Pula’s downward crawl maintained at 1.51%

Cash in hand: The Pula's value will be adjusted downwards during 2024
Cash in hand: The Pula's value will be adjusted downwards during 2024

The rate of crawl of the Pula will be maintained at a downward 1.51% for 2024, which means small reductions in the currency’s value totalling 1.51% through the year, due to expectations that local average inflation will be higher than major trading partners.

In a statement, the Finance Ministry said the weighting of the Pula against the basket of currencies would be maintained at 55 percent Special Drawing Rights currencies and 45 percent South African rand. The International Monetary Fund’s Special Drawing Rights currencies, referred to as SDR, comprise the US dollar, British pound, euro, Japanese yen and Chinese renminbi.

Since 2005, Botswana’s exchange rate policy, or the mechanism to determine the Pula’s value, has followed a crawling peg framework in which currency is fixed to a basket of the SDR and the Rand. In 2024, the weight of these currencies in the Pula basket or the proportions that each of these currencies contribute to the value of the Pula, will be maintained at 55% SDR and 45% Rand. The annual rate of crawl will entail making small, daily downward adjustments to the value of the Pula that will equal 1.51% during 2024.

Finance Ministry officials explained that the maintenance of the rate of crawl was due to expectations that local inflation will exceed that of trading partner countries.

“If, for example, a bag of potatoes is currently P100 in Botswana and R130 in South Africa at an exchange rate of P1 = R1.30, and assuming transport costs are not embedded in the pricing, Botswana’s producers face similar market price as South African producers and, therefore, competitive. “If, however, inflation in Botswana rises to be five percentage points higher than in South Africa, Botswana producers will be disadvantaged as it would be cheaper to purchase the same bag of potatoes in South Africa, holding all other things constant. “Therefore, the Pula exchange rate needs to adjust downward by five percent (rate of crawl) to maintain competitiveness of producers in Botswana,” the Ministry said.

The officials explained that the exchange rate affects aggregate demand through its impact on export and import prices. For example, if the exchange rate is P1.00 = R1.30 and the Pula strengthens against the South African rand to a level of P1.00 = R1.35, an exporter/seller of goods and services from Botswana to South Africa will receive less Pula revenue for the same amount of goods and/or services.

Inversely, a Botswana importer/buyer of goods and services from South Africa will pay less Pula for the South African rand denominated goods and services.

The maintenance of the 1.51% rate of crawl means slightly more pressure on the pricing of key imported commodities such as fuel and electricity, but more export competitiveness for key goods such as diamonds and increasingly, copper.

For 2024, ordinary households may pay slightly more for imported commodities, although this also depends on numerous other factors such as the costs of transport, labour, competition amongst suppliers and others.

The Finance Ministry has maintained a downward rate of crawl since at 2020, while the last upward rate of crawl was in 2019 at 0.3%.

“It is recognised that, in the main, sustained (need for) downward adjustment of the currency is a reflection of weak production capacity and productivity of the economy; and is also inflationary, ultimately affecting price competitiveness,” the Ministry said.

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