be published. In his latest economic review, he points to extensive government external borrowing as an almost certain contributor. He also notes that commercial banks reduced their holdings of foreign assets and converted them into Pula assets—another balance-sheet shift that boosted the official reserve position.

For Jefferis, this caution matters because Botswana’s trade account has not recovered in tandem with reserves. In the first five months of 2026, exports fell 17 percent while imports rose 4 percent, widening the trade deficit to P13 billion—more than double the P6.3 billion deficit recorded over the same period last year.

BoB itself has avoided attributing the stabilisation solely to exchange-rate changes. In its 2025 annual report, the central bank said the relative recovery reflected a combination of external borrowing, policy actions (including exchange-rate adjustments), and Southern African Customs Union (SACU) receipts.

What emerges more clearly from financial statements reviewed by this publication is that the new foreign-exchange order has proved lucrative for the institutions trading within it. BoB recorded a sharp rise in profit from foreign-exchange deals, while several listed commercial banks reported strong gains from currency trading and related market activity.

BoB posted P1.5 billion in profit on foreign-exchange deals in 2025, compared with just P32.6 million in 2024. The central bank defines this income as gains or losses arising from the difference between the mid-rate used to value foreign-currency holdings and the transaction rates applied when dealing with authorised counterparties, including financial institutions.

Commercial banks also reported stronger currency-related income. Stanbic Bank Botswana’s gains on foreign-exchange dealings more than doubled to P525.9 million in 2025 from P228.8 million a year earlier, accounting for almost all of Stanbic’s P541.1 million in net trading income. At Absa Bank Botswana, gains on currency trading and derivative instruments rose to P453.1 million from P192.1 million. After factoring in related-party currency and derivative losses and other trading movements, Absa’s total net trading income increased to P374.8 million from P224.2 million.

FNB Botswana did not disclose a separate post-July foreign-exchange trading figure. However, its half-year results show non-interest revenue rising 47 percent to P1.31 billion in the six months to December 2025. The bank attributed the performance to a “marked increase” in activity on its foreign-exchange trading book, driven by a more dynamic local FX market and global currency volatility.

The July 2025 exchange-rate changes were intended to shift more foreign-currency trading away from BoB and into the commercial banking system. That market has since become more active, and the financial statements confirm that both BoB and major commercial banks have earned more from foreign-exchange activity.

Yet the policy also carries a cost for exporters. Jefferis has argued that even after BoB reduced the margin at which it buys foreign currency from commercial banks—from 7.5 percent to 3 percent—the remaining spread still penalises exporters when they convert foreign earnings into Pula.