Botswana’s economy is facing fresh pressure as Citigroup Inc. has warned that the country may need to devalue its currency further, following a sharp drop in diamond revenues. The Bank of Botswana recently revised its exchange rate policy to allow the local currency, the pula, to depreciate more than initially planned. This move signals growing concern about the country’s main source of income—diamonds.
Earlier this July, the central bank adjusted its annual rate of crawl—the controlled pace at which the currency weakens—raising it to 2.76 percent for 2024. This is nearly double the 1.51 percent figure set earlier in the year. The aim is to encourage exports by making Botswana’s goods, including diamonds and other products, cheaper on the international market.
So far in 2024, the pula has already fallen by 3.35 percent against the US dollar. This makes it one of Africa’s weakest-performing currencies, ranking fifth-worst on the continent, according to Bloomberg data.
Botswana’s economic troubles are being driven mainly by falling diamond sales. Global demand for natural diamonds has slumped, especially as lab-grown diamonds gain popularity. According to the Bank of Botswana, sales of rough diamonds dropped by 49.2 percent in the first half of 2024. This drastic fall has put significant strain on the country’s budget.
Diamonds are crucial to Botswana’s economy, accounting for nearly one-third of government revenue. As the world’s second-largest diamond producer—after Russia—Botswana depends heavily on this single resource. But with prices falling and sales slowing down, the government is being forced to take tough decisions.
To manage the situation, Botswana has already introduced a number of austerity measures. These include reducing official travel, cutting down on government vehicle purchases, and delaying some major infrastructure projects. The government is also looking at its exchange rate as a way to manage the crisis.
According to Citigroup’s Chief Africa Economist, David Cowan, further devaluation of the pula may be necessary later in the year if diamond revenue does not recover. He also warned that the country might have to raise interest rates significantly to stabilise the economy.
At the moment, Botswana’s benchmark interest rate stands at 1.9 percent. It has remained unchanged since August 2023, but analysts believe this may not last much longer if inflation rises or the currency continues to weaken.
Another concern is the state of Botswana’s foreign-exchange reserves. For many years, the country was praised for its strong financial discipline, maintaining enough reserves to cover more than 10 months of imports. However, the situation has changed. According to BMI Research, Botswana’s reserves fell to the equivalent of just 5.2 months’ worth of imports by February 2024, marking their lowest level in recent memory.
This decline in reserves, coupled with falling revenue and external pressures, may limit the government’s ability to intervene in the market or provide a financial cushion during tough times.
The ongoing challenges are forcing Botswana to rethink its long-term economic strategy. Diversifying the economy, increasing the value of diamond exports through processing and value addition, and expanding non-diamond sectors like tourism, agriculture, and manufacturing have become more urgent.
While the current focus remains on exchange rate management, Botswana’s policymakers may also need to implement deeper economic reforms. The country’s reliance on diamonds leaves it vulnerable to global price swings and changes in consumer demand, especially as technology continues to reshape the diamond industry.
Whether Botswana can weather this economic storm depends on how quickly it can adapt to the new realities and strengthen other parts of its economy.
