Amid growing concerns from different economic agents, Finance Minister Ndaba Gaolathe told Parliament last week that recent adjustments to the way the pula is priced were triggered by growing concerns that the currency had become overvalued, placing pressure on the country’s foreign reserves and weakening the competitiveness of domestic producers. The Minister, who is also the country's Vice President, explained that while the pula’s strength was previously supported by robust diamond revenues, but the current global downturn in the diamond market had exposed underlying vulnerabilities. He said Botswana is now earning significantly less from diamond exports, and as a result, reducing the flow of foreign currency into the economy. “In the past, an overvalued pula was not a problem because diamond exports brought in billions of pula worth of foreign currency,” Gaolathe told legislators.
“Today, the diamond market has weakened, global demand has dropped, prices have fallen, and Botswana is earning far less from diamond sales. “When the pula remains overvalued or stronger than it should be, the Bank of Botswana had to dip into the foreign reserves, selling dollars and euros to buy pula and stop its value from falling too quickly,” he added. The government recently raised the pula’s downward rate of crawl downwards, increased banks’ trading margins for foreign currency trade with the Bank of Botswana (BoB), and raised the threshold that banks can approach the central bank for currency to $5 million from $1 million. The latter two changes are designed to make it more expensive for banks to access foreign currency from the BoB and rather trade amongst themselves, to preserve the reserves as the diamond slump has reduced forex inflows.
