Saturday, October 16, 2021

Economist outlines “Rand” effect on Botswana’s diversification efforts

Local economist, Keith Jefferis, opines that the reduced weight of the South African currency, the Rand, in the basket of currencies to which the local currency, the Pula, is attached to undermines efforts to diversify the economy through export led growth.

Within the currency basket the Rand constitutes 45 percent and the remaining 55 percent is the Special Drawing Right (SDR). The SDR, created by International Monetary Fund in 1969, presently consists of five major currencies namely US Dollar, Japanese Yen, Euro, British Pound and Chinese Renminbi. According to a Bank of Botswana (BoB) July research bulletin the SDR has been an important part of Botswana’s economic and financial policies as is reflected in the exchange rate policy framework, the monetary policy and foreign exchange reserves management. The Pula is set relative to these currencies on the basis of trading relationship Botswana has with their respective countries.

Jefferies argues in his latest economic report for the second quarter that the adjustment of the Rand’s weight from 50 percent to 45 percent in the SDR will make it difficult to support competitiveness of local firms if the rand weakens against the US dollar, which he says many commentators expect to happen in the medium-term. “This would lead the Pula to appreciate against the rand, making life difficult for many firms,” he says. His view is that by encouraging local firms’ competitiveness it will in turn improve their ability to export what they produce as well as create jobs.     

“There is a strong case to consider a reversion to the old policy of determining the Pula exchange rate basket weights on the basis on diversification and job creation objectives, not some other objectives (such as the interests of importers). This would require an increase in the rand weight in the basket, say to 60%, from the current 45%. And there may be a case to consider a modest downward crawl against the basket, rather than the current upward crawl,” he says. He suggests that the Rand should edge closer to 65 percent and the SDR at 35 percent as it did between 1997 and 2007. With the Rand at 45 percent of the basket’s weight Jefferis believes the policy adopted is that of a ‘strong Pula’ which he views as counterproductive to local producers given that it adds to their existing struggles. The downward adjustment of the Rand’s weight was done at the beginning of the year to which the Ministry of Finance and Economic Development explained was done to keep up with monetary policy developments in Botswana’s major trading partner countries, with a view of maintaining a stable and competitive real effective exchange rate of the pula.   

The focus of this discussion is the exchange rate policy framework which refers to the way in which a country manages its currency in respect to foreign currencies and the foreign exchange market. BoB explains that in formulating the policy a balance must be found between several differing, and sometimes conflicting objectives. It says, “the use of the exchange rate to promote the competitiveness of domestically-produced goods must be considered alongside the implication for the international purchasing power of the currency and, in particular, the impact of changes in the exchange rate on domestic inflation.” Jefferis points out that the Rand is particularly important because a significant number of Botswana’s non-mineral exports have traditionally been destined for South Africa. Excessive decrease in the Pula currency price against the Rand currency price, he says, would mean that local producers become increasingly uncompetitive.

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