Domestic economy holds firm despite global turmoil
Despite recent shocks that hit the global economy, particularly a two-month war Middle East conflict that sent oil prices skyrocketing, the domestic economy seems to have remained resilient.
According to the Bank of Botswana Financial Stability report of May, the financial system continues to demonstrate overall resilience, with systemic risk contained at moderate levels.
The report observed that the banking sector remains stable, supported by strong profitability and contained solvency risks.
However, this stability coexists with a clear concentration of risks in specific segments, most notably within Non Banking Financial Institutions (NBFIs).
“The persistent elevation of NBFI contagion and solvency indicators stands out as the dominant feature of current conditions, creating a system that is stable at its core but increasingly exposed to vulnerabilities in key transmission nodes. Systemic risk is therefore not widespread, but more concentrated and structurally embedded, increasing the system’s sensitivity to shocks.
The Reserve Bank observed that the elevated risk signals in the NBFI sector should not be interpreted as evidence of financial distress as they (NBFIs) remain profitable, solvent, and operationally sound, with no indication of balance sheet deterioration.
“Instead, the heatmap reflects their systemic importance and interconnectedness, particularly their role in financial intermediation, capital formation and liquidity provision. The elevated contagion and solvency indicators therefore signal exposure to system-wide transmission risks rather than firm-level fragility. The concern is that, given their scale and linkages, NBFIs are positioned to amplify shocks across the financial system even if they are not themselves the source of stress,” says the report issued two weeks ago.
Whilst the Reserve Bank appreciates that commercial banks rely on deposits placed by pension funds, insurers, and other institutional investors, it calls for a funding structure that is stable under normal conditions but inherently sensitive to changes in NBFI behaviour under a stressed liquidity environment.
“Adjustments in asset allocation or liquidity preferences within NBFIs can result in large and rapid withdrawal of deposits, tightening banking system liquidity and increasing funding costs. This channel is particularly important because it operates even in the absence of stress within NBFIs themselves,” said the BoB.
The Reserve Bank stated that the expanding size of the NBFI sector, as reflected in its rising assets-to-GDP ratio, has further increased its systemic importance in economic growth and initiatives to diversify the economy from heavy reliance on diamonds.
The BoB noted that NBFIs account for a larger share of financial system assets and the general GDP, and therefore, their interactions with banks, financial markets, and the real economy is crucial.
“This deepening interconnectedness means that even modest adjustments in NBFI sectoral strategies can have amplified effects across the system, particularly through market-based transmission mechanisms such as asset price movements and changes in liquidity conditions. Current conditions reflect the interaction between these structural characteristics and a set of ongoing cyclical pressures. Tight domestic liquidity conditions, volatile foreign exchange flows, external financial pressures, and moderate real-sector strain affecting household and corporate cash flows combine to reinforce underlying vulnerabilities,” observed the Bank
Meanwhile, the Bank of Botswana has called for intensified efforts to diversify the economy, accelerated implementation of the Botswana Economic Transformation Programme (BETP) to revive the economy and grow the Government Investment Account, which currently stands at P1.2 billion as at June22nd.
Some of the highlights of the 2025 BoB Annual Report indicate that the domestic inflation, which eased to 2.7% in 2025, is expected to rise sharply to 9% in 2026 due to higher energy and food prices, before reverting to the 3-6% target range in the medium term.
