Botswana is set for an artificial budget surplus triggered by diamond production and the crawling peg between the pula and the US dollar, a research has shown.
According to Standard Bank of South AfricaÔÇötrading as Stanbic in Botswana ÔÇô the main drivers of the boom in this year will be the commodity prices which are at a record high and Botswana’s pulas accelerated loss of strength against the dollar- a currency in which diamond produced from Botswana is sold through.
“Although the pula has remained relatively stable since its 12 percent devaluation at the end of May last year, it has weakened against the US dollar since the beginning of this yearÔÇöfrom an average of 534 thebe to the dollar in January to 621 thebe in September.
“The pula is now trading at levels last seen before the end of 2002. We expect the pula to continue to weaken to the US dollar and to trade at an average of about 5.80 thebe in 2006 and 650 thebe in 2007,” the report said.
In 2002 the pula collapsed to record lows as it was tracking its largest trading partner, South African rand that accounts about 60 percent of its value.
And during that time, it rose marginally against the rand igniting a stampede in the importation of South African products-especially cars.
The research further pointed out the key role played by the diamond industry, which contributes 30 percent of GDP, 75 percent of export and 45 percent of government revenue.
It said during the second quarter of the year, diamond exports remained robust totaling US dollar 861.1 million compared to US dollar 892.4 million in the first quarter of this year.
“This production has also reached a plateau. In its December 2004 sovereign ratings report Standard and Poor’s stated that barring any major new discoveries ‘diamond output is expected to plateau at the current annual production of 30 million carats.
Opencast operations at current extraction rates can be sustained for at least another 20 years, followed by another 25 years of deep-pit mining. And, consequently, there is a need for the country to diversify its economic and productive base,” the research said.
However, according to Bank of Botswana, which regularly publishes the Antwerp Diamond Index (ADI) for diamond prices shows that the prices rose 19 percent from fourth quarter of 2001 and through September to November this year.
Botswana has exported diamonds to the value of US$3 325 million in 2005 up from US$1 959.6 million in 2001.
In Q2 2006 diamond export amounted to US$861 million compared to US$892.4 in Q1 2006. The ADI, therefore, has risen from a low of 123.5 in 2001 to a high of 147.2 in September through November this year, which is a 19 percent increase.
Since then, the index has dropped marginally to 145.1 in December through June. The recent price reversal is in line with the interruption in other commodities’ price surge, such as oil, gold, platinum and copper.
Although the Pula has remained relatively stable since the 12 per cent devaluation at the end of May last year, it has weakened against the US dollar since the beginning of this year, from an average of BWP5.34/USD in January to BWP6.21/USD in September.
The Pula is now trading at levels last seen before the end of 2002. Pula is expected to continue to weaken to the US dollar and to trade at an average of about BWP5.8/USD in 2006 and BWP/USD in 2007.
Although Pula has fallen against the South African rand over the few years, it has strengthened since May this year. The Pula rose marginally against the rand in September from ZAR1.20/BWP against ZAR1.17/BWP in August.
Botswana’s relatively high inflation rate implies that the pula should weaken proportionally to the USD in line with central bank policy and the crawling band exchange rate, introduced in May 2005.
The central bank set the trading band at +0.5 percent around central parity in its 2006 monetary policy statement. In its mid-term review, the central bank reiterated its objective of a stable real effective exchange rate (REER). The crawling band arrangement and monetary policy will be used jointly to achieve a stable REER, the bank said.