- Reserves amounted to 9.1 months of import cover of goods and services
- Diamond market recovery, performance of externally managed funds are factors
At the end of December 2021, foreign exchange reserves amounted to P56 billion, an increase of 4.6 percent from P53.4 billion in December 2020, the Bank of Botswana (BoB) says in its 2021 annual report.
The reserves were equivalent to 9.1 months of import cover of goods and services. “In US dollar terms, the level of foreign exchange reserves fell by 2 percent from USD4.9 billion to USD4.8 billion and remained unchanged in Special Drawing Rights (SDR) terms at SDR3.4 billion over the same period,” says the report.
BoB says the increase in forex reserves was due to a number of factors, including recovery in diamond markets, good performance of externally managed funds, especially the equities mandates, and receipts of funds from an International Monetary Fund (IMF) SDR allocation of USD189 million and a World Bank loan, which offset the elevated withdrawals from the Transaction Balance Tranche (TBT).
Exchange Rate Policy
According to the report, in 2021 the Pula basket weights were maintained at 45 percent and 55 percent for the South African Rand (ZAR) and the IMF’s SDR, respectively, reflecting Botswana’s trade pattern and financial relationships with the external world.
“The Bank implemented an annual downward rate of crawl of 2.87 percent with a view to enhance domestic industry competitiveness in response to the adverse impact of the COVID-19 pandemic on the economy,” it says.
In the 12 months to December 2021, the trade-weighted nominal effective exchange rate (NEER) of the Pula depreciated in line with the rate of crawl of the Pula exchange rate.
“The real effective exchange rate (REER) appreciated by 0.2 percent in the 12 months to December 2021, because of a higher positive inflation differential between Botswana and trading partner countries than the downward rate of crawl, suggesting minimal loss in international competitiveness of domestic firms,” says the central bank.
BoB says beyond the exchange rate, durable competitiveness of domestic producers is also achieved through a sustained improvement in productivity, which also contributes to lower inflation.
“Importantly, the enhanced transparency engendered by the disclosure of Pula exchange rate parameters helps to reduce uncertainty surrounding the exchange rate policy and enriches information used in making financial and investment decisions by economic agents,” the report notes.