IN the recent past, many people have commented that the rand is too strong and that the South African Reserve Bank should consider devaluation. Disregarding the fact that South Africa does not pursue monetary policies allowing for this, a weaker rand may not be as desirable as many believe.
Yes, a weaker rand will help our manufacturing sector through making our exports cheaper on the international market and thus more competitive but consider the following example.
Please bear in mind that imports are generally paid for in the currency of the supplying nation and hence, in this example, in dollars.
The table represents a simplified example of South Africa’s current situation: We are a nation that regularly runs a trade deficit, in other words, we are more often than not, a net importer. From the table, we can see that the weaker exchange rate leads to a larger trade deficit but why is this of any concern?
Straight away, many economists will argue that a trade deficit is not always a bad thing and I concede that point, a trade deficit is not always bad. Trade deficits can mean goods are available at lower prices, larger profit margins for corporations or that consumers have greater spending power. However, these benefits are realised only in the short-run.
In the long-run, a trade deficit leads to economic instability where unemployment, foreign debt and currency crises become concerns.
There can also be repercussions during recessions and with the double-dip recession looming and South Africa’s unemployment rate at 24.9% for the second quarter, our focus must be on levelling the trade balance to prevent exacerbating unemployment, for one.
Over the last decade (2002-2011), South Africa has had an annual trade deficit eight (8) times, with trade surpluses occurring in 2002 and 2010. In the decade prior (1992-2001), we had a deficit just four (4) times. Clearly, deficits are occurring more regularly and before it establishes itself as a perpetual and long-term issue, South Africa needs to turn the situation around.
But what can we do to remedy the situation?
The Department of Trade and Industry’s Industrial Policy Action Plan (IPAP), is a target-oriented policy that can level the trade balance through focussing on the development of sectors with high employment and growth multipliers.
An integral component of this is setting up value-chains, so that up-stream and down-stream firms all benefit. The development of these sectors and their respective value-chains will create jobs, improve manufacturing and increase exports, thereby alleviating unemployment and levelling the trade balance.
With South Africa being a net importer, it is important for South African companies to be aware of South African technical regulations.
Our most recent regulation notification specifies the maximum amount of permissible sodium (salt) in certain foodstuffs. Therefore, our agro-processing sector, which is one of the focus sectors in the IPAP, will be affected.
As one of the sectors with particularly strong up- and down-stream linkages, the largest manufacturing sector in employment terms (about 178 000 employees – which increases to more than 1 million jobs if up-stream agriculture is included) and a trade deficit, it is vitally important to be aware of potential threats like the sectoral and national trade deficit or salt regulation.
A disregard for the above and the consequential worsening of economic stability and unemployment, will desist from the positive improvements achieved through the IPAP.
Therefore, the next time you hear someone say that the rand should be devalued or that a weaker rand is better for the economy, agree to disagree.
* Geoffrey Chapman is a guest columnist and trade policy expert at the SABS.