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      Botswana’s women boxing on the rise 

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      Darts Expects Only P50K from BNSC for 2023/24

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      Botswana currency is overvalued – study

      “An assessment of some macroeconomic fundamentals, key indicators of external stability, indicates that Botswana’s external position is somewhat weak,” the study has concluded

      mm by Kitso Dickson
      October 12, 2021
      in Companies & Markets
      0
      Botswana currency is overvalued – study

      Bank of Botswana (BOB) Governor Moses Dinekere Pelaelo (Pic:MONIRUL BHUIYAN/PRESS PHOTO)

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      A study by Esther Mpete, Senior Economist in the International Finance and Trade Unit, Research and Financial Stability Department at the Bank of Botswana has concluded that the decrease in non-mining exports, balance of trade deficit and the decline of foreign reserves present a strong signal of an overvalued currency and weakening international competitiveness.

      The study, which covered the period of 1996-2019, indicates that the Pula is moderately overvalued by about 4 percent.

      To strengthen trade competitiveness and promote diversification, Mpete says the value of the Pula needs to reflect changes in the fundamentals. “An assessment of some macroeconomic fundamentals, key indicators of external stability, indicates that Botswana’s external position is somewhat weak,” she wrote in a document published by the central bank.

      The noted deficit and declining non-mining exports since 2015 are attributable to losses in production, and therefore exports, in manufacturing, construction, tourism, transport, communications and finance and business services, mainly due to challenges in supply of water and electricity, declining government expenditure and, by association, the slowing performance of the mining sector.

      Broadly, Botswana imports a wide range of goods and services for consumption and production, but the main imports are production inputs, viz. machinery, electricity, electrical equipment, fuel and chemicals. As it is, Mpete says the country has limited domestic productive capacity and therefore inadequate import substitutability, which limits the responsiveness of domestic production to any exchange rate adjustments (depreciation).

      In the circumstances, the government’s industrialisation strategy focuses on enhancing competitiveness and capacity of the domestic industry to access export markets and substitutes for imports. On the other hand, the decrease in foreign exchange reserves is due to relatively slower growth in exports compared to imports, indicative of lack of traction of economic diversification efforts.

      Moreover, declining reserves are associated with a decrease (or slower growth) in diamond and SACU revenues and insufficient increase in alternative revenue sources or expanded domestic resource mobilisation, while the expenditure path is maintained at expansionary rates.

      Mpete study says the overvaluation of the Pula can also be attributed to the insufficiency of the rate of crawl to offset the inflation differentials,as well as the higher weight assigned to the SDR which makes the Pula stronger. In order to align the value of the Pula to the long-term equilibrium, she advises that authorities could consider adjustments of the rate of crawl using the Botswana forecast inflation instead of the Bank of Botswana’s inflation objective range, or the optimal/threshold level of inflation (Phetwe, 2016), which can be determined on a continuous basis.

      “In addition, the weights assigned to the SDR and the South African Rand could be inappropriate due to unreliable data based on foreign currency sales and purchases (errors and omissions),” she wrote. “This data is also influenced by exchange rate movements between the Pula and its basket currencies and does not take into account changes in exports and imports in terms of volumes and includes non-trade transactions.”

      Due to the lack of trade in services data or any other better alternative, Mpete proposes that authorities could consider an equal weighting between the two Pula basket currencies to avoid bias. “Meanwhile, the 2.87 percent downward rate of crawl that is being implemented with effect from May 2020 is expected to go a long way in re-aligning the Pula exchange rate,” she says.

      Tags: Bank of BotswanaEsther Mpete

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