US dollar strength threatens pump price recovery
Mbongeni Mguni | Monday October 3, 2022 09:34
On Wednesday the dollar, the currency in which global oil is transacted, reached P13.42 according to the Bank of Botswana website, possibly an all-time high according to available records.
The peak came after weeks of strengthening during which the US dollar has frequently traded above P13 to the pula.
Between January 1 and Wednesday, the dollar had appreciated by nearly 14% against the pula, with most of the gains made in September. By comparison, over the same period last year, the dollar had gained 4.7 percent against the pula.
The US dollar, known informally as the greenback, has been strengthening against other global currencies throughout the year and most notably in September, due to interest rate hikes in that country, which have resulted in higher capital inflows and currency strength.
The energy crisis, conflict in Ukraine and threat of a global recession have also accentuated the dollar’s status as a safe haven, driving more capital to the greenback and helping it reach parity with the euro in July, the first time in 20 years.
While a strong dollar enhances the allure of Botswana’s prime exports to the US, the single most important market for local diamonds and tourism, it also puts pressure on the costs incurred by oil companies in bringing fuel into the country.
The Botswana Energy Regulatory Authority (BERA) is due to produce its next calculation at the end of the month which will indicate the impact of the dollar’s strength. The calculation, known as a 'slate' is produced every month and indicates changes in the various factors making up the final cost of pump prices. The slate is shared with government, which then decides whether or not to adjust retail fuel prices.
“The current exchange rate movements would have an impact on the position of unit rates for the month of September 2022,” BERA officials said in response to BusinessWeek enquiries. “If the US dollar appreciates against the pula, petroleum products become costly. “This is so because international refined products are dollar-denominated and if the dollar strengthens, it becomes expensive to buy oil for holders of other currencies.”
Retail pump prices have risen eight times since January 2021, driven higher by the reopening of the global economy and the war in Ukraine. The result has been a cost of living crisis, with inflation trending at 14-year highs and government introducing temporary relief measures in August.
However, global crude prices have been weakening in the past few months, allowing BERA to effect an average 74 thebe decrease in petrol and diesel pump prices on September 10.
Data seen by BusinessWeek indicates that the reduction was made possible after the slate as at August 31 indicated an 'over-recovery' in the fuel price. Over-recovery refers to a situation where pump prices are higher than the cost incurred by oil companies in bringing the commodity into the country.
By the end of August, the local industry was enjoying an over-recovery of P2.04 for 95 petrol, P1.94 for 93 petrol and about 36 thebe for diesel.
BERA officials said it was not possible at the moment to estimate the impact of the dollar on the slate.
“The impact will be on September unit rates which are released at the end of the month. “For example, if we were going to realise unit over recoveries for the month of September, these over recoveries would reduce, likewise, if it were under-recoveries, the unit under-recoveries will increase,” they said.