Pula sinks to lows against USD, peaks against Rand
Mbongeni Mguni | Wednesday April 15, 2020 16:34
Records show that the Pula reached possibly its weakest level ever against the dollar on April 3, at USD/P12.36, as a result of the operations of the crawling peg system used to manage the local currency’s value.
The crawling peg system produces the Pula’s value by linking it to a basket of other currencies, which include the USD, British Pound, Euro and South African Rand and others. The system uses prevailing and forecast inflation in such countries and adjusts for levels of trade.
Each year, the Finance Ministry releases the rate of crawl for the Pula, which is the rate at which marginal increases or decreases are made to the Pula’s value based on inflation within the basket. This year, the rate was set at a downward crawl of 1.51% suggesting the Pula would seek to weaken during the year to maintain export competitiveness.
So far this year, the Pula has shed 15.3% against the USD, compared to a gain of about 0.01% last year.
Global currencies have been in flux over the sudden spread of the coronavirus outside China amidst rising infections and deaths. The crisis has triggered huge drops in most major stock exchanges and currency markets, leading to unforeseen effects on currencies such as the Pula.
While it has been falling against the US dollar, the local currency has been rapidly strengthening against the Rand, reaching a 17-year high this morning at BWP/R1.53. Traditionally the crawling peg mechanism means the Pula tends to gain against the Rand, when it loses against the USD and vice versa.
Since the beginning of the year, the Pula has gained about 16% against the Rand, compared to a drop in value of about 1.5% during 2019.
Analysts say the Pula’s current position is well balanced to support any ongoing local productive exports, while at the same time, minimising the impact of imported inflation from major trading partner, South Africa.
While weakness against the US dollar is associated with greater exposure to fuel price increases, global crude prices are currently at discounted levels, giving the local economy room to breathe. Government is due to announce a fuel price reduction soon, to boost the domestic economy at a time when the lockdown is stifling activity.
The Bank of Botswana’s Monetary Policy Committee is due to meet on April 30 where it is expected to cut the bank rate and thus lend support to the economy through lower loan costs.