The Ministry of Finance and Development Planning (MFDP) has effected adjustments to the exchange rate regime in a move analysts believe is aimed at protecting the Pula’s value against the volatility of the Rand.
Under the crawling peg policy, the Bank of Botswana (BoB) manages the Pula’s value in a “basket of currencies” assigning weights to each currency. The bank uses the “crawling peg” system or regular precise adjustments, to appropriately review the Pula’s value.
The basket of currencies comprises the South African Rand (SAR) and the IMF’s Special Drawing Rights (SDR) consisting of the US Dollar, the Euro, the British Pound, and the Japanese Yen.
In a statement released this week, the MFDP announced that the weight of the SAR in the basket has been reduced to 50 percent from 55 percent while the rate of the crawl has been adjusted from minus 0.16 to zero.
“The changes are aimed at maintaining the stability of the Real Effective Exchange Rate (REER), which is critical for economic diversification and job creation,” reads the statement.
The adjustments to the exchange rate policy mean that the Pula now has a fixed peg against the basket of currencies while the influence of the SAR on the local currency has been reduced.
Renowned economist, Keith Jefferis believes that the adjustments are not only meant to protect the Pula against the Rand’s volatility, but are also a reflection of the increased importance of dollar-based trade, particularly in diamonds.
“The change in the weights presumably reflects two things. First, a change in the underlying patterns of our international trade, perhaps reflecting the increased importance of diamonds and dollar-based trade in the overall mix.
“Second, concerns about being too strongly pegged to the Rand, which has been weak and unstable in the recent past, so the reduction in the Rand weight weakens that influence slightly,” said Jefferis.
The latest adjustments are likely to see the Pula slightly more stable against the greenback and slightly less stable against the Rand, although analysts reckon the difference might be minimal and difficult to spot.
The Rand has been significantly volatile against the US Dollar in the past few years and the effect has spilled over onto the Pula, which has lost 8.4 percent against the greenback in the 12 months to December 2014.
With Botswana’s economy highly integrated with South Africa’s economy, monetary authorities would probably consider the weight reduction to 50 percent more optimal.
This is in light of the short-term risks facing the Rand, stemming from the twin deficit challenges as well as macroeconomic risks of that economy and subsequently the Rand.
Analysts also believe the minor adjustments in the rate of crawl indicates that forecasted domestic inflation is now in convergence with those of the country’s major trading partners.
Inflation fell to a 42-year low of 3.8 percent in December last year with the central bank saying the medium term outlook still remains favourable.
“The increase of the crawl albeit small from minus 0.16% to zero, indicates the central bank’s view that forecasted inflation differentials for the next 12 months between Botswana and the average for our major trading partners have converged and are now not material enough to warrant any adjustments in order to maintain the stability real effective exchange rate,” said chief investments officer at Afena Capital, Alphonse Ndzinge.
South Africa consumer inflation stood at 5.3 percent in December last year.
According to the BoB, since the introduction of the crawl in 2005, Botswana’s inflation objective has generally been higher than the average inflation of its trading partners and this has necessitated a downward crawl.
Monetary authorities last adjusted the exchange rates policy in 2013, when the weight of the Rand in the basket was reduced from 60 percent to 55 percent and that of the US Dollar and (the) other currencies increased while the rate of crawl was also reduced.