SA advisers call for rand intervention

South Africa should be prepared to intervene in the foreign exchange market to keep its currency stable and “competitive”, and should maintain its inflation targets, a group advising the government said.

In its report released on Thursday, an international panel—known as the Harvard Group—also suggested a budget surplus of between 1% and 2% to help ease inflation and for exchange controls to be scrapped.

The international panel, known as the Harvard Group, were asked to assess South Africa’s economic policies and propose ways to boost growth and cut unemployment.

“Maintain the current inflation targeting regime but adopt a strategy that pays more attention to the level and stability of the real exchange rate,” it said.

“This involves the use of SARB [South African Reserve Bank] statements on the exchange rate when it deviates from what the bank considers compatible with external and internal balance. In addition, it [SARB] should be willing to intervene to back up its statement.”

The group did not give a recommended level for the currency.

The Treasury stressed that the report, submitted in 2007, did not reflect government views and that it had neither adopted nor rejected any of the recommendations.

However, Finance Minister Trevor Manuel and central bank Governor Tito Mboweni have, in the past, dismissed proposals to intervene to influence the level of the rand.

South Africa’s rand has weakened by about 10% against the dollar this year to about 7,60, but had held firm for several years after plunging to an all-time low of R13,85 in December 2001.

The gains knocked exports and boosted imports, and helped push the current account into a large deficit. The shortfall stood at a 36-year-high of 7,3% in 2007.

The rand has also been sharply volatile over the past two years.

Larger fiscal surplus

The report said fiscal policy should be used to bring down high domestic demand to allow the central bank to achieve its inflation target with a lower interest rate and a more competitive exchange rate.

“We recommend a larger fiscal surplus target for 2008.
Given current conditions, it should be at least in the one to two percentage points of GDP…,” it said.

The Treasury has forecast a surplus of 0,8% in 2008/09.

The country’s policy of targeting CPIX consumer inflation at between 3% and 6% has come under fire, particularly from trade unions, who say it has led to excessively tight monetary policy.

The central bank has raised its repo rate by 450 basis points to 11,5% since June 2006 in a vain attempt to tame inflation. Annual CPIX jumped to a more than five-year high of 10,1% in March, raising the chances of more rate increases.

The report also proposed that all existing exchange controls be eliminated.

The Treasury has gradually lifted restricting on capital outflows and announced in February it would move to prudential regulations. - Reuters

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