No govt plans to interfere in monetary policy

South Africa’s government has no plans to interfere in monetary policy in order to influence the exchange rate and promote vital exports, an economic adviser to President Thabo Mbeki said on Wednesday.

Mbeki rattled investors in February when he said raising interest rates was not the only tool to tame consumer spending and his government would study the link between inflation, the volatility of the rand and interest rates.

The currency market took his comments, along with similar utterances from the trade minister, as signs the authorities were in favour of a weaker rand and had decided to take a more direct hand in the functioning of the market.

But on Wednesday Iraj Abedian, one of eight members of the Panel of Economic Advisers to the Presidency, warned against reading too much into Mbeki’s remarks.

“People sensationalise things because they all want to score points ... You ask the president: ‘What should we do?’ He has got views,” he said in an interview, suggesting Mbeki had merely expressed an opinion.

“So the president wasn’t ushering in a new chapter or approach by fiddling or interfering with monetary policy management,” he added.

The central bank has repeatedly stressed its constitutional independence and dismissed calls to cut interest rates. South Africa’s interest-rate differential with countries like the United States has boosted the rand’s high yield appeal.

Like other emerging-market currencies, the rand has been through a wobbly spell since the middle of last year, when it tumbled to a three-and-a-quarter year low of 7,98/dollar.
But it is far better off than in 2001, when it fell to a record low of 13,85/dollar.

The rand’s relative strength since then has cramped exports and eaten away at jobs, prompting senior government officials to raise concern about its impact on the overall economy.

South Africa’s post-apartheid economy has recorded impressive growth in recent years, reaching a 20-year record of 5,1% in 2005. In the fourth quarter the economy expanded by 5,6%.

Yet this upswing has not yielded the jobs officials would have liked. Key employers, like manufacturing and mining, have shed thousands of jobs to offset losses triggered by the rand’s appreciation since late 2001.

About a quarter of South Africa’s workforce is unemployed.

Promoting exports, surplus

At the same time, manufacturers have struggled to keep up with a leap in domestic consumer demand, creating a massive trade imbalance.

The current-account deficit ballooned to 7,8% of gross domestic product in the fourth quarter of 2006 from 5,7% in the previous four months.

An international panel of advisers earlier this year said the rand may be overvalued, echoing worries that its strength could hurt exports and dampen long-term growth. But Abedian said the exchange rate alone could not solve these problems.

“To promote exports, we need a lot more variables. The exchange rate is not the beginning and end of export promotion,” he told Reuters.

Besides, in countries with a surplus like South Africa, it is common for currencies to come under pressure, he said, also disputing the notion that the government may view the surplus as an inflation-fighting tool.

“The surplus in the South African context is a consequence of limited institutional [capacity],” Abedian said.

“When local governments lack the capacity to implement especially capital spend projects ... My personal view is the surplus we have is primarily a by-product of that.”

South Africa is projected to register a budget surplus of 0,6% in the current financial year.—Reuters

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