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Drastic rand remedy

THE economic news of the week is being dominated by the dramatic fall of the rand. Some 15 months ago the rand stood at about R10 to the euro; at present, one pays more than R15 to buy a single euro.

The reasons are complex. Of course, the current platinum sector strike does not help. Neither does the growing awareness abroad of President Jacob Zuma’s incompetence and the inability (or is it unwillingness?) of his government to curb corruption and improve service delivery to poor communities.

But according to observers who understand more about these things than I do, the rot actually started in Argentina and Turkey, where the peso and the lira respectively took  dives.

Apparently, Argentina is the victim of its government’s refusal to pay back international loans, the nationalisation of the Spanish oil company Repsol and lying about its inflation and foreign currency supply. Turkey’s problems lie in a big corruption scandal surrounding Prime Minister Recep Tayyip Erdogan’s moderately Islamist government.

According to authoritative analyses, the fall of the peso and the lira was then exacerbated by the fact that the US Fed stopped pumping money into the American economy. This meant that the peso and lira also pulled down several other currencies including the Indian rupee, the Indonesian rupia, the Russian rouble – and the rand.

While Zuma and the strikes were therefore not the primary reason for the fall of the rand, one has to ask oneself why, for instance, the euro, the yen or the American dollar were not affected.

That is where South Africa’s problems and its weak government do play a role: simply put, there is trust in the European and American governments, and distrust in the South African authorities.

I know the matter is not simplistic, but in a sense a country’s currency may be compared to a company’s share price. If the market has faith in a company’s ability to make a profit, its share price wil rise, and the other way round.

In the meantime, the South African economy will, on balance, suffer because of the rand.

On the one hand, you could reason that a cheap rand benefits our exports. The problem is that this has not really happened. Our negative trade balance, which has not improved, shows that we still import much more than we export.

All these imports become considerably more expensive.

Most important of all our imports is, of course, oil. Not only will each motorist feel this directly in his pocket, but a rising oil price has a ripple effect throughout the economy, as all products have to be transported. Even food becomes more expensive – and this impacts most on poor people.

As serious as the effect on the poor is the possibility that the new middle class will be thrown back into poverty. Many lower middle class people have achieved this social status by borrowing and paying off all sorts of luxury products (television sets, fridges, etc), which places them in a fragile position.

When these people see the shameless way in which political leaders flaunt their wealth, is it a wonder that they turn away from the ANC? Opinion polls show that support for the ANC is falling almost as fast as the rand. Many will not vote for the opposition, but simply stay away from the ballot box.

There may be solutions, both in the long and the short term.

The long-term solution is either to elect another government (which will probably not happen anytime soon), or a drastic overhaul of the ANC by itself (which will definitely not happen soon).

The short-term solution is a very controversial one: to couple the rand temporarily either to the euro or the US dollar.

It has happened internationally several times before in the 20th century, and may have helped to avert or ameliorate economic crises elsewhere in the world. It does not have to be rigid; it does not remove the government’s right to devaluate the rand if and when the situation so demands.

I am not enough of a financial guru to make a definite pronouncement on this matter. All I am saying is let us look seriously at the option.

Of course, the first prize would be a better, more honest government and a better set of policies. But let us not hope for the impossible.

 - Fin24

* Leopold Scholtz is an independent political analyst who lives in Europe. Views expressed are his own.
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Rand - Dollar
18.90
+0.2%
Rand - Pound
23.86
+0.2%
Rand - Euro
20.37
+0.3%
Rand - Aus dollar
12.31
+0.2%
Rand - Yen
0.12
+0.2%
Platinum
908.05
0.0%
Palladium
1,014.94
0.0%
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2,232.75
-0.0%
Silver
24.95
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All Share
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