19/12/2025
Botswana Faces Economic Crisis as Foreign Reserves Nearly Depleted
BY JOSEPH LEGAU
Finance Minister Ndaba Gaolathe today delivered a sobering Mid-Year Budget Review to Parliament, revealing that the country narrowly avoided total depletion of its foreign exchange reserves and faces mounting fiscal pressures that threaten its economic stability.
The most critical revelation was that Botswana's foreign exchange reserves were on track to be completely exhausted by the first half of 2026 without emergency intervention. Reserves declined to P50.5 billion in September 2025 from P52.8 billion a year earlier, representing only five months of import cover.
The Bank of Botswana was selling an average of P4 billion monthly to commercial banks, totaling P48 billion annually. This far exceeded the country's primary foreign exchange inflows from SACU receipts and diamond sales, which combined average only P33 billion per year. The P15 billion annual gap was being filled by drawing down the P**a Fund, a practice the Minister described as unsustainable.
On July 11, 2025, the government implemented emergency measures to stem the hemorrhaging of reserves. The exchange rate crawl was adjusted from minus 1.51 percent to minus 2.76 percent, trading margins were widened from plus or minus 0.5 percent to plus or minus 7.5 percent, and the threshold for foreign currency transactions with commercial banks was raised from $1 million to $5 million.
The intervention proved effective. Monthly foreign exchange sales by the central bank dropped from P4 billion to approximately P3 billion, while interbank foreign exchange trading rose to P3.2 billion in the third quarter from P2.4 billion in the second quarter.
The traditional backbone of Botswana's economy is experiencing what may be a structural transformation. The diamond sector's sharp slowdown drove the economy to contract by 3 percent in 2024, with only 2.8 percent growth in the first half of 2025. Full-year GDP is projected to contract by 0.9 percent in 2025.
Mineral revenue, which historically dominated government finances, now accounts for only 11 to 20 percent of total revenues. Customs and excise duties have overtaken diamonds as the largest revenue source, contributing 35 to 39 percent of total revenues.
The sector faces intensified competition from lab-grown diamonds, rising production costs as aging mines transition to underground operations, and weak global demand. While Gaolathe noted that strategic marketing efforts and the closure of De Beers' lab-grown diamond facility may provide medium-term support, he acknowledged that diamond revenues are likely to remain below historical norms.
International rating agencies also downgraded Botswana's sovereign credit ratings in the third quarter of 2025. Standard & Poor's revised the long-term foreign currency rating to BBB in September, while Moody's downgraded the country to Baa1 in October. Both agencies maintain negative outlooks.
This continues a deterioration that began in 2019, when Botswana was downgraded from A/A2 and A-/A3 ratings. The downgrades reflect persistent fiscal and current account deficits, declining mineral revenues, elevated public debt trajectories, and eroded fiscal buffers.
Further downgrades could raise the risk premium on government borrowing, constrain access to international capital markets, and undermine investor confidence at a time when the government faces significant financing needs.
The 2024/2025 financial year ended with a preliminary deficit of P11.76 billion, or 4.46 percent of GDP, significantly better than the projected deficit of P24.73 billion due to cost-saving measures and revenues slightly exceeding forecasts.
For the first half of 2025/2026, total revenues reached P35.06 billion (46 percent of budget) while expenditure totaled P39.31 billion (40 percent of budget), resulting in a deficit of P4.25 billion.
The second half of the fiscal year presents more severe challenges. The government projects a deficit of P17.87 billion, equivalent to 6.5 percent of GDP, for the October 2025 to March 2026 period. This will require total borrowing of P29.77 billion, including P11.90 billion for debt refinancing. The financing will be split 56 percent domestic and 44 percent external.
Development spending has ground nearly to a halt. Only P6.97 billion, or 29.3 percent of the approved P23.75 billion development budget, was spent in the first half of the year.
The government suspended 132 of 148 Development Manager Model projects, allowing only 16 projects at advanced stages to continue. A task team is assessing the suspended projects for orderly closure. No new development projects were started during the period due to cash flow constraints.
A substantial portion of development spending went to Botswana Power Corporation, which received P2.45 billion to cover monthly electricity import bills and loan obligations. The continued poor performance of the Morupule B Power Plant has forced heavy reliance on power imports, constraining resources available for other development priorities.
The budget faces additional strain from P5.36 billion in arrears from previous years that were recorded during the current financial year. Recent salary negotiations require an additional P542 million for housing and upkeep allowances effective April 2025 to March 2026.
Payment delays have resulted in contractual penalties and strained relationships with service providers.
The Ministry of Water and Human Settlement has been particularly affected by cost-price adjustments arising from delays in commencing awarded projects. The government has implemented several austerity measures that are beginning to show results. Centralization of Government Purchase Orders reduced monthly spending from P1.6 billion in May 2025 to an average of P600 million from June to September. Overtime restrictions cut worked overtime by 29 percent, from P82.6 million in July to P58.5 million in September.
Travel restrictions reduced travel expenditure to 0.88 percent of the total recurrent budget compared to the historical 1.02 percent.
A payroll audit is underway to bring the expanding government wage bill under control. Preliminary findings are expected in December 2025, with final recommendations by April 2026.
Gaolathe warned that the upcoming 2026/2027 Budget Speech will outline additional austerity measures beyond those already in place. The objective is not merely to cut spending but to drastically reduce the growth of recurrent expenditure, which has consistently outpaced revenue by an average of 11 percentage points annually.
Despite the fiscal crisis, the government maintains its commitment to economic transformation. National Development Plan 12, covering 2025/2026 to 2029/2030, was recently approved with the Botswana Economic Transformation Programme as its strategic anchor. The plan focuses on accelerating economic diversification, promoting private-sector-led growth, and deliberately crowding in private investment. The goal is to transform Botswana into a high-income country that is digitally enabled, export-driven, and economically diversified.
The domestic challenges occur against a backdrop of global uncertainty. The IMF projects global growth to slow to 3.2 percent in 2025 and 3.1 percent in 2026. Rising protectionism, particularly US tariff escalations and retaliatory measures, is expected to distort trade flows and suppress global demand. China, one of Botswana's key trading partners, could experience a sharp slowdown. Global public debt is anticipated to exceed 100 percent of GDP by 2029, constraining fiscal space worldwide and tightening financial conditions.
Domestic inflation averaged 2.3 percent in the first half of 2025 but increased to 3.8 percent in November, reflecting effects of the exchange rate adjustment, utility price increases, and fuel price adjustments. Inflation is projected to average 3.5 percent in 2025 but rise to 5.9 percent in 2026, potentially breaching the upper bound of the 3-6 percent target range in the second quarter of 2026.
The Monetary Policy Committee maintained the Monetary Policy Rate at 3.5 percent in December 2025, following an increase from 1.9 percent in October. This proactive stance aims to enhance monetary policy transmission and reinforce the efficacy of recent exchange rate adjustments. Gaolathe's statement made it clear that Botswana faces a difficult adjustment period. The country must manage the transition away from diamond dependency while restoring fiscal discipline and safeguarding its creditworthiness.
The government's immediate priority is to ensure it no longer relies on borrowing to finance recurrent expenditure, a situation the Minister described as unsustainable and placing an unacceptable burden on future generations. Success will require firm implementation of austerity measures, acceleration of economic diversification efforts, and maintaining public and investor confidence during a challenging transition period.
The Minister concluded by urging Parliament to support the revised budget to rebuild fiscal buffers, preserve creditworthiness, tackle unemployment, and unlock new opportunities. The choices made in the coming months will determine whether Botswana can successfully navigate this crisis and emerge with a more resilient and diversified economy.
