The running down of┬áforeign sovereign┬áreserves by government┬ápose a great threat to the Pula exchange rate against its trading partners, Botswana Insurance Fund Management (Bifm) warned┬áthis week.
In its quarter review Bifm’s┬áhead of the Investment Committee, Dr Keith Jefferis┬áexpressed concern about the status of the reserves, saying if they continued falling and the┬ácountry continued to run a streak of┬ábalance of payments deficits, it┬áwill definitely weaken the Pula exchange rate.
This would eventually have implications for the exchange rate as the current exchange rate policy is dependent upon a high level of reserves to support the crawling peg. The crawling peg is a mechanism that is aimed at the Pula automatically adjusting itself against a basket of currencies that make it up.
The pula is┬á65 percent┬áSouth African rand, and the rest is dividend among the┬áUS dollar, Euro, Sterling Pound, Yen and SDR.
“Preventing this outcome requires restoring a balanced government budget as the fiscal deficit is one of the main drivers of the balance of payment,” he said in the review.
Botswana government has been running a balance of trade deficit for successive┬á20 months┬áto June this year owning to┬ápoor performance of the mineral sectorÔÇöespecially diamonds.
The diamond┬ásector was badly buttered┬áduring the┬áglobal economic crisis as the USA which is the leading diamond market┬ásuffered the weakest consumer confidence since the Great Depression.
As a result of that government┬á announced a P 12 billion┬á budget deficit which it said┬á was to be financed through various means┬á that included borrowing locally, internationally and drawing from the foreign reserves.
That whittle-down the foreign reserves from P 65 billion to around P 53 billion or 20 percent down┬á from their peak as government propped up some of the developmental projects that included the construction of stadium, airport and┬á dams.
“Between January and July 2010 the reserves fell by around 9 percent in pula and US dollar terms, and by July were around 20 percent lower than their peak in mid-2008,” Jefferis said.
However, he pointed out that the country experienced better than expected recovery┬áduring the┬ácourse of this year thanks to┬ábetter┬ádiamond prices and┬ávolumes that were sold through DTC.
“Recovery in Botswana’s most important industryÔÇödiamond mining ÔÇô has been stronger that earlier expectations, with global┬ádiamond market increasingly robust. This had a positive impact on trade balance and government budget, and has helped to stabilize some of the adverse macroeconomic┬ádevelopments that were in full swing┬áa year ago,” he added.
However, he pointed out that the┬áglobal economic┬áoutlook was still fragile as consumer confidence is┬ástill weak in the US market. Further, although the┬ádiamond prices are buoyant that is not reflected as the┬ápolished side┬áwhich┬ámeans that┬ámuch of the┬ádemand is being driven by┬ácutters and polishersÔÇöa move that might heat up.