The Bank of Botswana, acting in conjunction with the Ministry of Finance and Economic Development, has revised the pula basket of currencies in order to keep up with monetary policy developments in the country’s major trading partner countries, with a view of maintaining a stable and competitive real effective exchange rate of the Pula. This was revealed on Wednesday, as part of the bank’s annual review of….
The latest adjustment follows a similar exercise done in the beginning of 2016 when President Ian Khama approved the Ministry of Finance and Development Planning's recommendation to maintain the Pula basket weights at 50 percent South African rand and 50 percent SDR; and change the rate of crawl from zero to an upward crawl of 0.38 percent per annum.
In the previous years, the Pula basket comprised of the South African rand and the IMF's Special Drawing Rights (SDR) — consisting of the US Dollar, Japanese Yen, the Euro and the British Pound. However in the latest adjustment, the Chinese Renminbi has been added to the basket of currencies, following last year’s decision by IMF to approve China’s currency as part of SDR.
Under the newly approved pula basket, the South African Rand lost out as it is now assigned 45% down from 50%, while the SDR now occupies 55% up from 50%. Furthermore, the rate of crawl has been adjusted from the upward crawl of 0.38 percent per annum to an upward crawl of rate of 0.26 percent, effective 1st January 2017.
Botswana uses the Crawling peg/band mechanism: an exchange rate system where the value of the domestic currency is adjusted on a regular basis according to a pre-determined formula that takes account of, for example, actual or expected inflation differentials. If the rate of adjustment (or crawl) is determined precisely, then it is crawling peg; while, if some fluctuation allowed then it is a crawling band.
Before the adoption of the crawling peg in 2005, Botswana was using the floating exchange which saw a series of Pula devaluations: 7.5 percent in 2004 and the 12 percent in 2005. The explanation for the devaluations was to increase the competitiveness of Botswana’s exports. When adopting the crawling peg mechanism, the country sought to avoid discrete adjustments of the exchange rate while maintaining stability in the real effective exchange rate.
“It's all about the real effective exchange rate .We use the crawling peg system. Meaning we will always adjust the value of the pula using what we call the crawling rate to align it with our policy objectives which include stable and predictable inflation among others. Now you must have observed that the rand has been depreciating against US dollar and the sterling. So the issue is not the pula but the rand,” an official familiar with the matter from the Ministry of Finance and Economic Development explained.
The official who preferred to remain anonymous as the revision of the pula basket is predominantly handled by Bank of Botswana, further said since the currency is pegged to the rand and the SDR in the basket of currencies, the rand pulls down the pula as it depreciates. “Now against the SDR, it disadvantages us because mostly we import consumables from South Africa while importing productive goods from SDR countries. So we simply are putting the pula where it's supposed to be.”
The decision to reduce the weight of the South African Rand is seen as strategic as the biggest economy in Africa continues to face economic and political risks. The volatile rand remains at risk of plummeting as ratings agency have been giving strong hints of downgrading the country’s ratings to junk.
Furthermore, the risk of rate hikes rides on any sharp weakness in the rand and deterioration in expectations and wages. This poses risks for the pula as the country is the biggest trade partner (Botswana imports about 75 percent of goods from South Africa and exports about 16 percent to South Africa). Meanwhile, the rand finished 2016 stronger than the previous year, catching up on the Pula which depreciated by 7.5% against the rand.
On the other hand the Pula ended 2016 with strong gains against its other trade partners. The pula firmed against the dollar, appreciating by 5.5%. However the gains against the dollar are unlikely to last as the Federal Reserve Bank of America hiked interest rate at the end of 2016 with further indications of rate hikes in 2017, a process that will result in dollar strengthening against major currencies.
The pula appreciated the most against the pound at 27.5%, this follows the pummelling of the pound as markets still remain uncertain about the future of Britain after its shock referendum in favour of exiting the European Union. The pula’s value against the Euro was also up by 9.5% largely in part to the weakening of the Euro as the European Union grapples with terrorism fears, immigration concerns, and as well as mounting fears that more countries might leave the European Union.
