Botswana stood to gain more from the introduction of the new exchange rate mechanism in May 2005, it was said in parliament this week.
The newly appointed assistant minister of Finance and Development Planning, Guma Moyo, said one of the policy instruments of achieving macroeconomic stability is the introduction of the crawling-peg rate.
He noted the major objective of the crawling rate is to maintain a stable and competitive real exchange rate of the pula against a basket of international currencies.
The crawling rate will mean that the pula will adjust itself automatically against its trading partner currencies.
“This is critical in our strategy to achieve sustainable and diversified development. Since 1993 the real effective exchange rate of pula had appreciated by 20 percent relative to its long term average, indicating a loss of competitiveness. This was the principal reason for the devaluation of 7,5 percent in February 2004.
May 2005 saw a new exchange rate system called the crawling-peg.
“The crawling-peg is a method of achieving a desired adjustment in the exchange rate (up or down) by small percentages continuously within a given band or a range, rather than by major devaluation or valuation. As a consequence of the introduction of the new system, the pula had to be devalued by 12 percent in order to bring the local currency in line with its long term average,” Moyo revealed.
According to the legislator, studies have revealed that countries that have persisted with an overvalue currency invariably have had slower growth rates and frequently had currency crises that forced painful adjustments.
“Therefore, getting the exchange rate right is important for our future prosperity because a stable and competitive real exchange rate is one of the critical factors to achieve sustainable and diversified development.”
With the crawling band small, adjustments are made continuously taking into account the inflation differential between Botswaan and her trading partners, he said.
Moyo reassured that “one of the benefits of the steady crawl is that there is assurance that, in the future, the exchange rate will remain in line with economic fundamentals.”
“Keeping the real effective exchange rate in line with the fundamental benefits both exporters and domestic producers competing with imports as they are now are more competitive.”
The new regime also provides an anchor for expectations about future inflation and interest rates.
According to the February 2008 data from the Central Statistics Office, earnings of Botswana’s exports of both traditional and non-traditional commodities have grown significantly since May 2005.
Traditional exports include beef and diamonds, which are the mainstay of the economy of the country.
“Since the introduction of the new exchange rate regime in May 2005, exports increased from P22,5 billion to P26,7 billion in 2006 and further to P32,4 billion in 2007.
This, according to the assistant finance minister, represents an average annual increase of 13 percent over the entire period.
Over the same period, traditional exports which include meat and meat products, diamonds and copper/nickel matte, taken together, showed a significant increase with copper nickel matte increasing by an annual average of about 43 percent followed by the meat and meat products at about 23 percent.
Diamond exports grew by an annual average of about 6 percent over the same period.
“On the other hand, non-traditional exports, such as textiles, grew by an annual average of 25 percent. These improvements in exports reflect both, volume or quantity and price increases as a result of improved competitiveness”.
Moyo, who is also the Tati East MP, told parliament: “It is equally important to note that there was also a marked increase in production of imports competing commodities such as eggs, bread, bricks, fruits etc which helped to improve the trade balance further.”
Consequently, the balance of trade improved significantly in 2005 to P6,4 billion, from 1,3 billion recorded in 2004, he maintained, adding “the trade balance continued to improve reaching P6,8 billion in 2007”.
According to the assistant minister, the figures presented show an improvement in “our balance of trade as a result of improved competitiveness of our exports”.
“As far as we are concerned the introduction of a new exchange rate mechanism and consequent devaluation of the pula played a positive role in promoting our exports and import competing goods. The net effect of this is that the economy has also started to grow rapidly as shown by the 6,2 percent growth in 2006/07 national accounts year.
Minister Moyo was answering a question from Selebi-Phikwe West MP, Kavis Kario.