Citigroup Inc. has warned that Botswana may be forced to devalue its currency again as the country grapples with falling diamond revenues, the backbone of its economy.
- Botswana is experiencing economic challenges due to declining diamond revenues, a key income source.
- The country’s central bank has allowed its currency, the pula, to depreciate further to stimulate exports.
- Botswana’s pula has weakened significantly against the US dollar, making it one of the continent’s poorest-performing currencies.
Citigroup Inc. has warned that Botswana may be forced to devalue its currency again as the country grapples with falling diamond revenues, the backbone of its economy.
Earlier this month, the Bank of Botswana revised its exchange rate policy, allowing the pula to depreciate by up to 2.76% against a basket of currencies in 2024, almost double its initial target of 1.51%, in a bid to stimulate exports.
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So far this year, the pula has already weakened 3.35% against the US dollar, making it Africa’s fifth worst-performing currency, according to Bloomberg reported.
The downturn in Botswana’s main revenue stream comes amid a global slump in diamond prices, driven largely by the rising popularity of lab-grown alternatives.
In the first half of 2024, rough diamond sales plunged by 49.2%, according to figures from Botswana’s central bank.
As the world’s second-largest diamond producer after Russia, Botswana relies on diamonds for nearly a third of its government revenues. In response, the government has announced austerity measures, including cuts to official travel and vehicle purchases, and may delay some capital projects.
Further devaluation and rate hikes
With the outlook for natural diamond demand still uncertain, Botswana is turning to its exchange rate as a fiscal tool. Authorities hope a weaker currency will boost diamond earnings, improve non-diamond export competitiveness, and increase Southern African Customs Union (SACU) receipts, according to David Cowan, Chief Africa Economist at Citigroup.
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“Moreover, at this point in time another devaluation of Botswana pula cannot be discounted later this year,” Cowan noted in a report. “While interest rates may also have to increase significantly.”
The country’s benchmark interest rate, currently at 1.9%, has remained unchanged since August 2023.
Meanwhile, concerns are growing over Botswana’s dwindling foreign-exchange reserves.
Botswana has traditionally maintained foreign reserves sufficient to cover more than 10 months of imports, a sign of strong fiscal discipline. However, those reserves have steadily declined since 2018, hitting a record low of just 5.2 months’ worth in February 2024, according to a June research note from BMI.
