The macroeconomic package associated with South Africa’s New Growth Path (NGP), including a proposal to improve the competitiveness and stability of the rand, cannot be left on the backburner forever, Trade and Industry Minister Dr Rob Davies has argued.

The social partners are currently focusing primarily on the less controversial microeconomic elements, such as accelerating skills development, improving basic education, increasing local procurement, stimulating small business development and galvanizing the so-called green economy. However, the NGP also contains policy proposals on the currency and executive wage restraint, which raised anxiety levels when it was first released last year.

It is “common cause”, Davies asserts, that South Africa’s exchange rate is currently overvalued, having peaked at its highest real effective rate towards the end of 2010. The result has been a divergence between the country’s financial account, which is in surplus, and its current account, which is in deficit. It has also led to a dampening of export competitiveness, which threatens to further accelerate South Africa’s deindustrialisation.

But he acknowledges, too, that there is a real threat that when developed country monetary authorities, particularly in the US, begin tightening their policies the rand could “over shoot” and move from overvaluation to undervaluation – a threat that could further spur inflation in the context of rising fuel and food prices.

In response, the South African Reserve Bank’s mandate has been made more flexible to accommodate both inflation targeting and a focus on stimulating economic growth, employment and the threat of asset bubbles. This has led to an accumulation of foreign exchange reserves and has probably led to some interest-rate restraint.

The NGP, however, is premised on “looser monetary policy and a tighter fiscal policy”, which it designed partly to improve currency competitiveness and primarily to stimulate South Africa’s export-facing productive sectors, where a five-million jobs aspiration is being pinned.

Davies does not see the imbalances disappearing as has questioned whether South Africa should not learn a lesson from China’s remarkable industrialisation, which has been built partly on its controversial weak exchange-rate policy.

He argues that South Africa should constantly be on the lookout for a “range of instruments” to support its growth and job creation ambitions, and that, in the context of recovery, one of those instruments could involve currency management.

The National Treasury’s new DG Lungisa Fuzile has also confirmed that the department is prioritising the monitoring of the exchange rate and exploring policy measures to ensure competitiveness.

Besides reserve accumulation, which all acknowledge carries high direct and indirect costs, government is also interrogating a possible tax on short-term foreign currency inflows, as has been done by a range of other commodity-heavy economies since the global financial crisis.

Another mechanism currently receiving a hearing is the possible creation of a dedicated sovereign wealth fund (SWF), capitalised through a portion of earnings arising from the current resources upcycle.

Proponents of such a fund, including the Competition Commission’s economist Dr Simon Roberts, say the fund could act like a “fiscal rule”, whereby windfall revenues are ring-fenced outside of the country and saved. The fund could then be mandated to support regional initiatives in which South African product and services exporters would play a role.

A resource-rent tax linked to a SWF would enable South Africa, Roberts argues, to “save” resources earned from the commodity boom and preventing them from being spent on short-term consumption, whether on the government Budget, or privately. In that way the SWF forms part of fiscal policy.

South Africa is studying the effects of Brazil’s efforts to manage its exchange rate, where a number of instruments have already been deployed, including a tax on financial transactions, the imposition of a $3-billion limit on bank short dollar positions and penalties on those that exceed such positions.

Professor Giorgio Romano, of Universidade Federal do ABC, a Brazilian think-tank, says the results have been mixed, but that the country may pursue more capital flow management initiatives, given the importance of currency stability to its economic programmes.

“We have put the macroeconomic package to one side, because it has been quite controversial on some secondary matters,” Davies says.

However, he believes that the issues raised will eventually have to be addressed by stakeholders. The NGP’s suggestions on improving the competitiveness of the South African currency included.