Botswana, Africa’s leading diamond producer, may be compelled to devalue its currency again as weakening global diamond prices continue to pressure its economy.
Citigroup Inc. has warned that with falling revenues from diamond exports—the cornerstone of Botswana’s fiscal strength—further monetary policy adjustments could be imminent.
In response to dwindling income from diamond sales, the Bank of Botswana recently adjusted its exchange rate policy, permitting the pula to depreciate by up to 2.76% against a currency basket in 2024—almost double the previous target of 1.51%—to bolster export performance.
Tthe pula has already lost 3.35% of its value against the U.S. dollar this year, ranking it among the five worst-performing African currencies, per Bloomberg data.
The sharp downturn in Botswana’s primary revenue stream stems from a 49.2% plunge in rough diamond sales during the first half of 2024, driven largely by a shift in demand toward lab-grown alternatives.
As the world’s second-largest diamond producer after Russia, Botswana depends on diamonds for nearly one-third of its government revenues.
To cope with the fiscal shortfall, the government has announced austerity measures such as limiting official travel and deferring non-essential capital projects.
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Analysts say further devaluation and possibly interest rate hikes may follow if the diamond market does not stabilize.
David Cowan, Citigroup’s Chief Africa Economist, noted that Botswana may resort to another round of currency devaluation this year to increase earnings from diamond exports, improve the competitiveness of non-diamond goods, and boost revenue from the Southern African Customs Union (SACU).
“Another devaluation of the Botswana pula cannot be discounted later this year,” Cowan said. “While interest rates may also have to increase significantly.”
The central bank’s benchmark interest rate has remained steady at 1.9% since August 2023. However, concerns are mounting over Botswana’s declining foreign-exchange reserves, which fell to cover only 5.2 months of imports by February 2024—down from more than 10 months in previous years, according to a BMI research note.
Botswana’s economic outlook remains closely tied to developments in the global diamond market.
As prices remain volatile, the country may need to rely increasingly on exchange rate management and fiscal prudence to weather the storm.
Image Credit: Trendsnafrica
