Brian Benza
4 April 2008
Gaborone — The pula has made a firm 8.1 percent gain against the rand on a year-to-date basis on the back of the continued fall of the South African currency on international foreign exchange markets.
The development is a reversal of the trend of previous years during which the pula continuously lost value against the rand and all other major trading partners' currencies except the US dollar due to Botswana's crawling peg exchange rate regime. While the pula is gaining against the rand, it has been losing ground against all other major currencies since January, depreciating by 9.5 percent against the US dollar.
It took about 88 thebe to buy one rand last December, but the figure has now dropped to around 82 thebe. On the other hand, the US dollar rate has risen from P5.98 to P6.63 in the same period. "The main reason for the appreciation of the pula against the rand is that the rand itself is on a free fall as it is now trading around R8 to the dollar," says renowned economist Dr Keith Jefferies.
"The simplified deduction that the weakening of the rand will work in our favour is not exactly true because a weaker rand means higher inflation in South Africa. Since we get most of our import needs from there, we will end up importing the inflation." Inflation in Botswana, as in South Africa, has been on an upward trend since the second half of 2007, mainly due to higher energy and food prices.
"The ideal situation would be for the currency to be stable so that business can plan properly rather than for the currencies to continuously fluctuate," Jefferies added.
In January, the pula depreciated against most major trading partner currencies except the rand, losing against the euro (5.0 percent), the pound (3.6 percent), the yen (8.6 percent) and the US dollar (4.0 percent), while it appreciated against the rand (3.0 percent).
In February, the pula depreciated against most major trading partner currencies except the rand. The pula depreciated against the euro (4.1 percent), the pound (2.2 percent), the yen (3.9 percent) and the US dollar (2.4 percent), while it appreciated against the rand (1.9 percent).
The trend continued to March as the pula further weakened against most major trading partner currencies, losing by 6.8 percent, 3.2 percent, 7.8 percent and 3.1 percent against the euro, the pound, the yen and the US dollar respectively, while it appreciated against the rand by 3.2 percent.
On an annual basis, the pula has depreciated against all the currencies except the rand. The annual largest depreciation was 20.1 percent against the euro and the least was 5.4 percent against the US dollar. Although the depreciation of the pula against the dollar might have some negative impact on other sectors of the economy, Botswana foreign reserves have certainly got a boost from this development.
With foreign exchange reserves sitting at US$10,2 billion in November last year translating to P59.8 billion at that time the figure, due to the exchange rate movements, has ballooned to over P66 billion.
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 a 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.
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