Africa-Press – Botswana. Citigroup Inc. says Botswana is likely to devalue its currency again, as the southern African nation battles a downturn in revenues linked to the sharp collapse in global diamond prices, its main revenue source.
The Bank of Botswana, earlier this month announced it will allow the pula to weaken as much as 2.76% against a basket of other currencies this year, more than the initial target of 1.51% in order to boost exports. The pula has already weakened 3.35% against the US dollar year to date, making it the fifth worst-performing currency in Africa, according to data compiled by Bloomberg.The downturn in the global diamond market is being spurred by stiff competition from lab-grown gems and is particularly devastating for Botswana, the world’s second-biggest producer of the precious stones after Russia. The southern African nation is reliant on the precious stones for about a third of revenues.
While the uncertainty in the global diamond market persists, authorities in Botswana hope that some fiscal adjustment can be driven through exchange rate policy to help boost some government revenue, notably diamond revenue and Southern African Customs Union receipts, as well as improving non-diamond export competitiveness, according to David Cowan, the Chief Africa Economist at Citi.Read More: Anglo’s Handling of De Beers Sale Irks Stakeholder Botswana
“Moreover, at this point in time another devaluation of Botswana pula cannot be discounted later this year,” Cowan wrote in a note Monday. “While interest rates may also have to increase significantly,”
The benchmark interest rate at 1.9% has been left unchanged by monetary authorities since August last year.
With declining foreign-exchange reserves, the pula will eventually have to move to a more market-determined exchange rate once the peg is no longer sustainable, according to Keith Jefferis, managing director at Econsult Botswana.
The Bank of Botswana “is trying to achieve this by encouraging the emergence of more interbank foreign exchange trading,” wrote Jefferis in a July 16 client note adding that the attempt had no certain outcome. “The pula is also overvalued, and needs to depreciate, but there are better and less disruptive ways to achieve this.”
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