Two sides of the Pula's fortunes
Boitshepo Majube | Thursday February 6, 2014 15:44
As a result of the deliberate policy by the Bank of Botswana, the Pula has weakened against most major trading currencies, while appreciating against the Rand.
On an annual basis (12 months to January 2014), the Pula depreciated against the US dollar (9.1 percent) while it appreciated against the Yen (8.3 percent) and the Rand (5.1 percent) respectively.
John Cairns, Rand Merchant Currency Strategist stated that the depreciation of the Rand, which is tied in one basket with the Pula, is caused by the American Dollar negativity.
'During the recession South Africa became too addicted to cheap liquidity from America, now the liquidity is dwindling and causing the Rand to depreciate,' he said at the First National Bank (Botswana) 2014/15 Budget review Seminar held in Gaborone on Tuesday.
Cairns said the weakening Rand would have a negative impact, as SACU will come off worse. 'Weakening of the Rand, means less import duties for Botswana,' he said, further explaining that Botswana receipts from SACU would be affected.
After South Africa, Botswana is the second largest beneficiary from the customs revenue common pool with P15.97 billion (31.8% of total revenue) forecast to be received in the 2014/15 financial year.
On a positive side, Cairns stated that the recovery of the developed world is a good sign for Botswana’s diamond sector while the Pula's depreciation against the greenback will translate to higher Pula receipts for Botswana. He said the demand of diamonds is going to be high, at higher prices than it was previously.
'The US economy is picking up, which is good for diamonds as it is the main consumer of the Botswana diamond,' he said, further stating that this will boost Debswana’s production. While the developed world is picking up steam, Cairns said the emerging markets continue to struggle.
The Bank of Botswana (BoB) manages the Pula’s value in this ‘basket of currencies’ assigning weights to each currency and using the 'crawling peg' system or regular precise adjustments, to appropriately review the Pula’s value.
The exchange rate policy aims to strike a balance between the competitiveness of local goods and the Pula’s international purchasing power as well as implications of the currency's value on domestic inflation.
The weights of the currencies in the basket are 55% South African Rand and 45% for the currencies that make up the International Monetary Fund (IMF)'s Special Drawing Rights (SDR).Quizzed on membership of South Africa to SACU, Cairns said SA would probably push for revision of the sharing formula. 'SA is subsidising the region, while its budget is under pressure,' he said, further pointing out that should South Africa pull out, it will have a big negative impact on Swaziland and Lesotho.