CURRENCY
Because South Africa is such an open economy, the exchange rate has an important influence on prices in general, as reflected in both the consumer and producer price indices. Where the exchange rate goes, prices tend to follow.
Exchange rate movements, wide as they are, have also tended to lead rather than follow inflation. This matters for trade competitiveness. What exporters gain from a weaker rand can later be eroded by higher local costs of production. Meanwhile, importers are hurt by a weaker exchange rate but assisted by the faster rate at which the costs of local competitors rise following rand weakness. the US. Had the exchange rate largely followed the difference in inflation rates more closely since 1995( the purchasing power parity equivalent), a US dollar would now cost less than nine rand. The rand came close to this purchasing power parity level in 2010. The ratio of the actual USD / ZAR exchange rate to its purchasing power equivalent has nevertheless averaged well above one.
Unfortunately, faster export-led growth has not followed from this competitive exchange rate. Export and import volumes have largely stagnated.
The reasons are familiar. The rising cost of electricity and the failures of Transnet have been headwinds slowing growth and exports. The failure to offer competitive returns for investing in mining despite highly favourable metal prices is another reason why exports have not grown faster.
This is not the place to catalogue the reasons for the failure of the economy to grow faster. But export-led growth remains a route out of stagnation if South Africa could get its act together and address the constraints.
The foreign trade playing field has not been consistently a level one. The rand on average has weakened by more than the difference between South African and American inflation. Since 1995, South African inflation has averaged 5.7 % a year, while US inflation has averaged 2.6 % a year. This means it has been on an average 3.16 % a year slower, while over the same 30-year period, the annual move in the rand-dollar exchange rate has averaged 6.3 % a year.
It has made the USD / ZAR exchange rate consistently competitive – presumably encouraging more profitable exports and discouraging more expensive imports. The exchange rate has weakened by more than the difference in inflation rates between South Africa and
The volatility of the rand is explained largely by forces beyond South African control. The forces that drive highly variable flows of mobile capital to and from the US and into emerging markets generally, of which South Africa is an actively traded part, have moved the rand. These global forces, much more than South Africanspecific risks, explain much of what happens to the USD / ZAR rate and other exchange rates. They will continue to do so. South Africa should therefore expect ongoing exchange-rate volatility.
Had the exchange rate largely followed the difference in inflation rates more closely since 1995( the purchasing power parity equivalent), a US dollar would now cost less than nine rand.
Capital flows are far more important flows than trade in the foreign-exchange markets. Yet the Reserve Bank could do a much better job of not reacting with higher interest rates to exchange-rate volatility over which it has little influence. sabusinessintegrator. co. za 65