The instinct of the South African Reserve Bank has, in the past, been to raise interest rates to lower inflation and ensure that the foreign financing needs of government continue to roll in, reaping higher rewards than in rich country markets. The higher interest rates also signal the intention of the SARB to protect the currency — and hence the investments of foreigners — in rand-denominated government bonds.
Sometimes the SARB overshoots the target — in the late 1990s under Chris Stals and in the early 2000s under Tito Mboweni (for different reasons), the defence against expected inflation and the protection of the currency went too far. The result of the appreciation of the currency and the higher interest rates was that budding export-oriented or import-competing firms in the manufacturing sector were faced with contracts they had to fulfil at an unaffordable cost. In contrast, foreign firms competing with South African firms in tradeable sectors found they had a price advantage due to their weaker currencies relative to the rand.
As a result, when the economy boomed in the later 2000s (about 5% growth on average between 2004-2008), domestic firms were reluctant to invest in productive capacity as they feared they would be caught again by an appreciating rand.
Since the global financial crisis, because of domestic conditions and international liquidity, the rand has been relatively soft and not very volatile. Localisation policies and the damage to global value chains caused by Covid have also led to conditions favourable for investment in domestic production in the kind of goods usually available from international markets — “tradable goods”.
Climate change concerns and rising wages abroad have also helped to encourage local manufacturers, though the trend to digitisation, automation and robotisation in developed countries is a countervailing factor.
So, the SARB faces a difficult choice.
It can raise interest rates relatively rapidly to protect the currency and international borrowings, or it can respond to the changing global conditions more modestly, raising interest rates as little as possible. It can shift its focus to nurturing domestic production and services in tradable sectors, rather than being preoccupied with access to hot money.
This will make it more difficult for the government to borrow money over the medium term, and maybe even the longer term. It could also penalise short-term growth. But, if it is accompanied by a clear commitment by the government to prioritise domestic employment creation — and by business to invest in the tradable goods and services sectors — it could lead to a longer-term trajectory of sustainable growth and employment creation, instead of relying on foreign borrowing to fund domestic consumption.
It would make faster growth in labour-intensive sectors possible, and it could underwrite emerging green growth sectors where South Africa could be an African leader.
This is a difficult choice to make for a couple of reasons — first, it would seem risky to change course from the monetary policy practices of the past and rely on private sector investment in the tradable sector to make it worthwhile. Second, a looser monetary policy will entail a tighter fiscal policy — the government will have to be very careful in ensuring the efficient allocation of resources.
Government consumption expenditure won’t be able to grow much, especially if more public finance is directed towards the kind of investments that will encourage private sector investment — investments in people, education, skills, health and safety, and in infrastructure.
Underpinning such a shift, there would have to be a high level of understanding, agreement and coordination between government in all three spheres — the private sector, the unions and civil society.
In a democratic country such as ours, where veto power is scattered across a wide range of forces, it would not be possible to achieve this shift towards job creation in the tradable sectors — away from foreign-financed consumption — without a lot of serious negotiation under conditions of increasing trust.
Trust and good-faith negotiations are in short supply in our current political climate, which is one reason why the macroeconomic authorities would be reluctant to shift to such a strategy. But if they could deliver on such a shift, we could be on the path to sustainable job creation. BM/DM
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Please explain paragraph 2 re appreciation of the ZAR. The only “appreciation” I can recall was a correction to the disastrous free fall of the ZAR in period 1999 – 2001. The value never returned to pre freefall levels, so I struggle to understand the statement that the Rand appreciated during this period!
In 2005-06 the rand strengthened to under $6 to the US dollar. This was the first time in 8 years that the rand had achieved this level. It had been depreciating steadily before that which was to be expected considering differential rates of inflation and the liberalisation of South Africa’s trade protection in the second half of the 1990s. The disastrous free fall in 2001 should not disguise the fact that prior to that the rand was depreciating in a manner that could be explained by market conditions. The period 2005-07 was out of alignment with long term rand value trends. The problem wasn’t simply the absolute value but also the volatility of the currency which made it very difficult for domestic manufacturers to plan aged with any certainty. Perhpas I shold have emphasized that more.
Plan ‘ahead’ –sorry for the typo.
Big business is corrupt and responsible for South Africa’s problems!!
Every year big business, mostly transnational corporations illicitly park hundreds of billions of dollars out of the reach of tax and other regulators. This is what is referred to as illicit financial flight. It is estimated that 80% of illicit financial outflows is composed of the proceeds of tax evasion and laundered corporate transactions and not drug trading, racketeering, counterfeiting, contraband, and terrorist financing. The most important component of illicit outflows is trade mispricing that is the mis-invoicing of international trade transactions with the ultimate purpose of diverting financial resources.
South Africa is heavily affected by illicit financial outflows, according to data released by Global Financial Integrity. Between 2002 and 2011, South Africa lost a cumulative 1,007 billion rands to illicit outflows, i.e. more than a trillion rand. In 2007 a comrade we have had a long association with, Professor Ben Fine at SOAS University, working with other radical economists, estimated that there was the equivalent of 23% of GDP that was illicitly transferred out of South Africa. In 2012, the year of the Marikana massacre, SA lost R300 billion in illicit financial flows.
This is relevant, but the problem won’t be solved by the government trying to block capital outflows. The dual rand policies of the 1980s failed to achieve this. Government has to focus on increasing the confidence of investors–that’s the way to retain more funds and turn it into investment.