Sunday, July 3, 2022

Economists hail Pula rate of crawl disclosure

After almost eight years of non-disclosure of both the rate of crawl of the Pula and the weight of the currencies in the basket, government has finally acceded to calls from economists and investors for disclosure in a bid to foster transparency of Botswana’s exchange rate mechanism.

The long overdue move has been hailed by economists who believe it will assist banks and companies to efficiently manage their foreign exchange.

The disclosure was announced by Minister of Finance and Development Planning Kenneth Matambo in his 2013 Budget Speech that was presented to parliament on Monday.

Announcing the move, Matambo said the current rate of the downwards crawl is minus 0.16 percent per annum, which is intended to minimise the impact of the exchange rate adjustment on inflation.

The weights of the currencies in the basket, according to Matambo, are 55 percent South African Rand and 45 percent for the currencies that make up the International Monetary Fund (IMF)’s Special Drawing Rights (SDR).

“The rate of crawl and the weights of the currencies in the basket will be adjusted when the underlying conditions change. Such changes will be announced at the time they are made,” said the finance minister.

He explained that under the crawling peg exchange rate mechanism, the exchange rate of the Pula against a basket of international and regional currencies is adjusted gradually, based on the expected inflation differential with the country’s trading partners, and consistent with the central bank’s monetary policy.

“Given a higher expected inflation in Botswana than in trading partner countries, the Pula has been crawling downwards to prevent a loss in competitiveness of the Pula,” Matambo said.

The minister emphasised that while exchange rate adjustment is a short term measure, the best way for domestic producers to achieve sustainable international competitiveness is through gains in productivity.
“To achieve efficiency in the use of available resources is critical and must be an issue of concern for both the government and the private sector”, cautioned the finance minister.
A proponent of the disclosure, independent economist Dr Keith Jefferis who hailed the move said it was long overdue and would help banks and companies to manage their foreign exchange efficiently.

He added that it is a positive development and good for transparency. In his Economic Review for the third quarter of 2012, Dr Jefferis had decried that the specific details or parameters of the exchange rate mechanism were not made public by government or Bank of Botswana.

“In particular, the rate of crawl and the weights of currencies in the basket are not disclosed.
However, it is known that the rate of crawl is linked to the differential between projected inflation in Botswana and major trading partners, and that since the crawling peg was introduced, the crawl has been downwards ÔÇô although in principle it could be an upward crawl if Botswana’s inflation was expected to be lower than that of trading partners,” he observed.

Dr Jefferis explained that it is fairly easy to calculate the parameters through simple regression analysis and that using that technique, changes in the weights or the rate of crawl can be detected, albeit with a lag.

He observed that a significant change was made earlier in 2012 and notably the weight of the rand in the basket was reduced while that of the US dollar and other SDR currencies was increased.

“The rate of crawl was also reduced, so much so that the downward crawl is now almost non-existent.
In deference to the wishes of the authorities, we will not report the calculated values of the basket weights and rate of crawl here. Nevertheless, we continue to encourage the authorities to publish this information, in the interests of transparency in economic policy implementation, and to help decision-making in the private sector,” said Dr Jefferis.

He added that the changes will have a considerable economic impact in that the pass-through of imported inflation would be sharply reduced and help bring inflation within the central bank’s 3-6 percent objective range during 2013.

Secondly, he argued that by leading to a stronger Pula (compared to what its value would have been under the previous downward crawl), it was likely to reduce competitiveness through an appreciation of the real effective exchange rate, notwithstanding lower inflation.

His main worry was that the end result would make export led growth (and import substitution) more difficult to achieve.

“The change seems, therefore, to reflect a renewed emphasis on bringing down inflation, and less on achieving economic growth and diversification. But perhaps this is reading too much into the rationale for the change. Under the old policy, the Pula was likely, in time, to reach parity with the rand; under the changed policy this is now much less likely”, posited Dr Jefferis.

Echoing similar sentiments, Botswana Institute for Development Policy Analysis (BIDPA), Professor Roman Grynberg, said it was a positive move that would help investors determine the real value of the local currency (Pula). He also commended the disclosure.

Botswana Stock Exchange (BSE) Product Manager Thapelo Tsheole said exchange rate is among the most important prices in an open economy like Botswana’s because it influences the flow of goods and services and most importantly capital movement.

“These goods, services and capital are important in the running of any business in an economy because they use these inputs in their productions. Therefore, by availing the information on the exchange rate to the businesses, it will aid their business planning decisions hence safeguard their competitiveness, stability and further reduce uncertainty (better estimation) from business owners. Business owners now know the magnitude and viability of the crawling peg arrangement,” said Tsheole.

Like his peers, he said it is a positive development by the central bank and shows that the country has a central bank that knows, cares and listens to the concerns of the business community.

“To me it’s actually one of the most, if not the most important announcement in the budget. It’s a fact that businesses need information and certainty to operate efficiently and certainly this provides a huge advantage in terms of business planning”, he concluded.

In January , the Pula depreciated against the euro (6.1 percent), US dollar (3.3 percent), the British Sterling Pound (1.3 percent) and the Japanese Yen (2.1 percent). On an annual basis (12 months to January 2013), the Pula depreciated against the US dollar (9.1 percent) while it appreciated against the Yen (8.3 percent) and the Rand (5.1 percent).

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