Friday, May 24, 2024

The power of abolishing exchange controls

Two decades after the Botswana government sent all Exchange Controls the “dinosaur way”, there are tangible results that the tiny but mineral rich southern African nation can show for. 

The country’s Finance and Economic Development Minister – Dr Thapelo Matsheka says Botswana has been able to have a sound and stable macroeconomic environment thanks to the enhanced opportunities for trade and investment that came after abolishing exchange controls.

Exchange controls are government imposed limitations on the purchase and sometimes sale of currencies. These controls allow countries to better stabilize their economies by limiting in-flows and out-flows of currency, which can create exchange rate volatility or unpredictability. In Botswana they were abolished on the 9th of February 1999.

Last week Matsheka shared the international financial flows which reflect economic and other transactions between Botswana and the rest of the world. With attention directed towards the appropriate measure of flows of capital such as the overall net payments pertaining to various transactions and taken in totality.

Sharing the amount of inflows and outflows for the past five years between 2014 to 2018, with overall net flows indicated by movements in foreign exchange reserves.

Matsheka told Parliament that during this period, the foreign exchange were P79.1 billion in 2014, 2015 P84.9 billion, P76.8 billion in 2016, P73.7 billion and P71.4 in 2018. The amounts of net outflows were P5.4 billion in 2014, P11.1 billion in 2015, P1.9 billion in 2016 and P7.6 billion in 2017.”

“In 2018 portfolio investment recorded a net inflow of P5.4 billion, as a result of liquidation of foreign assets by Pension Funds. For the other investment categories, capital flows are mainly influenced by foreign assets of commercial banks,” Dr Matsheka said.

Given the small size of the market, Botswana has been advised to pursue and outward looking strategy geared towards supporting market expansion and economic diversification efforts, in particular export led growth. Dr Matsheka said “this strategy is important and serves Botswana well, since it promotes foreign direct investment (FDI). The country can and does benefit from FDI such as technology and skills transfer, employment creation and improved standards of living as well as access to foreign markets.”

The minister of finance was updating Parliament at the request of Member of Parliament for Selibe Phikwe west Dithapelo Keorapetse, who asked for an update on the year in which foreign exchange controls were abolished. The amount in Pula terms of inflows and outflows of capital and whether the system of free play of inflow and outflow of capital works perfectly for Botswana and if not, to state the imperfections and what he is doing about these.

Furthermore Minister added that the absence of exchange controls has enhanced opportunities for efficient trade and investment for both Botswana and foreign residents in this country, it can pose some challenges for monetary policy. He said “I am happy to observe that the current framework for the conduct of monetary policy and the crawling band exchange rate mechanism have effectively dealt with these challenges, hence the country continues to have a sound and stable macro-economic environment.“

Meanwhile Matsheka assured Parliament that government commitment towards implementing the necessary economic and other structural reforms to build resilience through economic diversification and inclusive growth.


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