Many people have been asking whether the changes to the Pula exchange rate arrangement last week entailed a devaluation of the Pula. The answer is, rather unhelpfully, yes and no. Typically, a devaluation of the Pula would involve a change in the parity of the Pula against the basket (this is what was done back in 2004 and 2005). But the recent changes did not include that. There was a slight increase in the downward rate of crawl of the Pula against the basket, from 1.51% a year to 2.76%, but that only involves an increase of 1.25% in the rate of depreciation over a full year, so it would not constitute a devaluation as normally understood.

The second element of last week’s changes involved a massive widening of the Bank of Botswana’s buy/sell spread for foreign currencies around its quoted mid-rate (derived from the basket formula), from 1% to 15%. The spread is normally so small (0.5% each side of the mid-rate) that it is hardly noticed. But this change is huge and essentially means that those buying foreign currencies (such as importers) will pay 7% more—effectively a devaluation of that amount. Those selling foreign currencies, such as exporters, will receive 7% less—so for them, it’s effectively a 7% revaluation of the Pula (making it more expensive).

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.

The main winner from this change is the Bank of Botswana, which will make up to 15 times more profit from foreign currency trading—potentially up to P0.5 billion 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 BoB. Overall, the winners are BoB and the banks, while the losers are exporters, importers, investors, and households in general.

Nevertheless, there is some logic behind these changes. With declining reserves, the Pula will eventually have to move to a more market-determined exchange rate once the peg is no longer sustainable. BoB is trying to achieve this by encouraging the emergence of more interbank foreign exchange trading. This may or may not be the result (there are complicated incentives at play, which mean that the changes could result in more—or perhaps less—interbank foreign exchange trading). The Pula is also overvalued and needs to depreciate, but there are better and less disruptive ways to achieve this.

Any policy change involves pros and cons. But in this case, the cons are certain, large, and immediate, while the pros are uncertain and further ahead. Overall, it is clear that this was not well thought through and will have a negative impact on an economy that is already struggling. The authorities need to strongly consider a reversal of the changes and a rethink of the best way to achieve the desired objectives.