Saving South Africa from monetary mayhem

Now that the government has become serious about eliminating exchange controls, a simpler solution becomes available to deal with the “strong” rand problem troubling exporters. All government has to do is offer them a choice of currencies. Exporters should be allowed to conduct their business in a currency of their choice. No longer would they have to struggle with the difficulties of compulsory currency conversion. For instance, an exporter doing business in euros should be allowed to choose to operate entirely in that currency, including banking, paying salaries and wages, and even income tax.

Conducting business in foreign currencies would solve the problem exporters experience as a result of currency fluctuations. As their income and main expense items would be denominated in the same currency, they would not be subject to foreign exchange losses. Every South African would benefit. No-one would have to suffer the high inflation and import prices that would result if the current call to weaken the rand to ‘improve trading conditions for exporters’ were heeded.

Abandoning exchange controls and allowing SA bankers and their customers to operate in any currency they choose, would remove further pressure on the South African Reserve Bank (SARB) to manipulate the rand. In fact, SARB and the government would be in a position to lead the currency reform that is desperately needed world-wide. SA could establish a currency board similar to those instituted with great success in Bermuda, Bulgaria, Estonia and Hong Kong, but instead of using a strong and stable currency (as the dollar was at one time) to anchor the rand, SA could use gold.

Using gold as an anchor would help to avoid the process of currency debasement that has destroyed economies since Roman times and which now threatens the dollar and the American economy, as well as many other economies besides. Currently, nations and their central banks are being forced to learn some harsh economic lessons about currency debasement. History will determine which of them learnt their lessons well.

A gold-anchored rand, utilising a currency board mechanism, would increase the stability of the rand monetary system and thus the attractiveness of our country as an investment destination. This is a “golden” opportunity for SA to not only have a stable currency, but to be seen to have one and to set an example for leading economies of the world to emulate.

This ‘new’ rand would tend to strengthen even more against other currencies as they continue to be debased, but as long as there is a choice in currencies, no South African would lose. SA exporters would be able to trade in other currencies, pay their creditors in weak ones and keep their savings in rands; in effect they would have the best of all worlds.

A stable currency is one of the most important requirements for bringing about high economic growth. A gold-anchored rand, which has the potential to increase the monetary demand for one of our most long-standing, important and desirable commodities, would be an added bonus. The reward for the country and all its people would be increased investment, accelerated growth and dramatically reduced unemployment.

SA exporters clamour for the purchasing power of the rand to be deliberately weakened so that they can earn the same number of (or more) rands as they did in the past for their exports. What they ignore is that the internal purchasing power of the rand has depreciated constantly and is even doing so while the rand strengthens against other currencies.

The inflation rate of 13.7% that we experienced in mid-2008 and which has been steadily declining since then (3.2% by September 2010), not only tells us how much more consumers have to pay for goods and services than they did a year ago, but also that SARB is managing the rand better. What the increased exchange rate of the rand indicates, is that SARB’s management of our currency has also been better than that of others such as the British pound and US dollar. What SARB’s critics are calling for is an abandonment of any concern about price inflation and its effects on pensioners, widows and orphans, which is a rather callous approach to the hardships of the less fortunate.

When the rand was introduced on 14 February 1961, R2 equalled £1 and R0.714 equalled US$1. But, over the years, the value of the rand has declined significantly against these and other currencies so that today about R11.40 equals £1 and R7 equals US$1. On 29 November 2001, Reserve Bank Governor, Tito Mboweni, said, “A golden thread that runs through the entire period is the existence of higher inflation in South Africa than in the United States and in South Africa's other main trading partner countries. Prices in South Africa are today approximately 70 times as high as in 1921. Over the same period, prices in the United States have only increased tenfold.” Since 1961, the rand has lost 90% of its purchasing power by comparison with the dollar. It is a perversion of language today to describe the rand as “strong”.

All of us, not only as consumers, are detrimentally affected by a decline in the purchasing power of the rand. Savers, pensioners and all who hold cash or claims on fixed amounts of future cash are most affected. The higher the inflation rate and the greater the erosion of the purchasing power of the rand, the harder life becomes for our most vulnerable members of society; the old, the poor, the low wage earners, and the unemployed. Can anyone seriously suggest that for us all to be able to buy steadily less with our hard-earned money would make our nation better off; that government should be actively encouraged to debase the rand even more?

In reality, the exporters’ complaints are not that the purchasing power of the rand is increasing, but that, for a brief period, it has not declined faster than foreign currencies, especially those of our major trading partners. Given that the US Federal Reserve is in the process of destroying the once mighty dollar by printing about $1.2 trillion of extra paper money in the last two years, SA should not attempt to compete in the race to the bottom. Establishing the rand as one of the world’s premier currencies would be a much more sensible policy.

Author: Eustace Davie is a director of the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author's and are not necessarily shared by the members of the Foundation.

FMF Feature Article / 02 November 2010

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