Mixed feelings greet prospects of Pula slide against Rand

GALE NGAKANE
Correspondent | Friday October 15, 2010 00:00

 

Sesinyi, a retired civil servant and author who started working for BoB on a contract basis on September 20, was responding to a Mmegi inquiry.

The Botswana currency fetched only R1.o4 for P1.00. From August 1976 when Botswana formally withdrew from the Rand Monetary Area (RMA) and introduced its own currency and pegged it to the US dollar at P1 = US$1.15, the Pula has never fallen below the Rand.

The Pula was on a par with the Rand, which was also pegged to the US dollar at R1= US$1.15.

Even by May 2005, when Botswana introduced a major change in its exchange rate policy that entailed the adoption of the current framework based on the crawling band mechanism where the rate of crawl is based on the differential between the Bank of Botswana's inflation objective and forecast inflation in trading partner countries, the Pula was still stronger by far.

 'It is possible that the value of the Pula could fall below the South African Rand due to the way the exchange rate mechanism operates. If the South African Rand were to strengthen against the other currencies in the basket, the Pula would depreciate further against the South African Rand.

'In addition, as it currently operates, the crawling band will also bring about a gradual depreciation, on average, against all currencies in the basket.

This is due to inflation in Botswana remaining higher than average inflation in trading partner currencies,' said Sesinyi, noting that if inflation in Botswana were lower than in its trading partners, the crawling band would be operated so as to bring about a gradual appreciation.

He hastened to add that it was not to say that such a development (where the pula fell below the Rand) was likely because there was intense pressure within South Africa to reduce the value of the Rand while international currency markets remained volatile and sentiment towards the South African Rand could easily change.

Sesinyi said there would be no important impact, one way or another, of such a development, adding that from an economic perspective, there was nothing significant about a particular nominal value for the exchange rate against any particular currency.

'It would certainly not signify that Botswana had fallen behind South Africa in any respect,' Sesinyi expained. 'There may be some impact on domestic inflation as goods and services imported from South Africa become more costly, but this would be substantially offset by the extent to which inflation in South Africa would be expected to fall due to the strength of its currency.

'While there is frequent talk in many countries of the need to have a 'strong' currency, this means very little in practice. It is at least as harmful to have a currency that is overvalued as one that is undervalued, and this is not determined by whether the bilateral exchange rate with one currency passes a particular value, however symbolic.

'Globally, in the context of the recent economic recession, many countries other than South Africa are concerned that their currencies are overvalued.

'This is not to say that nobody would be affected by a further depreciation of the Pula against the South African Rand. It will never be the case that the exchange rate (vis-a-vis any currency, not just the South African Rand) is at a level that favours everybody. Some will benefit while others will not, at any given point in time. 

'The exchange rate mechanism in Botswana was chosen to help stabilise the overall value of the currency once inflation is taken into account, with an emphasis on supporting the competitiveness of local businesses.

'This cannot be done by focussing on a bilateral exchange rate in isolation. But, currently, the reduced value of the Pula against the South African Rand is helping businesses in Botswana to compete against South African businesses.'

Botswana's business community and members of the public are fearful that the country would fall on hard times if the Rand rose above the Pula.

Michael Paxton of Francistown-based Agrichem, which imports most of its agricultural products from South Africa, said such a situation would spell doom for his company.

'As it is now, the situation is making business difficult because we are forced to increase prices,' said Paxton. 'In the event that the Pula is overtaken by the Rand, it will get even worse. We might as well close shop.'

Another businessman who did not want to reveal his name concurred with Paxton, saying he would lose his customers who would find his prices above their capacity. 'It is bad already, but it could get worse,' he said.

Meanwhile, BoB still maintains that the weakening of the Pula would not mean the weakening of the economy. Said Sesinyi: 'It is true that the bilateral exchange rate of the Pula against the South African Rand has continued to weaken (this trend has been evident since early 2009). However, there should be no inference that this signifies a weakening of the Botswana economy.'

The mechanism that determines the value of the Pula on a daily basis - the crawling band against a basket of currencies - was such that the currency's value was likely to move in different directions against the component currencies of the basket, he added.

 'Sometimes these movements represent day-to-day volatility, with offsetting movements following shortly afterwards. But if there is a strong longer-term trend in one of the component currencies, then this will also impact on the Pula. 

'In this context, the recent decline in the value of the Pula against the South African Rand is largely a reflection of the recent persistent strengthening of the South African currency against international currencies such as the United States dollar, the euro and British pound.

'This has resumed in recent weeks and is mainly due to international economic influences in the wake of the recent global recession rather than the strength or otherwise of the South African economy,' he said. However, noted that there were currently widespread calls from within South Africa for the authorities to take steps to reduce the value of the South African Rand to support competitiveness of South African producers.

He said if that were to occur, the value of the Pula against the South African Rand would increase once again. This possibility could be clearly seen in the experience of the past few years where there was a significant trend in both directions in the Pula/South African Rand exchange rate.

It should also be noted that the fact that Botswana was still able to choose the framework for determining its exchange rate was itself a reflection of the continuing underlying strength of the economy, he said.