Drop Inflation Targeting, Fix Rand Value, Ignore the DA

2016-01-11 10:39

The Democratic Alliance’s (DA) super billboard featuring President Jacob Zuma has been unveiled and as I predicted in my opinion piece ‘Maimane is White privilege Billboard’ before its unveiling, it is just political mess and misleading with a clock that counts down the number of phantom job losses without evidence. The public is best advised to see this billboard as a silly gimmick it is or worst a sign of shallow understanding by the DA of our economics as country.

DA’s Trade and Industry spokesman Dean Macpherson MP, IN reply to Bo Mbindwanel fail to respond to my direct and pointed critique on News24 of the irrelevant DA’s economic policies. Instead, like the billboard he ended up gossiping about affairs president Zuma is rumoured with one SAA chairperson as the sole reason for economic downturn in South Africa amongst his important points for same. This also illustrated just how shallow the understanding of our big and complex yet sophisticated economy the DA has. Macpherson ought to explain why he was in the forefront of attempting to derail Trade and Industry negotiations with the US over AGOA.

Macpherson demanded a parliament debate over the AGOA matter whereas government and the industry were involved in serious attempts to get the best and safe deal for South Africa. Macpherson has chicken egg on his face as chicken farmers and industry said they fully backed the Minister all the way and did not understand what the DA noise was about.

The DA billboard has whiffs of plagiarism of the ANC policies except where it calls for unconstitutional constraining of labour rights as contained in the bill of rights.

South Africa’s growth is constrained because it is an advanced and sophisticated economy yet small in comparison with other similarly advanced economies, what makes it small is mainly that the majority of South Africa’s citizens, the Africans, remain excluded from the main stream. The short years of growth averaging 3.5% are owed to Affirmative Action laws and Black Economic Empowerment wherein and through which three million black people entered the middle class. It is not necessary to point out that the DA was dead against these two pieces of legislation as introduced by president Nelson Mandela. The DA remains highly critical of these laws to date.

South Africa as a sophisticated, advanced economy which unfortunately has left 80% population behind makes it have little catch up growth to stimulate it except to improve and expand. The 80% left behind represent the inequalities, inequities that our nation has to confront. Access must be given to all.

The economic participation is within some 20% of the population and the continued restraint to trade imposed by mainly the DA to the majority is the main reason South Africa is not able to shock absorb economical downturns through domestic trade. The more blacks are halted from advancing the more country itself is stopped and its growth shall remain lacklustre.

Growth at 1.4% under the circumstances is but a miracle itself and its owed to government’s bold infrastructure and other stimulus spending as in the car manufacturing sector and youth wage subsidy amongst others. The private sector has but stopped investing inside the economy choosing instead to bank the profits and not even pass them to shareholders or to wages improvement. Some of this money is also spent by the private sector in external growth in the continent and the United Kingdom.

Another matter to be looked at urgently is the country’s monetary policy. The reason the ANC introduced inflation targeting was to enable stability and predictability in the markets, it also needed to be pro poor in that goods prices had to be in check. The idea is that with stability cones growth.

These were to be explicit conditions on the commitment to an inflation targeting.

It has become very clear that for commodity reliant economies, single-minded inflation targeting opens the economies to vulnerabilities during price shocks in whatever commodities they export.

If transparency and stability is what we are after, the volatile currency exchange rate defeats it, as the rand has been volatile for the past 27 years starting in the 1980’s after the death of the gold standard in 1971.

Under the successful governor Tito Mboweni, the first ever black governor and the first timer in central banking, inflation targeting helped increase in the bank and in public confidence about the stability of future prices.

President Mbeki’s adoption of inflation-targeting framework, made it clear that inflation control is a priority. It came in the time when inflation was double digit as such the idea was immediately credible and well communicated.

With a highly volatile rand, although inflation targeting exists, people still expect prices to be relatively unstable.

For the past 27 years the rand does not allow consumers and businesses to manage their finances with greater certainty about the future purchasing power of their savings and income. Even government was thrown into turmoil to explain its funding model for the controversial 1999 Arms Deal due to the rand US dollar exchange rate volatility. In essence, government spending be it on military or civils via US dominated bonds is counter developmental.

A freely floating rand is not conducive for a mainly commodity economy and one that is developmental and expanding. This combined with inflation targeting as its lack of flexibility, since it focuses on inflation at the expense of other monetary policy objectives, such as full employment is anti developmental state and anti National Development Plan policy itself. Our country constitution also calls for debt repayment first before public spending which makes inflation targeting with a free floating rand self defeating.

Inflation targeting for a commodity economy is also likely to have high interest rates which encourage cash hoarding by investors as is in South Africa although ours is mixed with political considerations.

Inflation targeting in South Africa has limited our ability to respond effectively to economic crises, since its focus is relatively narrow and response costs hard cash.

The ANC is duty bound to recall the economics cabinet cluster to relook at the monetary policy as a short-term matter and medium term examines the potential of a set currency.

The rand is popular with currency traders only because its highly volatile and they make serious money spreading their bets or shorting it. Its free floatation has made westerners extremely wealthy and coursed havoc in domestic commerce whilst providing limited relief to fishermen, miners and others.

The anti cash hoarding tax law is no longer a nice to have and the Minister of Finance or the Davies Tax Commission ought to make input in this regard as a matter of urgency as this could free R300 billion per annum to circulate back into the economy.

Inflation targeting must be dropped immediately, the Rand value must be fixed to R9 or so and the whinging DA must be ignored.

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