Pula Exchange Rate Adjustments Will Hurt the Economy – Jefferis

Rates will drive inflation, slow economic growth, and result in consumers footing the bill A top economist and former deputy governor of the central bank has raised alarm bells on the recent decision by the government to revise the Pula exchange rate. The Ministry of Finance recently increased the annual downward crawl rate from 1.51 percent to 2.76 percent to boost the competitiveness of domestic industries, support economic diversification and growth, and preserve foreign exchange reserves. The government further said it will also facilitate broader access to and use of foreign currency in the market. However, Dr. Keith Jefferies of Econsult warned that such a move will negatively impact business and consumers. “The only beneficiary is Bank of Botswana… and banks,” he said, advising that the Pula is overvalued and does need to depreciate and said there are better and less disruptive ways to achieve this. As part of the changes, the BoB has widened the trading margin for the Pula, expanding the buy/sell spread for foreign currencies from ±0.5 percent to ±7.5 percent. The aim, according to the central bank, is to promote the development of an interbank foreign exchange market and reduce commercial banks’ reliance on the BoB for currency trades. In addition, the threshold for foreign currency trading with commercial banks has been raised from USD1 million to USD5 million, while the Pula currency basket remains unchanged, weighted equally between the South African rand and the International Monetary Fund's Special Drawing Rights (SDR). Authorities argue that maintaining this basket helps limit volatility and supports competitiveness in key export markets like South Africa. Jefferis described the policy shift as both a “yes and no” when asked whether it constitutes a devaluation. “Typically, a devaluation would involve a change in the Pula’s parity against the basket, as was done in 2004 and 2005,” Jefferis explained in a note published Thursday. “But the recent changes didn’t include that.” He acknowledged a slight increase in the downward crawl—effectively a faster pace of depreciation—but dismissed it as too small to count as a conventional devaluation. The more significant change, he said, lies in the sharp widening of the BoB’s buy/sell spread. “This change is huge,” Jefferis said. “It means importers will now pay around 7 percent more for foreign currency—effectively a devaluation. Exporters, on the other hand, will receive 7 percent less, amounting to a revaluation of the Pula for them.” Jefferis warned that the broader impact would be negative: “More expensive imports will fuel inflation, while lower returns for exporters and investors will weaken economic incentives.” While devaluations are often used to boost exports, Jefferis noted that this policy change offers none of that benefit. “The main winner here is the Bank of Botswana, which could earn up to 15 times more profit from foreign currency trades, potentially as much as P500 million annually. That profit flows to government, effectively acting as a hidden tax on the economy,” he said. Commercial banks may also see higher margins, provided they can trade using their own foreign exchange supplies and not rely on the BoB. In Jefferis’s view, the real losers are exporters, importers, investors, and households. Still, he acknowledged that the rationale behind the policy is not without merit. With Botswana’s reserves declining, a shift toward a more market-determined exchange rate appears inevitable once the current peg becomes unsustainable. “The BoB is likely trying to pave the way for this shift by encouraging the development of an interbank forex market,” Jefferis said. “But whether this goal is achieved remains to be seen.” “Every policy decision comes with trade-offs,” Jefferis concluded. “But in this case, the costs are large, immediate, and certain, while the benefits are uncertain and longer-term. The authorities should strongly consider reversing the changes and rethinking how best to meet their objectives.” Speaking during a webinar on Thursday, Luigi Dsouza, Executive Director for FX Trading – Africa at Standard Chartered Bank, struck a more optimistic tone. He described the move as “a step forward” that could support Botswana’s efforts to diversify its economy.

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Pula Exchange Rate Adjustments Will Hurt the Economy – Jefferis

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