A deliberate policy of depreciating the rand could have undesirable effects, South African Reserve Bank (SARB) Governor Tito Mboweni told the Bureau for Economic Research conference in Somerset West on Wednesday.
“One of the calls frequently made is for deliberate depreciation of the exchange value of the rand in order to retain and expand employment in the tradables sector and to enhance overall growth,” Mboweni said.
“To realise such a goal in practice would conceivably require some combination of significant exchange-rate interventions by the bank [the SARB], a radical lowering of interest rates, abolishing exchange controls and pronouncements by the bank that it views the external value of the rand as too strong.
“Each of these, however, has its own challenges. Foreign-exchange interventions of the kind demanded of the bank involve payment of rand by the bank to the private-sector banks for such foreign currency.
“In order not to flood the money market with excessive rand liquidity, the rand created has to be sterilised. This involves an interest cost on the instruments used to sterilise the excess liquidity, such as the bank’s debentures or government bonds. Having raised the bank’s gross reserves from $8-billion two years ago to almost $20-billion at present, the interest cost of sterilisation — ultimately for the account of the taxpayer — has been considerable.
“Lower interest rates could lead to exchange-rate appreciation if expectations of increased short-term profitability and higher share prices overshadow the conventional mechanism which is based on comparative interest rates on bonds and loans, and these expectations are reflected in substantial share purchases by non-residents.
“Similarly, further relaxation of exchange control could boost confidence in the rand and prompt inflows rather than outflows of foreign currency, thereby leading to appreciation of the rand.
“Finally, pronouncements on an appropriate level for the rand’s external value might need to be backed up by currency interventions if they are to be taken seriously by the market. But in any case, the desired outcome may not arise.
“The bank has a preference for a relatively stable and competitive level of the external value of the rand,” Mboweni said.
“Accordingly, the bank prefers to leave the determination of the exchange rate essentially to market forces,” he said. — I-Net Bridge