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Weaker rand no silver bullet: Analysts

Dec 13 2010 19:06 Reuters

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Johannesburg - Economic Development Minister Ebrahim Patel's plan to weaken the rand by cutting interest rates is unlikely to gain support in government and would not increase the country's competitiveness.

His proposals on the rand are at odds with the policy articulated by both the central bank and the Finance Ministry and raise old questions over who exactly is driving policy.

Patel released his "new growth path" last month, a set of policy measures aimed at quickening South Africa's economic growth to create jobs for millions that continue to live in poverty, even 16 years after the end of apartheid.

"I do not think it's a good idea," said Tony Twine, economist at Econometrix. "Weakening the rand is an inflationary tactic which simply camouflages the inability of the economy to work efficiently."

The rand has gained nearly 30% against the dollar and the euro since the start of last year, helping to push inflation to 5-year lows and keep it within the Reserve Bank's 3% to 6% target.

But exports have been depressed, especially those destined to South Africa' largest trading partner, the eurozone as that region's growth has been sluggish.

Partly due to rand gains, the manufacturing sector has shrunk and shed hundreds of thousands of jobs, pushing unemployment to an official figure of 25.3% of the working force. The unofficial rate may be as high as 40%.

The rand is seen maintaining its gains into 2011, weighing on the manufacturing sector and the broader economy. At 5.5%, South Africa's rates remain attractive to investors.

Policy Confusion

President Jacob Zuma appointed Patel to reward the powerful Cosatu trades union grouping for helping him clinch the ANC's leadership from Thabo Mbeki. But so far, Patel, a former trade unionist, has not influenced policy and the "new growth path" is his attempt.

After the establishment of the National Planning Commission headed by former finance minister Trevor Manuel, analysts say it is unclear who has the power to drive policy in Zuma's cabinet.

"There is some confusion about boundaries between national planning and economic planning and there is nothing I'm aware of that clarifies what separates the two," said Adam Habib, deputy vice chancellor of the University of Johannesburg.

"There is no doubt that Patel's influence in part emanates from the unions, and if the unions are rejecting his proposals then he's got a serious problem," said Habib of union criticism of Patel's plan to put caps on wage increases.

For now, policy remains the responsibility of Finance Minister Pravin Gordhan, to the chagrin of Cosatu.

The power to change the Reserve Bank's mandate rests with Gordhan and setting a new rand policy would also be his prerogative, guided by the ANC's agenda.

Tensions have increased in recent months due to Cosatu's frustration with the ANC and analysts say eyes will be on whether Zuma will provide leadership and clarify roles.

Although some have speculated the alliance is near breaking point and Cosatu may break away and contest elections, both the ANC and its union ally have said they are committed to making the alliance work.

To keep Cosatu happy, the ANC may compromise on some of Patel's proposals, including increasing targeted support for struggling industries such as manufacturing.

Weaker rand no answer

The Reserve Bank and the National Treasury have said the rand is no silver bullet that will solve South Africa's problems with competitiveness, preferring a multi-pronged policy approach that includes tackling industrial policy and education.

The Reserve Bank has already reduced interest rates to historical lows in the past two years, cutting the repo rate by a cumulative 650 basis points to 5.5% and is less inclined to reduce them further.

Governor Gill Marcus said after the November MPC meeting there was limited room for further easing and the bank was not cutting rates to weaken the rand.

To deal with the rand, the Bank has opted to build reserves as and when appropriate, with the help of the National Treasury.

Analysts have long said that blaming the rand for all of South Africa's woes is a scapegoat and targeting it will not work.

"Monetary policy that targets the exchange rate will not address unemployment and the inequalities," said Lumkile Mondi chief economist at the Industrial Development Corporation.

"Such policies are very much appealing but dangerous and do not do anything for competitiveness," he added.

Nobel economic laureate Joseph Stiglitz, who is also on Patel's advisory panel, said in a statement that managing the exchange rate would be an appropriate policy for South Africa as it would help the economy to develop a diversified productive base.

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