The Bank of Botswana has implemented measures to address challenges related to low excess liquidity, including reducing the primary reserve requirement to zero, extending the maturity of repurchase agreements (repos) to 30 days, and adjusting foreign currency trading margins.
“These interventions have helped to stabilise liquidity conditions, evidenced by increased uptake of longer-term repos, improved interbank activity and a pause in prime lending rate hikes,” the bank states.
According to the central bank’s Financial Stability Report, excess liquidity in the banking sector fell to a historic low of P764 million in March this year.
However, average daily market liquidity rose to P1.557 billion in the second quarter of 2025, largely due to increased government spending funded by Southern African Customs Union (SACU) receipts.
The report also notes that banks continue to comply with minimum liquidity requirements, recording a liquidity ratio of 17.8% in June. However, structural weaknesses remain, including a high concentration of deposits and persistently high funding costs, Botswana Daily News reports.
The findings also indicate that foreign exchange risk exposure remains low, and reduced exchange rate volatility has helped support overall financial system stability.
“However, the underlying structural features of the economy and market, such as asset and funding concentration and deep interconnections, pose contagion risk that could be triggered by liquidity, leverage or external sector shocks,” the bank goes on to say.
Furthermore, the report says that financial stability indicators show banks, non-bank financial institutions, and financial market infrastructures remain resilient and robust.
Indeed, bank profitability has strengthened, supported by factors such as higher non-interest income, including service fees, and effective cost-containment measures.
That said, the bank cautions that financial institutions remain exposed to risks from weak economic growth, limited fiscal space, and subdued export revenues stemming from low diamond sales. It adds that persistent structural bottlenecks could further constrain investment and weaken the external position.
“Financial sector-specific vulnerabilities pertain to funding risk driven by tightening liquidity conditions and elevated refinancing pressures among financial institutions, as well as elevated contagion risk, considering concentrated exposures and interlinkages across banking, non-bank financial institutions, and public sector entities,” according to the report.
Additionally, although household credit risk is currently contained, it remains vulnerable to changes in employment conditions and borrowers’ debt-servicing capacity.
“Risks from crypto assets, climate-related exposures, and cybersecurity threats are currently assessed as low-impact and low-likelihood, though their latent potential to escalate remains non-negligible,” the Financial Stability Report states.