October slams the Reserve Bank

2012-03-03 08:45

South Africa’s top economic policymakers may have to rethink their approach to the rand after one of their own broke rank and criticised the country’s handling of the local currency, which he deems to be “overvalued”.

Lionel October, the director-general of the department of trade and industry (DTI), criticised the Reserve Bank on Friday for failing to take action against the “overvalued” rand, which he said was encouraging to importers to bring in more imports into the country at the expense of local exports and jobs.

“All over the world, central banks manage their exchange rates, but in South Africa we are still following the old view of the pre-2007 Washington Consensus, where the focus is on targeting inflation.

“This is a wrong policy, you have to intervene to stabilise the currency when it becomes too strong,” October said.

October’s comments may reignite the debate on whether Reserve Bank governor Gill Marcus should deliberately weaken the rand or leave its fate to the financial markets.

October said no country had ever industrialised on the back of a strong currency, including emerging industrialised powerhouses such as Japan, China, South Korea and Brazil.

“It is proven economics that many countries have industrialised on the back of fixed exchange rates. The rand is currently overvalued and we cannot industrialise on the back of an overvalued currency.

“It is frustrating that we are not intervening to deal with the problem. We are still letting the markets dictate the value of the rand. We need to intervene to ensure than we have a stable and competitive currency,” he said.

October’s comments imply that the government’s much-touted policy of fast-tracking industrialisation through beneficiating the country’s vast mineral resources will not work in a strong-rand environment.

Proponents of a weaker rand, particularly trade federation Cosatu, have been clamouring for the government to devalue the rand to R10 against the US dollar, a level that is said could give local exporters a shot in the arm.

On Friday, the rand was trading at around R7.45 against the greenback.

On the flip side, exponents of a free-floating rand argue that a devalued currency leads to high inflation and rising interest rates, which eventually weaken spending and employment creation.

Crucially, a softer rand would increase the price of imported crude oil, sparking a series of price hikes at the petrol pump.

Escalating fuel prices usually lit up the prices of other goods in the economy like food and clothes.

Some commentators have even argued that a weaker rand could lead to local companies, prime land, commercial and residential property becoming vulnerable to foreign ownership as foreigners could use their strong currencies to buy cheap local assets.

However, supporters of a “weak” or “competitive” rand are unfazed by this argument.

October said South Africa should follow the South Korean model, whereby a local currency is allowed to trade in a narrow band.

“We must keep the rand in a narrow band by selling (more rand) when the rand is strong and buying (more rand) when the rand is weak. You can’t plan if you have a currency that is widely fluctuating,” he said.

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