A fixed exchange rate regime would not be a solution for South Africa, National Treasury director general Letsetja Kganyago said on Tuesday, pointing out that it would be hard to implement and that it would carry a range of economic costs.

"Such a regime would require South Africa to give up its monetary sovereignty and adopt the same monetary policy stance to the country whose exchange rate is being targeted, even if it is not appropriate for domestic economic conditions," he said at a Mail & Guardian trade and industrial policy event in Pretoria.

Kganyago told Engineering News Online after his speech that South Africa's current managed float approach towards the currency, seemed to be the "most-reliant and correct" approach, when judging global economic history and performance.

"With the recent global collapse of financial markets, South Africa's prudent fiscal policy, credible monetary policy and an exchange rate that was allowed to absorb capital flows shocks have helped [the country] to sustain economic growth and jobs."

The Congress of South Africa Trade Unions wants the government to fix the currency and do away with inflation targeting of between 3% and 6%, arguing that it will lead to higher economic growth and jobs.

Prior to 2000, the monetary and fiscal authorities used a forward book - future agreements to provide foreign currency at a specific rand value - to sustain the value of the exchange rate, despite continuous downward pressure, and in 1998 domestic interest rates rose as high as 25%.

Kgnayago commented that the country's experience in trying to fix the interest rate and control currency came at "very high school fees".

The rand, which gained about 30% in 2009, has hardly moved in either direction from its elevated level this year, and South African manufacturers had said that the strong rand had been putting pressure on South African industries.

However, Kganyago said that the rand's recovery was accompanying the normalisation in global investor appetite in especially commodity-linked countries such as South Africa, Brazil and Australia.

Further, the appreciation of currency reduces the risk premium on local financial assets and, in turn, the cost of financing a country's economy. The stronger rand also helped to lower the rate of inflation, and reduced the cost of imported components of the government's infrastructure investment programme, therefore, easing pressure on public finances.

Kganyago said that the country's economy was more competitive today, in real nominal terms, than it had been on average for the last decade, and much more so than in the 1990s.

However, he said that the volatility of the exchange rate remained a "concern", as it made it difficult for small and medium-sized exporters to invest in production capacity, or for importers to plan for the costs of capital goods or consumption goods. But, he noted that larger firms, and those involved in both importing and exporting, were less concerned about the exchange rate.

"This points to the need for more targeted intervention in helping firms manage the overall costs of hedging. This would be more fruitful strategy than attempting to balance the costs and benefits of a larger macro approach," Kganyago said.

He also noted that over the longer term, the real exchange rate needed to depreciate to support the competitiveness of the economy, but stressed that a depreciated exchange rate was not a "silver bullet" for manufacturing and export promotion.

"South Africa needs to successfully implement complimentary policies to limit the impact of the exchange rate on inflation and to raise economy-wide productivity.

"The depreciation of the country's currency needs to occur through moderation of the nominal exchange rate, lower inflation, and much stronger productivity growth in sectors exposed to international competition."

Further, product and factor market rigidities needed to be removed to facilitate demand and production adjustments to changes in relative prices. "This underlines the need for microeconomic reforms that enhance the competitiveness and flexibility of the economy.

"Macroeconomic policy cannot simply throw a lever and make the country more competitive. Continuous learning, reskilling, adaptation and creativity at the microeconomic level is the only way to achieve and retain competitiveness in a rapidly evolving world economy," concluded Kganyago.