Those in favour of intervention argue that without a lower currency, efforts to boost South African manufacturing industry would not work as domestic producers cannot competitively export and/or are overwhelmed by cheap imports. Furthermore, the currency appreciation is viewed in some quarters as the primary cause of job losses so far. It is also suggested that the current mandate of the central bank will have to be reviewed to include management of the currency when necessary.
Those who are against intervention argue that the country does not have adequate foreign exchange reserves to sustainably weaken the currency. The rand’s recovery is viewed as accompanying the normalisation in global investor appetite for emerging markets assets such as equities, currencies and commodities. The stronger currency is seen as a boon and that policy makers should welcome it rather than try to combat it. These analysts argue that seeking “competitive devaluations” is the easy way out for companies that fail to engage in the necessary productivity and diversification efforts – in essence, devaluations delay structural reforms. Furthermore, it is asserted that the appreciation reduces the risk premium on local financial assets and, in turn, the cost of financing the economy. Finally, the stronger rand is seen as yielding two other benefits for SA: it helps lower the rate of inflation, and reduces the cost of imported components of the infrastructure investment programme – thus easing pressure on public finances.
These are the matters, inter alia, that the government’s task team investigating currency management is weighing. Consequently, the forum assessed the efficacy of managed floating versus flexible exchange rate systems, the scope for SA to pursue one or other of these systems, and the associated impacts on trade and industrial policies.
The Development through Trade Programme gratefully acknowledges the British High Commission and the Australian Agency for International Development, which have generously supported this project.