South Africa is “concerned” about the US Federal Reserve’s decision to pump more money into the economy as it would negatively affect developing countries, Finance Minister Pravin Gordhan said on Friday.
“Developing countries, including South Africa, will bear the brunt of the US decision to open its flood gates without due consideration of the consequences for other nations,” Gordhan said in a statement.
The US central bank announced this week it would inject $600-billion into its economy to encourage growth and lower unemployment by buying up government debt.
Known as “quantitative easing”, the strategy aimed to make borrowing cheaper so that more people and companies could access cash, then spend it and thus stimulate the economy.
‘Decision undermines the spirit of cooperation’
Gordhan expressed disappointment that the “unilateral step” took place a week before a Group of 20 nations meeting in South Korea next week to try to find a solution to fix the global economy.
“The USA’s decision undermines the spirit of multilateral cooperation that G20 leaders have fought so hard to maintain during the current crisis,” Gordhan said.
“It also runs contrary to the spirit in which G20 finance ministers and central bank governors met recently in South Korea, where they agreed that, given the high interdependence among nations in the global economic and financial system, uncoordinated responses would lead to worse outcomes for everyone.
“They also undertook to ‘move towards more market determined exchange rate systems that reflect underlying economic fundamentals and refrain from competitive devaluation of currencies’.”
The rand has strengthened by 7,5% against the US dollar since December 2009. This could be attributed to a flow of foreign funds into South Africa.
Gordhan said the US move “will force developing nations to take more steps to mitigate the impact of the increased flows into their financial markets”.
“As has been the case so far, most of the $600-billion that the Federal Reserve will pump into the USA’s economy will find its way into the financial markets of emerging market countries, where these dollar flows will have the effect of strengthening emerging market currencies, with devastating consequences for exports from developing countries.”
The minister added: “If we are to repair the global economy, all nations must find the right balance between measures aimed at protecting national interests and globally coordinated policies.” – Sapa