Pula, Rand gravitate towards parity

Brian Benza
Staff Writer | Wednesday December 22, 2010 00:00

From trading at between R1.40 and R1.50 two years ago, 2010 saw the pula increasingly lose its weight against the Rand and edge towards parity mostly on the back of the strengthening Rand rather than the BoB's policy.

According to the Bank of Botswana exchange rates, by Tuesday trading, the Pula was trading at R1.07, but the effective rate with commission factored in would see a holder of one Pula getting just about one Rand.

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 Rand. From January to October this year, the Pula has lost a further 6.9 percent against the Rand. The depreciation of the Pula - or, put in another way, the strengthening of the Rand -  has not only suffocated business for cross-border traders but it has also seen the arbitrage advantage for Batswana to do their shopping or car servicing in South Africa fade away. In the bigger picture of the economy, the two currencies' drift towards parity would spiral Botswana's average P2.5 billion a month import bill, 85 percent of which is from South Africa, adding pressure to domestic inflation and the recovering economy. The ripple effects of the weaker Pula have also been felt throughout the economy, particularly the small scale trading sector which relies on South African commodities.For decades, cross-border informal trade through South Africa has provided a lifeline for many Batswana who are 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.

However, 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 it. On the basis of the best available forecasts, analysts say that the Pula could weaken further against the Rand in the next few months, but not reach effective parity. Eventually, analysts expect the Rand to 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. On the other hand, the weakening Pula has however boosted exports to South Africa as Botswana goods will be relatively cheaper on the South African marketIn addition, a persistently strong Rand will open up opportunities for Botswana exporters in competitive markets such as SACU, Africa, the European Union and the US.