A new, softer rand

The presidency and the national treasury are in discussions about how to soften the South African currency, which the government admitted this week was overvalued and was adversely affecting the growth of the non- commodity export sector, which has the potential to soak up thousands of semi- and low-skilled job seekers.

President Thabo Mbeki announced in his State of the Nation address that the government would review the country’s exchange rate, inflation and interest rates “so as to put in place measures that will facilitate the growth of industries, which produce tradables for both the domestic and export markets, and have the potential to absorb large pools of semi-skilled workers”.

Minister of Trade and Industry Mandisi Mpahlwa expanded on this during the economic, investment and employment cluster briefing on Monday: “The International Expert Panel [the Harvard University panel of international economists commissioned by the treasury to advise on Asgisa] has raised concerns around the volatility of the exchange rate and the possibility of its overvaluation.

“The latter is a potential problem given that increasing export orientation is viewed by the panel as a key employment creation strategy.”

Senior officials in the treasury and the presidency said the departments were developing economic models in order better to understand the structure of South Africa’s economy and to make fiscal decisions that would bring the exchange rate to an “optimal level”.

Goolam Ballim, group economist at Standard Bank, said that an optimal level for the rand to dollar exchange to “achieve balanced and sustainable growth” would be between R7 and R7,50. On Wednesday evening the rand/dollar exchange rate was R7,22.

While there is no suggestion that intervention by the executive in the exchange rate would inpinge on the mandate of the Reserve Bank, Governor Tito Mboweni may be called on to interpret his mandate more broadly, a senior presidency official said.

The narrow interpretation to which the Reserve Bank currently subscribes, requires the central bank only to keep the inflation rate within the prescribed 3% to 6% bracket. According to this interpretation, the bank does not look at the current account deficit or the exchange rate.

A broader interpretation of the role of the Reserve Bank would be to consider these macro fundamentals — particularly the exchange rate and the current account deficit — in its monetary policy decisions.

“This doesn’t lessen the monetary policy role, but the Reserve Bank would also be concerned about other things,” said a senior treasury official. “The Reserve Bank’s attitude is that it needed time to build credibility. Now that it has had a few years to achieve this, there is room to take a slightly broader view of inflation.”

The essence of the problem is that South Africa’s fiscal and monetary policy has been pro-cyclical during the past 10 years. This means that it has been expansionary in expansions and contractionary in contractions.

The Harvard panel has said that to protect South Africa’s currency from external shocks, fiscal and monetary policy must become anti-cyclical — limit expenditure during booms and maintain or increase interest rates.

According to the panel, most developing economies are pro-cyclical because of political pressure and the so-called Dutch Disease. This occurs when governments increase spending during commodity booms in response to greater availability of finance from tax revenue and borrowing. They then find it difficult to cut back when commodity prices go down.

Cosatu has consistently criticised the treasury for failing to expand the budget deficit. Any suggestion that it plans to increase its fiscal surplus is likely to come under intense criticism from the labour federation.

In his medium term budget policy statement in October, Finance Minister Trevor Manuel announced that the budget balance would be in surplus next year because the budget revenue is projected at R20-billion higher than budgeted. Manuel said he anticipated a budget surplus of about a half percent of GDP.

He said: “Our fiscal stance contributes to overall savings at a point where a considerable gap has opened up between domestic savings and investment. It assists in containing consumption expenditure at a time when both the balance of payments and the inflation trend indicate the need for moderation.”

Another way to weaken the currency is to add to the stock of reserves. But, say the Harvard panel­lists, the question is how much reserve is enough.

South Africa has succeeded in raising its reserve levels from the disastrous low levels of 1997, but it still has a low ratio of reserves to imports — barely two months’ worth.

Increasing reserves is also risky because it could have an inflationary impact, which would contradict the role of the Reserve Bank, said Johan Fedderke, a member of the Harvard panel.

Ballim said that, at a minimum, government departments must begin speaking “with a single voice” on the need to soften the currency. At the moment, competing interests between the treasury and the departments of public enterprises and trade and industry mean that there are conflicting messages on a desirable currency level.

The Cabinet will discuss the proposals being developed by the presidency and treasury at the July Cabinet lekgotla.

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Vicki Robinson
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