Pula slips against the dollar, firms against the rand

Brian Benza
Staff Writer | Friday October 31, 2008 00:00

 

Two months ago, the pula was trading at just under P7 per dollar, but it has now weakened to as low as P8.7 per dollar, following in the footsteps of the currency of Botswana's biggest trading partner, the South African Rand.

The unfolding global financial crisis, which has seen international credit lines squeezed, has taken a huge toll on the rand as South Africa depends on the international markets for its balance of payments support.

Over the same period, the rand has weakened against the dollar from around R8 to over R11 per dollar today.

'The rand has been weakened by the uncertainty surrounding South Africa's balance of payments support from international markets which are currently going through a crisis,' says economic consultant, Dr Keith Jefferis, in an interview with Business Week.'Due to the link between Botswana's economy and South Africa's, when the rand weakens against the dollar, the pula follows suit, although not by the same margins.

At the same time, the pula also gains against the rand.'

The pula has been strengthening against the rand over the past months, going from around 88thebe to a rand, to around 75thebe to a rand.

In a mid-term fiscal policy review in Cape Town recently, South Africa's Finance Minister, Trevor Manuel, warned that higher global borrowing costs, falling commodity prices and weaker demand for South Africa's exports would cause the economy to slow and push the budget into deficit.

The rand has slid 33 percent against the dollar this year, making it the worst performing major currency in the world, partly owing to concerns that the country will struggle to finance the gap with foreign purchases of stocks and bonds.

While the recent development may be short-termed, the exchange rate movements may favour Botswana, which relies on South Africa for about 90 percent of its imports because the firming of the pula should reduce the import bill.

Although many economic commentators have always called for a regime such as this one - where the pula appreciates against the rand and depreciates against the US dollar on the basis that it will reduce Botswana's import bill while increasing the country's dollar-based revenues - others have tended to differ from this position, arguing that the situation may not be as simple as that.

Jefferis said in an earlier interview that the deduction that the weakening of the rand would work in Botswana's favour could be misleading because a weaker rand meant higher inflation in South Africa and therefore the domino effect of more imported inflation in Botswana. The ideal situation was one of stable currencies in which businesses could plan properly rather than one of continuous currency fluctuations, Jefferis said.