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Kganyago warns against intervening to weaken the rand

National Treasury DG Lesetja Kganyago warns against intervening to weaken the rand. Cameraperson: Nicholas Boyd. Editing: Darlene Creamer. (26/5/2009)

28th May 2009

By: Terence Creamer
Creamer Media Editor


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South Africa’s National Treasury remained opposed to adopting strategies that would seek to weaken the rand in order to boost the competitiveness of export-oriented companies and to shore up jobs, despite growing pressure from some economists and lobby groups to do just that.

Speaking at a media briefing on Tuesday, National Treasury DG Lesetja Kganyago cautioned on the futility of such exercises, noting that South Africa had burned its fingers previously when seeking to intervene in setting a level for the currency.

Here, Kganyago was referring to the active intervention by the South African Reserve Bank during the 1997 Asia crisis. At the time, it attempted to defend the sharply depreciating rand by borrowing dollars to buy rands.

This led to the creation of the now notorious “net open forward position” of around R30-billion, which took years to unwind.

“Let’s get something clear. In policymaking there are things that you must accept that you do not have control of. The exchange rate is one of those things,” he averred.

Only those with “deep, deep pockets” had any chance of controlling a floating currency, while to intervene to support a certain level required “huge reserves”.

“What the country actually needs is a currency that is competitive and that is less volatile,” Kganyago argued.

“Taken to its logical conclusion, what that means is that you have got to bring down inflation in South Africa to be in line with those of our trading partners.”

To allow inflation to run out of control in the hope that the currency will weaken, would have the opposite effect, he continued. “You are actually appreciating the currency in real terms.”

“Once upon a time, our central bank thought they knew where the rand should be and they used to intervene in the market.

“My God, didn’t they come out second best, because they were taught a lesson . . . which cost the taxpayer billions and billions of rands.

“I think that it was a very expensive lesson . . . I don’t think we want to pay those tuition fees again,” Kganyago concluded.



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