Background Information
The foreign exchange reserves are assets held by the Bank of Botswana in foreign currencies. The reserves are accumulated mainly through surpluses on the balance of payments together with increases to the value of existing foreign currency investments. It is important for Botswana to maintain adequate foreign exchange reserves to be able to meet the demand for foreign currency to pay for imports of goods and services on an ongoing basis, as well as meet other international payment obligations, including the costs of servicing international debt.
Adequate reserves are furthermore required to support a managed exchange rate, as with the crawling peg that is the basis for the exchange rate policy in Botswana. The level of reserves fluctuates on a daily basis due to the Bank’s foreign currency transactions (purchases and sales) with both the Botswana Government and the domestic banks.
Recent Performance
The value of the reserves in both domestic and foreign currency terms (US dollar and SDR) is reported regularly in the Bank’s monthly and annual financial statements as well as in the Botswana Financial Statistics (Tables 3.4 and 6.7).
By international standards, Botswana has accumulated significant reserves when measured relative to the total imports of goods and services by a country. This is due to a combination of a sustained period of balance of payments surpluses and prudent management of the foreign exchange reserves.
Global economic activity contracted considerably in 2020, mainly due to the COVID-19 pandemic. Consequently, the volume of exports, in particular diamonds declined, which adversely affected the country’s foreign exchange reserves. At the end of 2019, prior to the peak of the pandemic, the foreign exchange reserves amounted to P65.3 billion, equivalent to 12.9 months of import cover. The level of foreign exchange reserves fell by 18 percent to P53.5 billion at the end of 2020 (9.6 months of import cover). The decline was due to the decline in receipts while demand for foreign exchange to fund Government external payments and other foreign currency denominated obligations, as well foreign currency requirements by commercial banks, remained elevated. The foreign exchange reserves declined further in 2021 by 4.7 percent in March to reach P50.9 billion. This was equivalent to 9.1 months of import cover.