Abstract:
The objective of this paper is to assess whether the Botswana Pula has been misaligned or has been consistent with economic fundamentals. To do that an equilibrium exchange rate is estimated using data from the 1st quarter of 1990 to the 4th quarter of 2010 and an Auto Regressive Distributed Lag (ARDL) model. A comparison of the results with the actual values of the effective exchange rate showed that the Pula exhibited a stable movement and has been consistent with economic fundamentals during the estimation period. But forecasts for the last quarters of 2011 to 2012 seem to suggest that the exchange rate has started to slightly deviate from its economic fundamentals relative to its recent history. Such a deviation (mainly a depreciation in this case) might be representing one of the following cases: (1) it represents a temporary market adjustment and, hence in that case, should not be viewed as more than a temporary fluctuations; (ii) an indication of a shift from economic fundamentals such that the trend will encourage exports and discourage imports; this will be good news in principle but for a heavily import dependent economy for its intermediate inputs in production and consumption, this probably will entail a huge import bill (partly because of what is called the J-curve effect and import dependence of the economy) without significantly boosting exports owing to inelastic demand. If indeed this is the case, it calls for an appropriate and timey adjustment before it leads to serious economic distortions.
