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Missed Opportunity?

7th October 2011

By: Terence Creamer
Creamer Media Editor


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Pan-African Investment and Research Services (PAIRS) economist Dr Iraj Abedian argued last week that the monetary authorities needed an entirely new textbook for dealing with the prevailing realities of the global economic system, where orthodox economic theory no longer seems to apply.

He was particularly unhappy that the South African Reserve Bank had “squandered the opportunity” in September to break free from its theoretical shackles and consolidate domestic currency competitiveness. Instead, it opted to leave interest rates unchanged at 5.5%. The rand, which last month fell to a 28-year low of close to R8.50 to the US dollar, would probably now return to relatively uncompetitive levels by the time of the Monetary Policy Committee’s (MPC’s) next meeting from November 8 to 10, Abedian added.


Econometrics modelling done by PAIRS indicated that the productive sectors of the economy (mining, manufacturing, agri-culture and tourism) required an exchange rate of between R8.40 and R8.60 to the US dollar to remain competitive, which was also suggestive of the need for fundamentally different monetary policies.

But the bank made the “unfortunate error” of “panicking” when the rand began to fall. It then retreated to the relative safety of its orthodox economic models, which contend that South Africa’s currency will eventually adjust downwards because its inflation is consistently higher than those of its trading partners.


But this has not been the case in recent years and, since 2002, the currency has been appreciating. The net cumulative effect, according to PAIRS, has made South Africa 58% less competitive than the US and 68% less competitive than the UK. It is also 70% and 30% less competitive than Japan and the eurozone respectively and 72% less competitive than China.

“The level of reserve accumulation is not sufficient for the type of economy that we have. Yes, it’s costly to accumulate reserves, but . . . if you think reserve accumulation is expensive, behold the cost of thousands of jobs going out of the economy, industries closing and the economy contracting.”

It’s now up to Finance Minister Pravin Gordhan, who will announce his Medium-Term Budget Policy Statement on October 25, to consider some fiscal policy loosening to help mitigate the effect of the bank’s decision. The focus, again, should be on stimulating the real economy through “massive and well-considered” capital spending. “Not grant, not pension, or welfare payments . . . we have had too much of that kind of fiscal loosening,” Abedian averred.

Nevertheless, he lamented the fact that the “fantastic card” topin the rand to levels weaker than R8 to the dollar was not played by the MPC. “The Reserve Bank should have used it to align our policies with the strategic needs of the economy, meaning job creation and the growth of our manufacturing sector. And they just squandered the opportunity.”

Abedian may well be correct. But change is difficult and the risks perceived by the MPC, particularly with regard to the threat of imported inflation, are also all too real. What is in less doubt, though, is that South Africa has to prioritise policy decisions that are fully alive to the fact that the productive sectors probably offer the best prospects for making a dent in our chronically high unemployment rate, which currently stands at a disastrous 25.7%.


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