The Botswana Minister of Finance and Development Planning, Baledzi Gaolathe, on Sunday announced a 12% devaluation of the pula against a basket of currencies, as well as a change in the system of exchange-rate adjustments to a crawling peg rather than the discrete steps previously used, in order to improve Botswana’s competitiveness.
“One of Botswana’s exchange-rate policy objectives is to maintain a stable and competitive real exchange rate of the pula against a basket of international currencies. This is a critical element in our strategy to achieve sustained and diversified development,” Gaolathe said.
The rate of crawl will be reviewed from time to time to align it with the differential between the expected rate of inflation in Botswana and the expected rate of inflation in the currencies of the basket.
The margin between the buy and sell rates for currencies quoted by the Bank of Botswana has been increased from the current margin of about 0,125% around the central rate to a margin of about 0,5% around the central rate.
“The new system has major advantages over the system it replaces. First, the slow, steady crawl provides an assurance that in the future the exchange rate will remain in line with the fundamentals. Second, it is forward looking, which thereby provides an anchor for expectations about future inflation and interest rates.
“Third, the new system will encourage the development of a foreign-exchange market. This is intended to encourage the development of an interbank foreign-exchange market,” Gaolathe explained.
Gaolathe expects the tourism, textiles, diamond, copper-nickel and beef sectors to benefit from a more competitive exchange rate.
In addition, the assurance of a stable, competitive real effective exchange rate will be an important reassurance to foreign direct investors that Botswana is an attractive destination.
The move was widely expected, with the United Kingdom-based Consensus Economics expecting the pula to move to 5,14 per dollar over the next 24 months, from 4,542 in early May when the survey was taken.
It was the scale of the move that caught economists by surprise, as the last devaluation on February 5 last year was only 7,5%. The new pula rate is 5,44 per dollar.
Botswana’s country ceilings for foreign currency debt and bank deposits are rated A2/Prime-1 by Moody’s Investor Services, and the government’s domestic currency rating is A1.
These ratings reflect very low levels of debt and an exceptionally comfortable liquidity position, Moody’s said in August last year.
Prudent management of diamond export earnings — in value terms, the country is the largest producer of diamonds in the world — is primarily responsible for Botswana’s impressive macroeconomic record since independence in 1966.
Gross domestic product (GDP) growth rates have averaged 7% a year and per capita incomes have posted some of the highest rates of growth in the world.
Such high levels of sustained growth have not translated into significant imbalances, whether on the fiscal or external fronts. Furthermore, a conservative monetary policy strategy has contributed to relatively low and stable inflation more recently.
These strengths are partially mitigated by a narrow economic base and the severe socio-economic impact of the HIV/Aids pandemic. In addition, wide income inequalities and high unemployment rates persist, partially the product of educational and skills shortages.
Despite consistent efforts at diversification, the diamond sector continues to dominate macroeconomic performance.
Mining, primarily diamonds, still contributes more than third of GDP, provides about 70% of export earnings and makes up around half of government receipts.
Reducing the economy’s dependence on diamonds and handling the HIV/Aids crisis remain the primary focus of the government development strategy over the ninth national development plan period, lasting from 2003/04 to 2008/09.
Botswana boasts very low levels of debt (10% of GDP) and remarkably managed to avoid the “Dutch disease”-related distortions that typically affect economies with large natural-resource endowments.
Regrettably, the meaningful expansion of non-mining sectors depends largely on factors outside of the control of policy-makers, Moody’s noted.
First, because Botswana’s domestic market is relatively small (population of 1,7-million), attracting foreign investment has been difficult.
Second, Botswana’s geographic location (the country is landlocked and geographically distant from the world’s main markets) makes it a relatively unappealing export platform.
Third, despite Botswana’s track record of macroeconomic and political stability, relatively low levels of foreign investment are attracted to the region generally. — I-Net Bridge