Monday, September 27, 2021

Botswana’s currency dilemma: Is it time to tame The Pula?

In January 2021, Wilfred Mandlebe – the Permanent Secretary at the ministry of Finance and Economic Development announced a key financial and money markets decision taken by the country’s Treasury. The Treasury had decided to set the local currency to lose 2.87 percent in 2021 (2020: 1.51%).  The aim is to boost the country’s export competitiveness, according to the economic development ministry officials.

The January decision follows a tradition in which the value of the Pula has been allowed to move upwards or downwards at the beginning of each year using a rate of crawl that factors in the inflation differential between Botswana and major trading partners such as US, UK and South Africa.

Esther Mpete, researcher at the Bank of Botswana defines currency exchange rate as the price of one currency in terms of another. In the Pula case, Botswana uses a crawling band exchange rate regime under which the local currency is pegged to a basket of currencies, including the US Dollar, Euro, South African Rand, and Japanese Yen amongst others.

Available official data obtained from the Exchange Rate Committee Meeting minutes held in October 2003 shows that prior to the 7.5 percent and 12 percent devaluations of 2004 and 2005, respectively, the Pula was assessed to have been overvalued by about 20 percent. Currently, Mpete pegs the over valuation at 4 percent.

“The Pula is moderately overvalued by about 4 percent. The decrease in non-mining exports, trade balance deficit and declining of foreign reserves present a strong signal of an overvalued currency and weakening international competitiveness”, reads part of a paper authored by Mpete and published in early September 2021.

Official figures pegs the country’s merchandise account at a revised deficit of P23.2 billion in 2020 compared to P11.6 billion in 2019. The unfavourable figures are blamed on a 16.7 percent decline in diamond sales abroad from P51 billion in 2019 to P42.5 billion during the Covid 19 year of 2020. The merchandise account records the country’s transactions with external markets and is also part of the current account. The central bank says the deterioration of the country’s Balance of Payment (BoP) has been unfolding alongside the slowdown in annual economic growth, which dropped considerably from an average of 7.1 percent during 2005 – 2007 to an average of 6.4 percent during 2010 – 2012. This was followed by an average of 4.6 percent, and 3.9 percent during 2013 – 2015 and 2016 – 2018, respectively.

Mpete says going forward, to strengthen the country’s trade competitiveness and promote its diversification drive, the value of the Pula needs to reflect changes in the fundamentals.

“An assessment of some macroeconomic fundamentals, key indicators of external stability, indicates that Botswana’s external position is somewhat weak”, says Mpete.

She adds that the 2.87 percent downward rate of crawl that is currently being implemented is expected to go a long way in re-aligning the Pula exchange rate.

In January, the Pula basket was kept at 45 percent to the South African Rand and 55 percent to the International Monetary Fund’s special drawing right currencies.

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