This week Minister of Finance & Economic Development, Dr Thapelo Matsheka approached parliament seeking lawmakers approval of Government’s intention to increase bond program ceiling from the current P15 Billion to P30 billion.
“I stand to request this honorable house to authorize increase in bond issuance program from the current P15 billion to P30 billion,” Dr Matsheka said. He explained that due to the halt in economic growth occasioned by COVID-19 pandemic government had to revisit options for funding the national budget, particularly for the second half of the National Development Plan (NDP) 11.
Botswana Stock Exchange (BSE) has this week revealed a gloomy picture of diamond mining newcomer, Lucara, with its stock devaluated and its entire business affected by the COVID-19 pandemic.
A BSE survey for a period between 1st January to 31st August 2020 — recording the second half of the year, the third quarter of the year and five months of coronavirus in Botswana — shows that the Domestic Company Index (DCI) depreciated by 5.9 percent.
Botswana Diamond PLC, a diamond exploration company trading on both London Stock Exchange Alternative Investment Market (AIM) and Botswana Stock Exchange (BSE) on Monday unlocked value from its shares to raise capital for its ongoing exploration works in Botswana and South Africa.
A statement from the company this week reveals that the placing was with existing and new investors to raise £300,000 via the issue of 50,000,000 new ordinary shares at a placing price of 0.6p per Placing Share.
Each Placing Share, according to Botswana Diamond Executives has one warrant attached with the right to subscribe for one new ordinary share at 0.6p per new ordinary share for a period of two years from, 7th September 2020, being the date of the Placing Warrants issue.
In a statement Chairman of Botswana Diamonds, John Teeling explained that the funds raised will be used to fund ongoing exploration activities during the current year in Botswana and South Africa, and to provide additional working capital for the Company.
The company is currently drilling kimberlite M8 on the Marsfontein licence in South Africa and has generated further kimberlite targets which will be drilled on the adjacent Thorny River concession.
In Botswana, the funds will be focused on commercializing the KX36 project following the recent acquisition of Sekaka Diamonds from Petra Diamonds. This will include finalizing a work programme to upgrade the grades and diamond value of the kimberlite pipe as well as investigating innovative mining options.
Drilling is planned for the adjacent Sunland Minerals property and following further assessment of the comprehensive Sekaka database more drilling targets are likely. “This is a very active and exciting time for Botswana Diamonds. We are drilling the very promising M8 kimberlite at Marsfontein and further drilling is likely on targets identified on the adjacent Thorny River ground,” he said.
The company Board Chair further noted, “We have a number of active projects. The recently acquired KX36 diamond resource in the Kalahari offers great potential. While awaiting final approvals from the Botswana authorities some of the funds raised will be used to detail the works we will do to refine grade, size distribution and value per carat.”
In addition BOD said the Placing Shares will rank pari passu with the Company’s existing ordinary shares. Application will be made for the Placing Shares to be admitted to trading on AIM and it is expected that such admission will become effective on or around 23 September 2020.
Last month Botswana Diamond announced that it has entered into agreement with global miner Petra Diamonds to acquire the latter’s exploration assets in Botswana. Key to these assets, housed under Sekaka Diamonds, 100 % subsidiary of Petra is the KX36 Diamond discovery, a high grade ore Kimberlite pipe located in the CKGR, considered Botswana’s next diamond glory after the magnificent Orapa and prolific Jwaneng Mines.
The acquisition entailed two adjacent Prospecting Licences and a diamond processing plant. Sekaka has been Petra’s exploration vehicle in Botswana for year and holds three Prospecting Licenses in the Central Kalahari Game Reserve (Kalahari) PL169/2019, PL058/2007 and PL224/2007, which includes the high grade KX36 kimberlite pipe.