Pula hinges on Rand depreciation

MBONGENI MGUNI
Staff Writer | Friday August 6, 2010 00:00

Boosted by strong capital inflows, the Rand has gained against the Pula and other hard currencies since last year, strengthening from levels of R10.27 to the greenback in February 2009, to its current R7.31. From February 2009 to February 2010, the Rand rose by 37 percent against the US Dollar, during which period the Pula declined by approximately 12 percent against the Rand.

Over the same period, the Pula has generally firmed against the US Dollar, as a result of the operation of the currency basket against which it is managed. Botswana's currency basket includes the Rand, US Dollar, British Pound, Euro and Japanese Yen.

The Bank of Botswana's crawling peg currency management system also means the Pula's weakening against the stronger Rand has been incremental rather than sudden.

Analysts have pointed out that the Rand/Pula exchange has been drifting towards parity. Parity would spiral Botswana's approximate P2.7 billion a month import bill, of which 85 percent is from South Africa, adding pressure to domestic inflation and the recovering economy.

The Pula's gradual weakening against the Rand has contributed in part to Botswana's estimated import bill of P15.6 billion between January and May this year. The ripple effects of the weaker Pula have been felt throughout the economy, particularly small scale trading sector which relies on South African commodities.

This week, it emerged that a sector-wide effort is underway in South Africa to pressure that government to act on the Rand's strength. Several large manufacturing firms, unions and other entities have stepped up pressure on President Jacob Zuma's government to implement exchange policy action that will result in a weaker Rand.

The group argues that the strong Rand has hurt exports and job stability, in an economy still shrugging off the effects of last year's global recession.

The Rand is presently a free-float currency, meaning that it cannot be devalued; any action to lower its value by the South African government would require a change in exchange rate policy.

Lobbyists in South Africa are thus calling for a shift away from the free-float system and a move towards more management of the currency.

'The Rand should be linked to a basket of currencies to protect local industries, especially manufacturing. Both the manufacturing and tourism sectors would benefit from a competitive currency.

'We have found it very difficult to engage with the National Treasury on this issue and we are calling on this department to be realigned to operate more sensitively to the needs of industry,' PG Group CEO, Stewart Jennings was quoted as saying in South African media.

COSATU Secretary General, Zwelinzima Vavi said: 'Government from time to time speaks about the need for the Rand to reach a competitive level, but we only really hear this in the budget speech or the state of the nation address.

'We need to see some aggression in terms of the competitiveness of the exchange rate and more needs to be done.'COSATU has called for the re-introduction of the fixed peg system, suggesting that the Rand should be set at R10.50 to the greenback.

Last week, President Zuma pledged to meet industry soon on the level of the Rand, hinting at possible action to lower the South African currency.

Other industry actors in South Africa have slammed talk of action on the Rand, saying previous interventions had proved disastrous for that economy.

'High inflation is the inevitable consequence of currency devaluation and this is precisely what occurred eight years ago. The further consequence is an increase in income inequality, as the better off are able to protect themselves by investing n assets, which increase in value during periods of inflation, while the poor are most at risk,' said Pick n Pay Chairman, Gareth Ackerman in a statement released to the media.

He added that South Africa being a net importer of food and food commodity products would suffer badly from any attempt to lower the Rand's value.

Local economist, Keith Jefferis said while currency trends were difficult to predict, it was expected that the Rand would gradually depreciate in coming months.

'There's an expectation that the Rand will depreciate over the next 18 months and that would help the Pula strengthen against the Rand and take some pressure off.

'One cannot predict these matters with any accuracy because they depend on other exchange rates such as the Rand/US Dollar.

However, on the basis of the best available forecasts, I would say that the Pula could weaken further against the Rand in the next six to nine months, but not reach parity.

'Eventually, the Rand will weaken and this will cause the Pula to strengthen against the Rand and most likely recover to above R1.10 by the end of 2011,' he said.

The weaker Pula will however boost local exports to South Africa, estimated at P1.2 million by May 2010. For 2009, total exports to South Africa were P3.6 million, the largest in Africa.

In addition, a persistently strong Rand will open up opportunities for Botswana exporters in competitive markets such as SACU, Africa, European Union and the US.