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Send  Share  RSS  Twitter  28 Jul 2010

ECONOMY: Warning On Rand Intervention


Recent Western Cape Business News

Cape Town - Pick n Pay Chairman Gareth Ackerman has warned against any intervention on the Rand. “While there may be good reason to want a weaker Rand to strengthen exports, the flipslide of a weaker currency may well impact negatively on the very poor in South Africa.

High inflation is the inevitable consequence of a currency devaluation and this is precisely what occurred eight years ago. The further consequence is an increase in income inequality, as the better-off are able to protect themselves by investing in assets which increase in value during periods of inflation, while the poor are most at risk.

Low-income South Africans will suffer disproportionately as a result of depreciation-induced inflation, because a higher proportion of their income goes to food purchasing. The potential increases in food prices will further reduce the purchasing power of the poor.

South Africa should not forget the experience of late 2001, when the prices of basic agricultural commodities and foodstuffs increased rapidly. At the time, a Treasury-commissioned investigation revealed that the trigger for the increase in food prices was the sharp depreciation of the Rand.

We cannot follow that tragic route for a second time within a decade, particularly if we are mindful of the effect that rampant food inflation had on the poor – and the middle classes – in 2008.

South Africa is a net importer of food and food commodity products are dollar-denominated. A wide range of foodstuffs – including bread, rice, coffee, tea and other staples – are all based on the dollar. Any attempt to devalue the Rand will inevitably cause food inflation to rise rapidly again, hurting the poorest in our country who are already under significant pressure from declining disposable incomes, rising costs and the threat of unemployment.

Of particular concern to Pick n Pay is the effect of depreciation on food inflation and the food value chain. Not only will there be a direct impact on the cost of imported foods, but a rise in the price of the input costs on locally produced food will also result in increased prices. Combined, these factors can only lead to greater food insecurity. 

A weakened Rand also raises the very real prospect of a wage-price spiral which will impact dangerously on macro-economic stability and the rising budget deficit. Whatever gains may be achieved through devaluation will prove short-lived, as wage demands increase to compensate for the increased costs from the weaker currency. This cycle of spiraling wages and prices will eventually erode whatever advantages may flow from a depreciated Rand.

Rand devaluation will increase the cost of importing raw materials and capital equipment, growing the cost of production at precisely the time when South Africa most needs these if we are to create jobs.

As world oil prices rise again - and oil, too, is purchased in dollars - devaluation will increase the fuel price, leading to further increases in the production costs – such as transport - of basic foodstuffs such as maize and wheat.  Allied to this, biofuels will once again become an issue and food surpluses that are currently being achieved regionally will dry up – causing both shortages and dramatic price rises. 

It may well be that intervention against strength in the Rand could in the short term boost South Africa’s export sector, but this benefit would be considerably outweighed by its effect on inflation - which will only bring further disadvantage to the poor.”


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