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The Pula Basket Adjustment Explained

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Dr-Keith Jefferies
LEADING ECONOMIST: Dr Keith Jefferies

Following the announcement by the Ministry of Finance and Economic Development on January 5th detailing the adjustment of the pula basket, many Batswana have been perplexed as to what the true meaning of the adjustment is and its inherent implications.

Botswana has historically operated under a Band, Basket and Crawl exchange rate regime.

To simplify this, one needs to be cognizant of the fact that the pula is pegged (the policy of attaching the central bank’s rate of exchange to another country’s currency) to both the South African rand and the IMF’s Special Drawing Rights (SDR) – a basket of currencies comprising of the dollar, euro, sterling, yen and yuan.

This consequently means that the value of the pula will be determined by movements in the band instead of supply and demand, which would have been the case had the currency been floating.

The adjustment in question refers to the recent deviation from the weights in the pula basket.

Whereas before, the weights were 50% SDR and 50% ZAR, as of January1st the weights have been adjusted to 55% SDR and 45% ZAR – the first time that the weight of the rand in the Botswana basket has fallen below 50%.

Leading economist, Dr Keith Jefferies, has expressed concerns over the adjustment and the thinly worded press release by the Ministry of Finance and Economic Development.

This is mostly due to the fact that the press release does not attribute the deviation to anything specific but rather ascribes the adjustment as an effort to keep pace with Botswana’s partners.

It reads; “The Pula basket of currencies has been reviewed in order to keep-up with monetary policy developments in our major trading partner countries, with a view of maintaining a stable and competitive real effective exchange rate of the Pula.”

It was initially not clear what monetary policy developments in Botswana’s major trading partner countries were being alluded to and so First National Bank Economist – Moatlhodi Sebabole elucidated further.

He said; “The last part of 2015 and most of 2016 was dominated by divergent policy setting where Botswana’s trading partners like South Africa and US were increasing policy rates, whereas other markets like Britain, Europe, China and Japan were on an easing stance.

The divergent policy settings created some instability for Botswana in a real effective rate perspective as the pula weakened against the SDR basket, primarily the USD – and also inflation was on aggregate lower than the trading partners in the pula basket.

These developments in policy rate and price movements thus related in disruptions to the real effective exchange rate, prompting the adjustment to the administration of the pula basket”

Sebabole is also of the viewpoint that in theory; “The adjustment should make the Botswana exports more competitive as the pula is not too expensive for exports purposes, and not too weak for import price stability.

Thus, holding all else constant, the stable real effective exchange rate should benefit Botswana’s trade account and the balance of payments.

Of course the practical trade dynamics will be significantly determined by trade policies; demand prospects and other market developments,” he concluded.