Saturday, May 21, 2022

Pula exchange rate under threatÔÇöBifm

The running down of foreign sovereign reserves by government pose a great threat to the Pula exchange rate against its trading partners, Botswana Insurance Fund Management (Bifm) warned this 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 65 percent South African rand, and the rest is dividend among the US 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 sector was badly buttered during the global economic crisis as the USA which is the leading diamond market suffered the weakest consumer confidence since the Great Depression.
As a result of that government  announced a P 12 billion  budget deficit which it said  was to be financed through various means  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  from their peak as government propped up some of the developmental projects that included the construction of stadium, airport and  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 during the course of this year thanks to better diamond prices and volumes 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.


Read this week's paper