Botswana May Devalue Pula Again Amid 49% Diamond Revenue Drop and Weakening Forex Reserves
Citigroup Inc. has issued a warning that Botswana may be forced to devalue its currency once more as falling diamond revenues—the cornerstone of the nation’s economy—put increasing pressure on fiscal and monetary stability.
Earlier this month, the Bank of Botswana revised its exchange rate policy, allowing the pula to depreciate by up to 2.76% against a weighted basket of currencies in 2024—nearly double its original target of 1.51%. The move is aimed at stimulating exports and cushioning the impact of weakening foreign income.
According to Bloomberg, the pula has already fallen by 3.35% against the US dollar so far this year, making it Africa’s fifth-worst-performing currency.
This decline coincides with a sharp drop in global demand for natural diamonds, driven largely by the growing popularity of lab-grown alternatives.
As a result, Botswana’s rough diamond sales plunged 49.2% in the first half of 2024, according to data from the country’s central bank.
As the world’s second-largest diamond producer after Russia, Botswana relies on diamonds for nearly one-third of its government revenue.
The sudden revenue shortfall has prompted the government to introduce austerity measures, including restrictions on official travel, vehicle purchases, and the potential delay of capital projects.
With the outlook for diamond demand still highly uncertain, Botswana is increasingly using its exchange rate as a fiscal tool.
A weaker pula could help boost local earnings from diamond exports, improve competitiveness for non-diamond exports, and increase receipts from the Southern African Customs Union (SACU).
“Another devaluation of the Botswana pula cannot be discounted later this year,” warned David Cowan, Chief Africa Economist at Citigroup. “Moreover, interest rates may also have to increase significantly.”
Botswana’s benchmark interest rate, currently at 1.9%, has remained unchanged since August 2023. However, rising inflationary risks could force the central bank to tighten monetary policy.
Meanwhile, concerns are mounting over dwindling foreign exchange reserves, long considered a sign of the country’s fiscal discipline.
Historically, Botswana has maintained reserves covering more than 10 months of imports. But as of February 2024, those reserves had fallen to the equivalent of just 5.2 months’ worth, according to a June research note by BMI.
The combination of falling diamond revenues, a weakening currency, and shrinking reserves underscores the mounting economic challenges facing Botswana.
Without a significant recovery in global diamond demand or effective diversification of its economy, the country may be forced to rely more heavily on monetary adjustments to maintain macroeconomic stability.
