Choppies Cookoff

Behind the Pula revaluation

SHARE   |   Monday, 16 January 2017   |   By Kabelo Adamson
Behind the Pula revaluation

The recent decision to revise the Pula basket weights to 45 percent South African Rand (ZAR) and 55 percent Special Drawing Rights (SDR) adjustment is meant to maintain Pula stability compared to the currencies of its trading partners, mainly the rand and the currencies in the SDR basket (USD, JPY, EUR, GBP and CNY). An Economist at FNB Botswana, Moatlhodi Sebabole said this week that the objective of the adjustment is meant to maintain the competitiveness of the Pula in exporting of goods and services, (mainly diamonds) as well as managing the import bill. The adjustment, which has been put into effect on the first day of this year, also involves the change of the rate of crawl from an upward crawl rate of 0.38 percent per annum to an upward crawl rate of 0.26 percent. “The 0.12 reduction in the crawl (adjustment from 0.38 to 0.26%) means although the crawl remains positive, the incremental rise in the value of the Pula by end of 2017 will be 0.12ppt less than it would have been without the change,” Sebabole said, adding that therefore the Pula is being appreciated at a slower pace than it was last year, so as to make it competitive in the export market. In simple terms, Sebabole said an analogy of this effect is that if it is assumed that there was in place a crawl rate of 0% before the adjustment, and expected the exchange rate of Pula to Rand, BWP/ZAR, to be R1.28 to P1.00 by end of 2017, then changing the crawl by 0.26% will result in Pula value increasing such that P1.00 gives P1.2833. “The realist assumption in this case of reducing the crawl from 0.38% to 0.26% now is that the same assumption for R1.28 for P1.00 forecast will result in P1.00 giving R1.2815 by end of 2017,” he explained.


On the 5 percent reduction in the Rand weighting 45 percent and the subsequent increase in the SDR weighting to 55%, the FNBB economist said this implies some increase stability of the Pula in 2017 compared to 2016. “This is because the Rand is the most volatile currency in the world, actually in 2016, the exchange rate of Rand to Dollar, USD/ZAR had a volatility (measure of risk) of 22%; compared to that of the SDR to the dollar, SDR/USD volatility of only 4%,” he said. According to the economist, this indicates that in 2016 the Rand was 5.5 times more risky than the combined currencies in the SDR which explains why the Pula weakened against the Dollar significantly when the rand was weakening against Dollar. Sebabole said the new change in the weight of the Rand to 45% implies that, holding all else constant, whereas before the change in the weights, a 1% movement in the Rand resulted in a 0.5% movement in the Pula, now a 1% movement results in a 0.45% movement in the Pula. This, he said, means that if the Rand depreciates by 10% against the Dollar, then the Pula will subsequently depreciate 4.5% against the Dollar before adjusting for the crawl movement. Despite the adjustments, Sebabole said it is important to note that despite this change, the Rand will remain the dominant factor for determining Pula movements. “One way to look at this is from technical perspective in that in 2016, when the Rand weighting in the Pula basket was 50%, the Rand accounted for 85% of the volatility or risk in the movement of the Pula against the Dollar, USD/BWP - if the new weights of 45% to Rand were existent in 2016, then the Rand would have accounted for 82% of the USD/BWP volatility,’ he explained. This latest adjustments in the Pula basket comes a year after government maintained the Pula basket weights at 50 percent South African Rand and 50 SDR while the rate of crawl was changed from zero to an upward crawl of 0.38 percent per annum.