Last week, President Duma Boko, on the recommendation of the Ministry of Finance and consultation with the Bank of Botswana, announced further changes to the Pula Exchange Policy Framework, following the July adjustment.
Dr Bose Mathanjane, a finance professional with nine years of experience in financial markets analysis, breaks down these changes, including what the asymmetric trading margin means, and how households and firms will be impacted.
1. Introduction: The Significance of Asymmetry in Exchange Rate Regimes
The recent revision of Botswana’s foreign exchange policy framework introduces a deliberately asymmetric trading margin around the central parity of the Pula. Specifically, the Bank of Botswana (BoB) reduced the margin at which it buys foreign currency from commercial banks from +7.5% to +3% relative to central parity, while retaining the sell margin at −7.5%.
This asymmetric configuration represents a substantive departure from the conventional logic of symmetric exchange rate bands and warrants analytical attention beyond standard exchange rate volatility arguments.
In a crawling peg system, margins are not merely technical parameters; they encode policy preferences, incentive structures, and distributional outcomes. By narrowing the buy margin while leaving the sell margin unchanged, policymakers have effectively altered the relative price of foreign currency inflows versus outflows, signalling a strategic recalibration of Botswana’s external adjustment mechanism.
2. Conceptual Framework: Asymmetric Bands as a Policy Instrument
Exchange rate theory traditionally emphasises symmetry for neutrality and market efficiency (Obstfeld & Rogoff, 1996). However, asymmetric margins are increasingly recognised as second-best policy instruments in small open economies with structural foreign exchange imbalances (Ghosh et al., 2015). Such asymmetry allows authorities to influence market behaviour without explicit capital controls, using price signals rather than quantitative restrictions.
In Botswana’s case, the asymmetric adjustment selectively affects foreign currency inflows while preserving flexibility in meeting foreign currency demand. This design reflects a nuanced policy objective: discouraging speculative or excessive inflows conversion while safeguarding the economy’s ability to finance imports, service external obligations, and stabilise domestic prices.
3. Implications for Businesses: Foreign-Currency-Receiving Firms
3.1 Reduced Conversion Gains and Altered Incentives
For foreign-currency-receiving businesses—such as exporters, tourism operators, diamond aggregators, and cross-border service providers—the narrowing of the BoB buy margin has a direct price effect. Foreign currency sold to commercial banks, and ultimately to the central bank, now attracts a less favourable exchange rate relative to the previous regime.
This reduces the implicit “conversion premium” previously enjoyed by exporters during periods when the Pula traded near the upper bound of the band. From a microeconomic standpoint, this represents a partial internalisation of exchange rate risk, shifting firms away from reliance on policy-induced currency gains toward productivity-based competitiveness (Krugman, 1987).
3.2 Behavioural and Structural Effects
The asymmetric margin introduces a subtle but powerful behavioural signal: foreign exchange earnings are no longer disproportionately rewarded through the policy band. Firms may therefore respond by:
- Increasing foreign currency retention offshore (within regulatory limits),
- Delaying conversion decisions,
- Or rebalancing pricing strategies toward value addition rather than volume expansion.
While this may compress margins in the short term, it promotes structural upgrading over time. Export-led growth models that rely excessively on currency undervaluation often generate shallow industrialisation (Rodrik, 2008). Botswana’s policy adjustment can thus be interpreted as an attempt to avoid this trap by limiting policy-driven exchange rate rents.
4. Implications for Households
4.1 Inflation Containment and Consumption Stability
Households are not direct participants in wholesale FX markets, but they are deeply affected by the exchange rate pass-through effect. By maintaining a wide sell margin while tightening the buy margin, the BoB ensures continued capacity to supply foreign currency at stabilising prices, thereby mitigating upward pressure on import prices.
Empirical studies show that asymmetric FX regimes can dampen inflation expectations by prioritising downside risks to currency depreciation (Taylor, 2000). In Botswana, where imported goods account for a significant share of household consumption, this supports real income stability, particularly for low- and middle-income households with limited inflation hedging capacity.
4.2 Distributional Consequences
The adjustment has mildly regressive effects on households whose incomes are indirectly linked to export sectors, as lower FX conversion gains may translate into slower wage growth or reduced bonuses. However, this is counterbalanced by broader welfare gains from price stability. Inflation is widely regarded as a regressive tax (Easterly & Fischer, 2001), and policies that prioritise inflation containment tend to yield net social benefits over time.
5. Implications for Government and Public Finance
5.1 Fiscal Predictability and Revenue Management
From a fiscal standpoint, the asymmetric margin enhances budgetary predictability. Government revenues—particularly those linked to mineral exports and dividends—are often denominated in foreign currency. A narrower buy margin reduces exchange rate windfalls but also limits downside volatility, allowing for more conservative and credible fiscal planning.
This aligns with the principles of countercyclical fiscal management, long advocated in resource-dependent economies (Frankel, 2011). By constraining FX-induced revenue surges, the policy indirectly supports fiscal discipline and reduces procyclicality.
5.2 Foreign Reserves and Policy Autonomy
The reduction in the buy margin also affects reserve accumulation dynamics. Lower incentives for rapid FX conversion may slow reserve accumulation at the margin, but this must be weighed against reduced sterilisation costs and lower exposure to valuation losses. Moreover, by preserving a wide sell margin, the BoB retains operational autonomy to respond to external shocks, reinforcing its role as lender of last resort in foreign currency.
6. Political Economy and Strategic Interpretation
The asymmetric FX margin should be understood as a strategic compromise between competing policy objectives: export competitiveness, inflation control, and macroeconomic credibility. Rather than relying on blunt instruments, the authorities have opted for a targeted adjustment that reallocates risk and reward across economic agents.
In political economy terms, the policy subtly shifts the burden of external adjustment toward sectors with greater capacity to absorb it—export-oriented firms—while protecting households and preserving state stability. This reflects an implicit social contract consistent with Botswana’s developmental state tradition.
7. Conclusion
The asymmetric reduction of the Pula buy-rate margin from +7.5% to +3%, while maintaining the sell margin at −7.5%, represents a deliberate and sophisticated recalibration of Botswana’s exchange rate framework. For foreign-currency-receiving businesses, it tempers policy-induced gains and incentivises productivity-driven competitiveness. For households, it supports price stability and protects real incomes. For the government, it enhances fiscal predictability, reserve management efficiency, and policy credibility.
Far from being a technical adjustment, the reform constitutes a reallocation of exchange rate risk and reward across the economy, reinforcing long-term stability over short-term opportunism. Its ultimate success will depend on complementary structural policies, but as a standalone measure, it reflects a high degree of institutional maturity in Botswana’s macroeconomic management.
References
- Easterly, W., & Fischer, S. (2001). Inflation and the Poor. Journal of Money, Credit and Banking.
- Frankel, J. (2011). A Solution to Fiscal Procyclicality. World Bank Policy Research Working Paper.
- Ghosh, A. R., Ostry, J. D., & Qureshi, M. (2015). Exchange Rate Management and Crisis Susceptibility. IMF Economic Review.
- Krugman, P. (1987). Pricing to Market When the Exchange Rate Changes. Real-Financial Linkages.
- Obstfeld, M., & Rogoff, K. (1996). Foundations of International Macroeconomics. MIT Press.
- Rodrik, D. (2008). The Real Exchange Rate and Economic Growth. Brookings Papers on Economic Activity.
- Taylor, J. B. (2000). Low Inflation, Pass-Through, and the Pricing Power of Firms. European Economic Review.