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PULA basket weights unchanged

Pula Basket weights have been retained at 45 percent South African Rand (ZAR) and 55 percent International Monetary Fund (IMF) Special Drawing Rights (SDR), Ministry of Finance and Economic Development has announced.

Botswana’s current exchange rate arrangement is that the Pula (BWP) is pegged to a currency basket comprising the South African rand and the IMF’s SDR, in a forward-looking crawling band mechanism. On a regular basis the Pula Exchange Rate Policy Framework is reviewed with a view to maintain a stable and competitive real effective exchange rate of the country’s currency.

This is provided for  by Section 21 of the Bank of Botswana Act which submits that the framework for determining the external value of the Pula shall be determined by His Excellency the President on the recommendation of the Minister of Finance and Economic Development, after consultation with Bank of Botswana, the country ‘s central bank.

In December 2019 the Ministry of Finance and Bank of Botswana reviewed the exchange rate mechanism, following their recommendation His Excellency the President then approved to maintain the Pula basket weights at 45 percent South African rand and 55 percent SDR coupled with a recommendation to implement an upward rate of crawl of 1.51 percent per annum effective 1st January, 2020.

Explaining the recommended rate of crawl, Permanent Secretary in the Ministry of Finance & Economic Development, Dr Wilfred Mandlebe said this reflects the difference between the Bank’s medium-term inflation objective and the forecast inflation for trading partner countries. “The overall objective of the Country’s exchange rate policy is to achieve and maintain the competitiveness of domestic products and services in the domestic and international markets,” he said.

The basket weights are in line with the country’s estimated trade pattern, while the adopted rate of crawl mirrors the inflation differential between Botswana and its trading partners. Pula Basket weights were adjusted in 2017 from 50-50 ZAR –IMF SDR to the current stance. This was the first time that the weight of the rand in the BWP basket was reduced below 50 percent.

The announcement by the country’s treasury last month means the ZAR will now go into the fourth year trailing behind the IMF Special Drawing Right as far as weight on the pula basket is concerned. The Special Drawing Rights is an international reserve asset, created by the International Monetary Fund in 1969 to supplement its member countries’ official reserves.

So far SDR 204.2 billion which is equivalent to about US$291 billion have been allocated to members, including SDR 182.6 billion allocated in 2009 in the wake of the global financial crisis. The value of the SDR is based on a basket of five currencies the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling.

The SDR was created as a supplementary international reserve asset in the context of the Bretton Woods fixed exchange rate system. The collapse of Bretton Woods’s system in 1973 and the shift of major currencies to floating exchange rate regimes lessened the reliance on the SDR as a global reserve asset. SDR allocations can play a role in providing liquidity and supplementing member countries’ official reserves, as was the case with the 2009 allocations totaling SDR 182.6 billion to IMF members amid the global financial crisis.

The SDR serves as the unit of account of the IMF and some other international organizations. The SDR is neither a currency nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. SDRs can be exchanged for these currencies. In general a currency basket is a selected group of currencies in which the weighted average is used as a measure of the value or the amount of an obligation.

A currency basket functions as a benchmark for regional currency movements – its composition and weighting depend on its purpose. Colloquially, a currency basket is often referred to as a currency cocktail. Commonly used in contracts as a way of avoiding or minimizing the risk of currency fluctuations.  The European currency unit which was replaced by the euro and the Asian currency unit are examples of currency baskets. However, the most well-known currency basket is the U.S. dollar index: USDX.

The U.S. dollar index started in 1973, and today is a basket of six currencies; the euro, Japanese yen, Canadian dollar, British pound, Swedish krona and Swiss franc. The euro is by far the biggest weighting making up 58 percent of the basket. During the 21st century the index has reached a high of 121 during the tech boom and a low of 71 just prior to the Great Recession.

