Botswana is facing worsening economic conditions that could trigger widespread job losses which are expected to place households, businesses and the country’s financial system under severe strain.
The warning is contained in the latest Financial Stability Report prepared by the Bank in collaboration with member institutions of the Financial Stability Council (FSC) which identifies unemployment as one of the most significant threats facing Botswana’s economy.
According to the report, current weak domestic economic conditions have heightened the risk that employment losses could materialise or intensify in the near future. To assess the resilience of the financial sector, the Bank conducted a stress test based on what it described as a ‘severe but plausible scenario’ involving rising unemployment and stagnant household incomes.’
The scenario reflects structural vulnerabilities in the household sector, particularly the high concentration of unsecured borrowing, which increases households’ exposure to labour-market shocks and income declines,’ the report states.Under such circumstances, widespread job losses would sharply reduce household incomes and weaken borrowers’ ability to service debt.
The Bank warns that this could trigger a surge in loan defaults and a significant increase in non-performing loans (NPLs), placing additional pressure on banks already operating in a constrained liquidity environment. ‘The resulting deterioration in asset quality erodes bank profitability and adds pressure to funding and liquidity conditions in an already constrained financial system,’ the report says.
The central bank also highlighted concerns over concentration risks within the banking industry. Despite modest growth in bank balance sheets, the sector remains heavily dependent on wholesale deposits from institutional investors, exposing banks to funding and rollover risks.
‘Banking industry concentration remains a concern,’ the report notes, adding that government employees continue to account for the largest share of bank borrowing, making employment conditions a critical factor for financial sector stability. To address these vulnerabilities, the Bank revealed that it is considering targeted supervisory interventions, including institution-specific capital requirements for banks with elevated deposit concentration risks and additional measures to strengthen liquidity management.
The report further identifies Botswana’s dependence on the diamond sector as a major source of vulnerability. The stress test modelled a prolonged decline in global diamond demand, driven by economic slowdown in key markets, weaker luxury goods consumption and growing competition from synthetic diamonds.
‘The persistence of these circumstances could entail diamond mines scaling down operations, potential job losses in mining and related sectors as well as lower foreign exchange inflows,’ the report warns.
The report also warns that a sustained downturn in the diamond industry would reduce household incomes, weaken consumer spending and place further pressure on businesses. While the banking sector is considered resilient enough to withstand a moderate decline in diamond revenues, the report warns that a severe and prolonged slump could push some financial institutions below regulatory capital requirements.
The findings suggest growing concerns that employment losses, coupled with weaknesses in the diamond sector and household indebtedness could emerge as a powerful source of systemic risk for Botswana’s economy.