Is Chris Stals about to scrap the financial rand? Jacques Magliolo Looks into the rumours
A statement by Reserve Bank governor Chris Stals this week fuelled rumours that the financial rand would be scrapped within weeks. However, according to a number of economists and analysts, the speculation seems optimistic.
The finrand was introduced by the Reserve Bank to discourage foreigners from removing funds from South Africa. In effect, a company wanting to operate here would obtain finrands at a better rate than commerical rands for their currency. But if they wanted to disinvest the exchange rate used would be at the less favourable commercial rand rate.
Stals was reported as saying the Reserve Bank had secured foreign credit of close to R12-billion to support the exchange rate once the dual currency system was abolished. He added that the underlying conditions for the scrapping of the finrand were improving all the time.
The pre-conditions are:
* The discount rate, which is the percentage difference between the commercial and financial rands, has to remain at 10 percent for a reasonable period of time.
“Massive buying by foreign banks of finrands in anticipation of the scrapping of the unit (before Stal’s speech) is driving down the discount rate,” says Southern Life economist Sandra Gordon. The discount rate fell to 10 percent last week and had maintained this level by Wednesday.
Says another economist: “The low discount rate has, in turn, fueled these rumours. However, the rate is merely one of three pre-conditions which has to be fulfilled before Stals can recommend to the cabinet that the units be unified.”
Gordon adds: “Stals has said that the discount rate has to remain at a rate of at most 10 percent for a reasonable period of time.What that time is, is anyone’s guess.”
* Non-resident holders of South African assets should not dispose of these assets after the two currencies have been combined. In other words, the pool of finrands must decrease over time. But no time frame has been provided by the Bank.
This would be best achieved by a continuing increase in foreign investor confidence in the country. This should, in turn, be reflected in a sustained reduction in the finrand discount.
However, political turbulence such as the Inkatha Freedom Party’s walkout from parliament is likely to decrease foreign investor confidence.
The actual pool of finrand deposits (on an annual basis) increased at
the end of 1994 to R6,4-billion from 1993’s R4,4- billion. Speculation of the scrapping was further supported by Stals revealing this week that finrand balances had fallen to about R5,5-billion.