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Botswana: Devaluation Led to Improved Trade Balance - Gaolathe
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Mmegi/The Reporter (Gaborone)
14 April 2008
Posted to the web 15 April 2008
Lekopanye Mooketsi
Gaborone
The earnings of the country's exports of both traditional and non-traditional commodities have grown significantly since May 2005 when the new exchange rate regime was introduced, the Minister of Finance and Development Planning, Baledzi Gaolathe, has told Parliament.
Since then, export earnings have grown from P22.5 billion to P26.7 billion in 2006 and further to P32.4 billion last year, representing an average annual increase of 13 percent over the period.
Over the same period, traditional exports - which include meat and meat products, diamonds, and copper/nickel matte - have shown a significant increase, with copper nickel matte growing by an annual average of 43 percent and diamond exports by an annual average of six percent over the same period. Non-traditional exports such as textiles grew by an annual average of 25 percent. Gaolathe said these improvements in exports reflect volume, quantity and price increases as a result of improved competitiveness.
Gaolathe was answering a question from the MP for Selibe-Phikwe West, Kavis Kario, who had wanted to know the benefits that had accrued to the economy as a result of the devaluation of the pula in 2005 and 2006. "It is equally important to note that there was also a marked increase in (the) production of import-competing commodities such as eggs, bread, bricks and fruits," the Minister said, adding this had helped to improve Botswana's balance of trade further.
Consequently, the country's balance of trade improved significantly, recording P6.4 billion in 2005 from P1.3 billion recorded in 2004. As it continued to improve, the balance of trade reached P6.8 billion in 2007. "As far as we are concerned, the introduction of a new exchange rate mechanism and the consequent devaluation of pula played a positive role in promoting our exports and import-competing goods," Gaolathe said.
"The net effect of this is that the economy has also started to grow rapidly as shown by (the) 6.2 percent growth in 2006/07 national accounts year." Gaolathe said one of a number of policy instruments of achieving macro-economic stability is the exchange rate and that the major objective of the exchange rate policy is to maintain a stable and competitive real exchange rate of the pula against a basket of international currencies. This is critical to government's strategy of achieving sustainable and diversified economic development. Gaolathe told the House that since 1993, the real effective exchange rate of the pula had appreciated by about 20 percent relative to its long-term average, indicating a loss of competitiveness; this was the principal reason for the 7.5 percent devaluation in February 2004. The Minister said a new exchange rate system, the crawling band, was introduced in May 2005.
He explained the crawling band as a method of continuously achieving a desired adjustment in the exchange rate by small percentages within a given band or range rather than by major devaluation or revaluation. Gaolathe said as a result of the introduction of the new system, the pula had to be devalued by 12 percent in order to bring it in line with its long-term average. Studies had shown that countries that have persisted with an overvalued currency have invariably had slower growth rates and frequent currency crises that forced painful adjustments.
"Therefore, getting the exchange rate right is important for our future prosperity because a stable and competitive real exchange rate is one of the critical factors (of achieving) sustainable and diversified development," Gaolathe said.
With the crawling band, small adjustments are made continuously, taking into account the inflation differential between Botswana and her trading partners, he pointed out, adding that one of the benefits of the steady crawl is that there is an assurance that the exchange rate will remain in line with economic fundamentals in the future.
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He said the new regime also provides an anchor for expectations about future inflation and interest rates.
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