Botswana’s central bank raised its key interest rate by 160 basis points on Thursday in an effort to reduce the gap with market lending rates, which have climbed due to a liquidity crunch caused by the economic slowdown.

The move lifts the country’s Monetary Policy Rate to 3.5% from the previous 1.9%.

Botswana’s economy shrank last year and is projected to contract again this year amid a prolonged slump in the global diamond market, the nation’s main export.

Banks have increased their lending rates as liquidity tightened due to weaker diamond sales and higher government borrowing to fund the budget deficit, Reuters news agency reports.

The Bank of Botswana stated that the rate hike is intended to enhance the transmission of monetary policy.

Central bank governor Cornelius Dekop said at a press conference that banks had been instructed not to raise their prime lending rates any further.

Furthermore, earlier this month, credit rating agency Moody’s downgraded Botswana’s sovereign rating, pointing to the government’s challenges in adapting to the global diamond market downturn and rising public debt.

Inflation in Botswana jumped to 3.7% year-on-year in September, up from 1.4% in August, but remains within the central bank’s 3%-6% target range.

The central bank now expects inflation to increase from an average of 2.7% this year to 5.9% in 2026.