Pula continues to gain against US dollar

BRIAN BENZA
Staff Writer | Friday May 8, 2009 00:00

As a result of 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. The Pula simultaneously gains against the rand.

The rand recently fell to as low as R12 to the US dollar, but by Wednesday, it had managed to gain big ground, trading at R8.08 against the dollar. Analysts believe it will continue on that path for some time as sentiment towards high-risk assets improves.

Consequently, the Pula has begun to gain against the American dollar as the see-saw in the financial markets continues.  On a year to date basis, the Pula has traded in similar fashion to other  currencies  like the euro, Japanese yen and British pound According  to figures from the Bank of Botswana (BoB) during April, the Pula appreciated against the euro (7.2 percent), US dollar (7.9 percent), the yen (7.0 percent) and the pound (4.0 percent) but depreciated against the rand (4.9 percent).  However, on an  annual basis the Pula depreciated against the yen (16.9 percent), US dollar (11.4 percent) and the rand (1.2 percent) while appreciating against the euro (3.6 percent) and the pound (17.4 percent).

The global financial crisis, which has seen international credit lines squeezed, had taken a huge toll on the rand as South Africa is dependent on international markets for its balance of payments support. As the markets continue to move up and down due to the turmoil, the exchange rate swings are expected to persist as well, much to the detriment of mostly the business sector.

Analysts believe the ideal situation would be for the currency to be stable so that businesses can plan properly.  Although economic commentators have always clamoured for a regime where the Pula appreciates against the US$,  on the basis that it will cut Botswana's Import bill from South Africa and increase the land-locked country's revenues which are usually  US$ based, renowned economist Dr Keith Jefferis believes the situation is not as simple as that. 'The simplified deduction that the weakening of the rand will work in our favour is not exactly true because a  weaker rand means  higher inflation in South Africa and since we  get  most of our import needs from there, we will end up importing the inflation here,' he said. In an earlier interview, Dr Jefferis  said that the crawling peg regime has served Botswana well, 'but it is of course necessary that the pegged exchange rate does not get too far out of line with economic fundamentals and what market forces would do if they were allowed to operate'.

'The Government made an important policy commitment at the time that the crawling band was introduced, which was understood as meaning that sharp adjustments in the exchange rate would no longer be necessary.' In order to maintain policy credibility, I believe that this position should be maintained, despite exceptional circumstances. The crawling band has sufficient flexibility built into the mechanism to cope with a wide range of circumstances and developments, and I believe that it can accommodate the current crisis as well as less turbulent times,' he said.