Fall of dollar eats into Botswana's reserves

Brian Benza
Staff Writer | Friday January 11, 2008 00:00

According to a statement released by the bank of Botswana this week, last year the Pula depreciated against all the major trading partner currencies except the US dollar, against which it appreciated by 0.4 percent.

The annual largest depreciation was 10.3 percent against the euro while the least was 1.3 percent against the pound.

While the Pula lateral  movements in the year can be attributed to the crawling peg exchange rate regime adopted by the monetary authorities in 2005 coupled by the fall in the US dollar in 2007, analysts have remained adamant that the current currency movements are counter productive and are hemorrhaging the country's resources.

However, during the month of December, the Pula fell against the Rand  by (0.5 percent), the US dollar (0.1 percent), and the Euro (0.2 percent) while it appreciated by 3.0 percent and 1.2 percent against the Pound and the Yen, respectively. 

'The pula has been behaving in opposite directions against the rand and the US dollar for some time now and we believe the trend is set to continue particularly on the back of the continued fall of the US dollar against most major currencies.

'I, however, believe the current trend of the pula against the two currencies is supposed to be in the opposite direction, due to the negative effects the movements have on inflation and national revenue,' said an analyst with a local bank.

On the inflation front, it is believed that the primary external influence on domestic inflation is imported inflation from South Africa from where Botswana imports most of her goods, mainly food. Botswana imports about 90 percent of its food from South Africa.

The analyst added that if the Pula continues to fall against the Rand, the effects of an ever-bloating import bill will inflate the inflation figures here in Botswana.

Inflation has been a nagging problem for South African monetary authorities for some time now although pressures will be expected to ease as from February next year, due to the contractionary monetary policy measures adopted by the Reserve Bank of South Africa.

On the other hand, other economic commentators reckon a model exchange rate management system should be pulling the Pula in the opposite direction against the US$ as Botswana's foreign exchange revenues, mainly diamonds, are predominantly in the form of US$ and therefore the continued appreciation of the pula against the greenback will cut down on the US$-based revenues.

The continued appreciation of the Pula against the greenback will also eat into the national reserves which are US dollar-based.

'The 1.3 percent gain of the pula against the USD means that the country's national reserves (US$8billion as at December 2006) have lost 1.3 percent of value in pula terms.

'However, this situation is not peculiar to this country alone as most other countries in the world have their reserves in the form of US$ and have also not been spared by the crash of the American currency,' said the analyst.

While monetary policy focuses on attaining low and stable inflation to achieve real exchange rate stability in the longer term, in the short-term, domestic inflation may deviate significantly from trading partners average inflation. 

This would result in depreciation or appreciation of the real exchange rate, thus necessitating an adjustment of the nominal Pula exchange rate to correct for a real exchange rate misalignment.