Africa-Press – Botswana. As economic uncertainty deepens, Batswana face the looming threat of another Pula devaluation before year-end.
Batswana are bracing for the possibility of another devaluation of the Pula before the end of the year—a development likely to compound existing economic challenges for households and businesses alike.
In a sobering economic outlook, economist and market analyst at the American-based multinational investment bank and financial services company Citigroup, David Cowan, warned that a further adjustment of the exchange rate cannot be ruled out. He cited mounting pressure on the lifeline of Botswana’s economy—rough diamonds—which have slumped significantly due to a global market flooded with cheaper lab-grown diamonds.
“Another devaluation of the Botswana Pula cannot be discounted later this year,” Cowan said in a report released this week. “While interest rates may also have to increase significantly.”
Just recently
This comes just months after Botswana implemented a devaluation of the Pula—a move that triggered a wave of price increases, especially on imported goods. The devaluation was aimed at restoring competitiveness and preserving foreign reserves, but its impact has since trickled down to consumers, with inflationary pressures eroding household incomes.
Cowan’s remarks have further stoked fears of more economic pain, with analysts warning that another devaluation could spur further hikes in fuel, food, and transport costs.
Compounding the situation is the potential for interest rate increases, which Cowan notes may be necessary to contain inflation and support the Pula. The Bank of Botswana has so far maintained a cautious approach, but rising global interest rates and a strong US dollar continue to weigh heavily on the Pula’s stability.
Weakened currency
Reports indicate that the currency has weakened more than 3% against the US dollar since January, ranking among Africa’s five worst performers.
Last week, former Bank of Botswana Deputy Governor Keith Jefferies criticised the government’s decision to allow the Pula to depreciate, saying the policy shift lacked adequate planning and foresight.
“Overall, it is clear that this was not well thought through and will have a negative impact on an economy that is already struggling,” Jefferies said in a commentary.
He added, “So the change is effectively a devaluation for those buying foreign currencies with Pula and a revaluation for those selling foreign currencies to buy Pula. And of course, the number of firms and households that buy foreign exchange is far higher than those selling.”
“This results in the worst of both worlds—more expensive imports and therefore a jump in inflation, and a disincentive for exporters and investors, whom we should be trying to encourage. A devaluation is typically used to encourage exports, but this time we don’t even have that benefit,” he said.
Main winner
According to Jefferies, the “main winner from this change is the Bank of Botswana, which will make up to fifteen times more profit from foreign currency trading—potentially up to 0.5 billion Pula a year.”
“This profit ultimately flows to government, so it represents a hidden tax on the economy; the banks may also make more profit from trading, at least from foreign currency that they do not have to source from the Bank of Botswana.”
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