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Rand on a slippery slope

The Department of Finance believes the rand could sink as low as R26 to the United States dollar by 2018, after dropping to about R14,9 to the dollar by 2010.

The department’s affordability study of the arms deal provides a rare insight into an official line on the future of the currency. The study, drafted in late 1999, predicts an inevitable decline R9,6/$ in 2003/4, R18,5 by 2013/4 and R22,8/$ by 2016/17.

The projections were done by Warburg Dillon Read “in consultation with the Department of Finance”.

During 1995 the rand hovered around the R3,60 to the dollar level, weathering the abolition of the financial rand. On April 27 1994, when South Africa held its first democratic elections, the rand was at R3,58.

It stood at R4,30/$ at the beginning of 1996, but lost ground in February 1996 after, some argue, the Reserve Bank had allowed it to remain artificially strong. It ended 1996 at R4,70.

During the Asian crisis in 1998, after the Reserve Bank had blown R26-billion in a futile effort at propping it up, the rand slumped from R5,10 to around R6,40. It recovered some ground afterwards, but ended up depreciating 20% during 1998.

The currency was fairly stable during 1999, losing just 40c, or 7%. But last year saw a further depreciation of 22%.

Currency traders and economists blamed, among other things, the ANC’s failure to deal convincingly with Aids and increasing repression in Zimbabwe. At the beginning of this year the rand was worth R7,5, but deteriorated to more than R8,10 by the end of April.

The briefing says the calculations by Warburg Dillon Read show that “for every R1 depreciation in the dollar exchange rate the cost of servicing foreign debt will increase by R2,5-billion and principal repayments will increase by R4,8-billion,” adding “it is clear that the scale of this currency risk is sizeable over the 20-year period [of payment].”

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Richard Calland
Richard Calland is an associate professor in public law at the University of Cape Town and a founding partner of the Paternoster Group.

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