“The objective of this paper is to assess the extent to which the Botswana exchange rate (the Pula) has been consistent with economic fundamentals. To do so an equilibrium exchange rate is estimated and compared against the values of the effective exchange rate data from 1990Q:1 to 2011Q:4. Using an Auto Regressive Distributed Lag (ARDL) model, the estimation results showed that the Pula exhibited a stable movement and has been consistent with economic fundamentals during the estimation period. But forecasts for the four quarters of 2011 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: (i) a temporary market adjustment and, hence in that case, should not be viewed as more than a temporary fluctuation; (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 production and consumption needs, this will probably entail a huge import bill. This is partly because of what is called the J-curve effect and import dependence of the economy. If indeed this is the case, then it calls for an appropriate and timely adjustment before it entails serious economic distortions.”
