The Ministry of Finance has defended its decision to allow the Pula to lose its depreciate by 1.51 percent against a basket of other currencies in 2024 saying it expects local inflation to be elevated than price growth in the economies of its trading partners. This is contained in an explanatory note that was released following the announcement that a decision has been taken to adjust the Pula exchange rate.
The Ministry of Finance said it reviews the parameters for the Pula exchange rate twice in a year; being the currencies in the Pula basket and their weights, as well as the rate of crawl. According to the Ministry, this is done to assess the alignment of the Pula exchange rate with the policy objective of maintaining a stable and competitive real effective exchange rate of the Pula; that is, retaining the competitiveness of Botswana producers against imports and exports in international markets.
“For 2024, it was determined that inflation in Botswana would be on average higher than in the trading partner countries, suggesting maintenance of a downward rate of crawl of 1.51 percent for 2024,” the Ministry noted. It further noted that the annual downward crawl would therefore be implemented through small daily adjustments that would equal 1.51 percent over twelve months.
“It was also determined that the trade patterns remain largely unchanged and, therefore, maintained at 55 percent SDR and 45 percent South African rand,” the Ministry said. It noted that the announcements of the Pula exchange rate parameters and any adjustments are intended to enhance the transparency and integrity of the framework. “In this regard, knowledge of the Pula basket weights, and rate of crawl enable the market and the general public to plan for investments and transactions on the basis of publicly available information that can be used as an input to any economic decisions,” the Ministry said.
Defending the decision to weaken the Pula, the Ministry said the crawling band exchange rate framework continues to create stability between Botswana and its major trading partners. “The framework enables a gradual nominal Pula exchange rate adjustment to correct for any misalignment of the exchange rate,” the Ministry said adding that “the adoption of this framework has enabled Botswana to avoid discrete devaluations and revaluations of the Pula, as it had been the case before.” Furthermore, the Ministry said, the crawling band framework has helped minimise the rate of uncertainty and volatility since the fluctuation in the exchange rate is kept minimal as compared to a floating exchange regime. Moreover, the flexibility afforded by the current exchange rate framework continues to be used to support both monetary and fiscal policy during economic crises.
“For example, the annual rate of crawl was adjusted to negative 2.87 percent effective May 2020, in response to the adverse impact of COVID-19 containment measures on economic activity and to maintain competitiveness of domestic firms in international markets and against imports,” the Ministry said.
It said the current exchange rate framework also tends to be more relevant for a developing country like Botswana, which is still heavily dependent on natural resources and is slowly diversifying its portfolio away from the mining sector.
“With its undiversified economic base, Botswana could not have sustained a flexible regime because a surge in capital inflows could have led to a significant appreciation of the Pula, thus, undermining the competitiveness of the tradeables sector,” it said. The Ministry said while there are short-term benefits of deliberate exchange rate adjustments to maintain price competitiveness, for it to have the desired long-term impact there should be adequate production capacity and productivity improvements by the domestic industry. In addition, for government institutions, there should be effective implementation of plans and programmes. Overall, therefore, the Ministry said, there is a need for generalized entrenchment and traction of structural transformation and policy reforms as being fundamental to industrialisation and productivity improvements that would enhance the competitiveness of domestic producers in a low inflation environment.
“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 Finance Ministry noted.