For a developing country that Botswana is which is still very much on a course of traversing the world for global investors, maintaining a competitive real effective exchange rate of the Pula strikes as an imperative as other investment wooing tools. Equity investors who have exposure to different countries will use a currency basket to smoothen risks. Because their core investment strategies are in the equity markets, they do not want to report any substantial losses in a market they are not experts in. The same can be said for bondholders.

On the other hand, currency traders who have a broad-based view of a single currency will choose to own that currency against a variety of different currencies. For example, traders that are bullish, the U.S. dollar could use the USDX to express this trade. Traders and investors can build their own currency baskets with different weightings depending on their strategy.

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. Observers note this  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 in 2017. A stable real effective exchange rate for an upcoming economy is observed by experts and economist as one that should benefit a country such as Botswana in the area of trade accounts and balance of payments.

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China’s GDP expands 3% in 2022 despite various pressures

2nd February 2023
China’s Gross Domestic Product (GDP) expanded by 3% year-on-year to 121.02 trillion yuan ($17.93 trillion) in 2022 despite being mired in various growth pressures, according to data from the National Bureau Statistics.

The annual growth rate beat a median economist forecast of 2.8% as polled by Reuters. The country’s fourth-quarter GDP growth of 2.9% also surpassed expectations for a 1.8% increase.

In 2022, the Chinese economy encountered more difficulties and challenges than was expected amid a complex domestic and international situation. However, NBS said economic growth stabilized after various measures were taken to shore up growth.

Industrial output rose 3.6% in 2022 over the previous year, while retail sales slightly shrank by 0.2% data show that fixed-asset investment increased 5.1% over 2021, with a 9.1% hike in manufacturing investment but a 10% fall in property investment.

China created 12.06 million new jobs in urban regions throughout the year, surpassing its annual target of 11 million, and officials have stressed the importance of continuing an employment-first policy in 2023.

Meanwhile, China tourism market is a step closer to robust recovery. Tourism operators are in high spirits because the market saw a good chance of a robust recovery during the Spring Festival holiday amid relaxed COVID-19 travel policies.

On January 27, the last day of the seven-day break, the Ministry of Culture and Tourism published an encouraging performance report of the tourism market. It said that domestic destinations and attractions received 308 million visits, up 23.1% year-on-year. The number is roughly 88.6% of that in 2019, they year before the pandemic hit.

According to the report, tourism-related revenue generated during the seven-day period was about 375.8 billion yuan ($55.41 billion), a year-on-year rise of 30%. The revenue was about 73% of that in 2019, the Ministry said.

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Jewellery manufacturing plant to create over 100 jobs

30th January 2023

The state of the art jewellery manufacturing plant that has been set up by international diamond and cutting company, KGK Diamonds Botswana will create over 100 jobs, of which 89 percent will be localized.

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Investors inject capital into Tsodilo Resources Company

25th January 2023

Local diamond and metal exploration company Tsodilo Resources Limited has negotiated a non-brokered private placement of 2,200, 914 units of the company at a price per unit of 0.20 US Dollars, which will provide gross proceeds to the company in the amount of C$440, 188. 20.

According to a statement from the group, proceeds from the private placement will be used for the betterment of the Xaudum iron formation project in Botswana and general corporate purposes.

The statement says every unit of the company will consist of a common share in the capital of the company and one Common Share purchase warrant of the company.

Each warrant will enable a holder to make a single purchase for the period of 24 months at an amount of $0.20. As per regularity requirements, the group indicates that the common shares and warrants will be subject to a four month plus a day hold period from date of closure.

Tsodilo is exempt from the formal valuation and minority shareholder approval requirements. This is for the reason that the fair market value of the private placement, insofar as it involves the director, is not more than 25% of the company’s market capitalization.

Tsodilo Resources Limited is an international diamond and metals exploration company engaged in the search for economic diamond and metal deposits at its Bosoto Limited and Gcwihaba Resources projects in Botswana.  The company has a 100% stake in Bosoto which holds the BK16 kimberlite project in the Orapa Kimberlite Field (OKF) in Botswana.

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