Informal traders the hardest hit in Pula's freefall

| Friday April 9, 2010 00:00

 

Times are tough; times are impossible. The battle-weary faces of the informal traders tell the riches-to-rags story of a currency that is conspiring to impoverish the already marginalised. For decades, cross-border informal trade through South Africa has provided a lifeline for many Batswana unable to get a foothold in the mainstream economy. These informal traders, mainly engaged in clothing, hair products and various fashion accessories, enjoyed bustling business in the late 1990s, throughout the new millennium and until recently, all underpinned by the Pula's traditional dominance of the South African Rand.

From 1976 when the Pula replaced the Rand as Botswana's official currency, monetary policy authorities sought to strategically weigh the new currency against the Rand, taking into consideration the high import bill from South Africa. The result was numerous devaluations between June 1980 and May 30, 2005 when the government introduced the crawling peg mechanism under which the Pula is adjusted continuously against the currencies of five major trading partners.

The numerous devaluations, including the one by a whopping 12 percent on May 30, 2005, did little to sully the Pula's generally favourable rate against the Rand, driving cross-border traders' informal business. A case in point is that by 2002, the Pula was worth R1.60 and after the 2005 devaluation, slid down to only R1.40.During this halcyon period, burgeoning cross-border trade forced local authorities to demarcate and allocate stalls for traders in various centres, boosting informal trade activities, while simultaneously offering wider retail options for consumers. Those traders without access to stalls used a variety of marketing methods, including word-of-mouth, to sell their wares.So successful was this informal trade that it quickly became an established informal employment sector, moving from a family-based enterprise to a semi-official venture capable of employing and providing livelihoods for many. All this was based on the precarious balance between the Pula and the Rand, which held a positive relationship since the Pula was pegged against a basket of currencies in 1980.

However, the beginning of 2009 marked the decline of the decades-old sector, with the steady decline of the Pula against the Rand. From trading between R1.30 and R1.40 at the height of the cross-border trade, the Pula last year began a downward slide that by Wednesday saw the local currency plummet to R1.07, one of the lowest points ever.

While the Pula appreciated by about two percent against the Rand in 2007 and a further 10 percent in 2008, it has thus far fallen by approximately 11.8 percent since the beginning of 2009. Between last October and this week, the Pula has averaged R1.11, and forecasts are that the rate could drop even further.The Pula's fall has dragged down cross-border traders with it. In separate interviews this week, traders said their previously lucrative business had come grinding to a halt, leaving them teetering on the brink of insolvency.

For more than a decade, Pauline Wilfred has built up a solid business importing and retailing textile products from South Africa for local value addition. She fondly remembers her business' heydays when the Pula's strength drove profitability.'I was heavily into the business when the rate was between R1.25 and P1.30 and we were able to make profits. Now, purchasing goods in South Africa has become so expensive; there are no profits to be made any more.

 'Many people are now opting to buy in Asia, China in particular, but some of us don't have that option. My business is making pillows and selling sheets and South Africa is still the best place to buy these materials. I'm now simply in the business to make whatever little I can to continue providing for my children,' she said. For David Kgafela, the business has become a hand-to-mouth affair. 'We are living from hand to mouth. The business used to make enough to enable us to save. Now we are in the business only to sustain ourselves; to make a living. Now it's just about providing for the family and paying school fees,' he said.

Kgafela explained that the nature of the informal trade was such that passing on higher import costs to consumers was self-destructive. 'We are already many in this industry, and if you raise your prices, you will not get business at the end of the day. 'We are already competing with the shops around us. The rate of the Pula to the Rand has killed us. We used to offer cheaper prices than the shops, but now we have to fight hard for every thebe,' he said.

Another trader, Charles Ntlhe, described the customs duty charged on their imports as 'the straw that broke the camel's back'. 'You leave here using money, travel all the way there, buy the items at a high price and are then charged customs duty at the border! This industry has become riddled with challenges and profits have dried up,' he said.

The shimmer in the tunnel for the traders is the forthcoming World Cup in South Africa. Local football fans are already snapping up football jerseys and tracksuits associated with their favourite teams.

'People do buy the football jerseys and the tracksuits, which are the hot favourite items here. We are fortunate because in South Africa, trade in these items is done by the Somalians and they are giving us at wholesale prices, enabling us to make a small profit margin. That's what is helping our business,' said Kgafela.

Economists say little can be done to help the cross-border traders. The experts point out that the Pula's freefall against the Rand has been more about the South African currency's strengthening rather than the local currency's weakening. The Rand has gained 28 percent against the US dollar and on Monday reached a 20-month high against the greenback.

The Rand's strength has been underpinned by a higher risk appetite among investors for high-yield assets. Besides traders, the currency's strength poses a concern for local economic prospects. 'It increases the costs of inputs; imports become more expensive. It also raises the issue of imported inflation. Cross-border traders really have no options.

'One alternative for them could be to look to different markets for their supplies. But generally, South Africa is preferred for its proximity and the fact that many supplies pass through it. There's little the traders can do; it's just a question of buying in South Africa and returning here to sell at a marginal profit,' said Odirile Okaile, African Alliance analyst.

However, the silver lining on the traders' cloud is that the Pula tends to gain against the US dollar whenever it (the Pula) weakens against the Rand. The Pula has gradually gained ground against the US dollar and is presently trading at about P6.70 from a high of nearly P7.00 late February. This strength has led better-capitalised traders to look east for a return to profitability.

'I used to buy clothing, perfumes and other items from South Africa until about three years ago when I could see that the rate was eroding my already meagre profits. I have now been able to secure supply lines in Mainland China and the prices there are rock bottom! Buying in China has improved my competitiveness, although increasingly more traders are also going there. The price of the US dollar against the Pula is obviously helping this situation,' said Nono Segokgo, another trader. Another avenue for relief for the cross-border traders may come from South Africa itself where manufacturers are pressuring monetary authorities to review the Rand's value. The strong rand is undermining the manufacturing sector's export competitiveness.

While the South African government has dismissed speculation that it plans to fix the Rand's value, it is increasingly under pressure to accommodate the manufacturing and mining sectors' concerns.