Pretoria - In response to a proposal on Monday by the Organisation for Economic Cooperation and Development (OECD) to intervene more actively on the rand, Finance Minister
Pravin Gordhan said it will remain government policy to pursue a competitive and stable exchange rate.
Although Gordhan acceded that the OECD report will be carefully considered by the government and that it adds another voice to critical economic debate, he refused to be drawn on which proposals he rejected or approved.
Earlier on Monday, the OECD in its economic review of South Africa said steps to relieve upward pressure on the rand exchange rate could be beneficial for the South African economy.
It said other developing countries' exchange rate policies help to prevent their currencies strengthening too much, thereby improving their competitive positions, and proposed four steps to relieve upward pressure on the exchange rate.
The first is that fiscal policy must be made more rule-based and more anti-cyclic.
Secondly, foreign exchange intervention can be used to halve overvaluation of the rand, the OECD said.
"South Africa's current levels of reserves are low, measured by the standards of developing markets, which leaves room for an increase (in reserves).
SA needs to save more"Intervention with foreign exchange must be supported by improved communication to send stronger signals to the market about where the authorities see the exchange rate in relation to its equilibrium level."
Though foreign exchange control measures were considerably eased in the past two Budgets, the OECD said that if the remaining control on the outflow of capital is removed, the pressure on the rand to strengthen will lessen.
Lastly, the OECD said that higher savings rates would also help to prevent the rand being overvalued.
The OECD also said low employment levels are one of the greatest policy challenges for South Africa's economy.
It said the way in which wages are negotiated contributes to the lack of cost effectiveness in the local labour market.
"One promising plan to give outsiders a greater voice is to coordinate wage negotiations better," the OECD said.
"Renewal of the framework for collective bargaining can improve employment. South Africa is characterised by a pattern of collective bargaining that's associated with the poorest labour market outcomes in the OECD.
"Given South Africa's institutional history, with the great involvement of trade unions in the labour market it may perhaps not be possible to change to a system of highly decentralised bargaining.
"A possible solution could be to improve coordination in wage fixing, so that the macroeconomic benefits of wages being kept under control are understood better and the role of outsiders outside the labour market is enlarged."
- Fin24.com