The effect of pula devaluation on non-mining export sector in Botswana

This dissertation investigates the effects of exchange rate devaluation on non-mining exports in Botswana over the period 1984-2012 and the exchange rate pass-through effect to consumer prices. The economy of Botswana is significantly dependent on mineral exports, particularly the diamond. The dominance and over-reliance on diamond exports in the economy has led to low levels of economic diversification. Bank of Botswana has over the years devalued the pula, in attempt to stimulate growth of non-mining export industries and to enhance non-mining export competitiveness. However, raising export competitiveness this way may be inflationary and have no significant effect on non-mining exports. The study investigates the existence of cointegration between real effective exchange rate and the non-mining exports using the Johansen method of cointegration. The vector error correction model is used, to examine the short-run dynamics of the model. The results suggest that a positive long-run relationship exists between real effective exchange rate and Botswana’s non-mining exports. The results of the exchange rate pass-through suggest that nominal exchange rate has a short term relationship with consumer prices in Botswana. However this relationship does not hold over the long run