As Botswana ushers in 2025, the announcement of changes to the Pula exchange rate framework offers an opportunity to reflect on the importance of strategic economic decisions. Currency basket reviews, a move designed to adjust the value of a country’s currency, is not new to Botswana—it has been implemented several times in the past to stimulate economic growth. But what does it really mean, and how does it impact businesses, individuals, and the broader economy?
Let’s break it down and explore why these decisions are made, their potential outcomes, and what they mean for Botswana’s economic resilience.
What Is Devaluation?
A devaluation occurs when a country deliberately lowers the value of its currency compared to others. Think of it this way: if the Pula could previously buy one loaf of bread from abroad, after devaluation, you might need more Pula to purchase that same loaf. This adjustment impacts the cost of imports, exports, and the overall competitiveness of a country’s economy.
In Botswana’s case, the Pula operates on a “crawling band exchange rate framework,” pegged to a basket of currencies. Recent changes, effective January 1, 2025, include equalising the currency basket’s weightings between the South African Rand and the Special Drawing Rights (SDR). These adjustments aim to enhance the Pula’s competitiveness in regional and global markets, particularly with trading partners like South Africa.
Why Does Botswana Review the BWP Basket?
Botswana has strategically reviewed the BWP multiple times to address specific economic challenges. For example:
•1982-1990s: Devaluations aimed to boost exports by making Botswana’s goods cheaper for international buyers. This was crucial in supporting local industries.
•2005: A 12% devaluation which saw the introduction to a gradual adjustment mechanism (crawling peg), providing stability while promoting trade competitiveness.
The current adjustments aim to:
•Support Exports: By making Botswana’s products and services more affordable for international buyers, businesses can expand their reach.
•Balance Inflation: Aligning currency values with inflation rates helps maintain economic stability.
•Promote Economic Diversification: As diamonds contribute less to GDP growth, empowering other sectors like mining, manufacturing, and tourism is crucial.
The Pros and Cons of Reviewing the BWP Basket:
If the review results in the devaluation of the Pula it brings both opportunities and challenges:
The Pros:
1.Boosts Exports: Local businesses benefit as their products become more competitive globally.
2.Stimulates Economic Growth: Increased export activity injects money into the economy, creating jobs and supporting development.
3.Encourages Local Production: Higher import costs can motivate businesses to produce locally, reducing reliance on foreign goods and promoting domestic industries.
The Cons:
1.Rising Costs of Imports: Everyday goods and essentials that Botswana imports, such as food, fuel, and technology, will become more expensive for consumers.
2.Inflationary Pressures: As import prices rise, businesses may pass these costs onto consumers, increasing the overall cost of living.
3.Impact on Savings and Investment: For individuals and businesses holding assets in Pula, the reduced currency value can diminish purchasing power relative to other currencies and deter investment.
Lessons from the Past
Botswana’s history with currency devaluation highlights its dual role as a short-term solution and a long-term economic strategy. For instance:
•In the 1980s and 1990s, devaluation helped stabilize the economy during global downturns by boosting export revenue.
•In 2005, the introduction of a crawling peg system mitigated market shocks, allowing for gradual adjustments instead of sudden changes.
These decisions, while impactful, remind us that currency policy is one piece of a broader economic puzzle.
A Call for Economic Resilience
Currency devaluation alone cannot solve structural economic challenges. It must be paired with policies that address productivity, innovation, and economic diversification. For Botswana, this means:
1.Investing in Key Sectors: Beyond diamonds, sectors like agriculture, manufacturing, and tourism must be supported to create sustainable growth.
2.Empowering Local Businesses: Financial resources, like the recent P34 million financing for Blagus (a citizen-owned contractor in mining) through Stanbic’s CEEP funding program to enable businesses to scale and compete globally.
3.Fostering Financial Literacy: Individuals and businesses must understand how macroeconomic shifts affect their finances, helping them plan and adapt effectively.
The decision to adjust the Pula exchange rate reflects a commitment to economic competitiveness and sustainability. While it may bring short-term challenges, it also lays the groundwork for long-term growth.
It would be remiss to not make mention of the widening of the Bank of Botswana (BoB) buying and selling trading margins. The current structure of the BWP FX market is currently solely dependent on BoB’s and the markets’ ability to meet our markets FX demands at the prevailing rates. This is only sustainable to the extent that our FX reserves and market liquidity support the pricing mechanism.
As we see increased pressure on our countries FX reserves this could be seen as a part of a long-term process of having an exchange rate determined by market supply and demand forces as under the current BWP basket mechanism the overall value of the BWP is not influenced by market forces creating long term sustainability challenges.
As we step into 2025, let this serve as a reminder of the importance of adaptability, informed decision-making, and strategic planning. Whether you’re a business owner navigating new opportunities or an individual managing rising costs, understanding the bigger picture empowers us all to thrive in a dynamic economic landscape.
Botswana’s history of resilience is a testament to its strength. Together, through collaboration, innovation, and empowerment, we can turn challenges into stepping stones toward a brighter future.
By Lesego Osman (Head of Business and Commercial Banking, Stanbic Bank Botswana)