Botswana devalues currency

The devaluation on Monday would give exporters and domestic producers a much stronger position versus the rest of the world, putting Botswana on a path to rapid and diversified growth and sustained job creation, an official statement said.

A new framework for the pula would also allow the exchange rate to be adjusted continuously rather than in steps, which should encourage the development of a foreign exchange market, a Finance Ministry statement said.

“Tourism, textiles, diamonds, copper-nickel and beef are among the many sectors that will benefit from the new system,” the government said. “In brief … (it) is an important step on our path to rapid, diversified and sustained job creation.” 

Botswana’s economy is widely regarded as an African success story, but it is heavily reliant on dollar revenues from diamond exports. The government wants to diversify to boost flagging  growth and bring down a jobless rate of more than 20%.

Economists described the move as “significant” as it surpassed a devaluation of 7.5% in February 2004, and follows an unexpected decision by the Bank of Botswana to trim its key interest rate by 25 basis points to 14% in April.

Slowing economy

“It looks as though the rationale behind this is the realisation that the economy is slowing and more needs to be done about it,” said Standard Chartered’s Africa economist Razia Khan.

Growth forecsts for the next two fiscal years have been lowered

“But it will have a huge impact on inflation and after last year’s devaluation it will hit confidence in the exchange rate, which may be difficult to restore in the future.”

In a February budget statement, Botswana’s Finance Minister Baledzi Gaolathe lowered growth forecasts for the next two fiscal years to between 4 and 5% – slowing sharply from 5.7% in 2003/04.

He also noted that the pula had appreciated by 12.8% against the dollar since the last devaluation, saying a policy of devaluing the unit gradually would make more sense in future.

The pula was trading on Monday at about 5.6 to the dollar compared with about 5.0 before the devaluation.

Odd timing

Khan described the timing of the devaluation as “odd” as the South African rand – which is believed to account for between 60 and 70% of the pula basket – has depreciated sharply against the dollar over the past few weeks.

The Bank of Botswana keeps the breakdown of its currency basket secret, but says it includes the dollar, the euro, the pound, the yen and the Special Drawing Rights of the International Monetary Fund (IMF).

“… it will have a huge impact on inflation and after last year’s devaluation it will hit confidence in the exchange rate, which may be difficult to restore in the future” Razia Khan, Standard Chartered economist

The devaluation means the pula is worth 1.21 rand instead of 1.37 rand. South Africa is one of Botswana’s main trade partners and Khan said prices were likely to rise, pushing inflation up to 9% this year – versus a 6% target limit.

It rose by an annual rate of 7.8% in December 2004. Botswana’s Finance Ministry said the devaluation had been decided following consultation with the central bank, and President Festus Mogae had approved the changes, including a “crawling peg” for the pula.

Inflation hike

“This system … has been successfully employed by several other countries,” it said.
 
The rate of crawl would be reviewed from time to time to align it with the differential between the expected rate of inflation in Botswana and the expected rate of inflation in the currencies of the basket, it said.

The central bank said it was widening the margin around its quoted exchange rates to 0.5% from 0.125% previously.