Will the debate on the rand weigh costs and benefits?

Public debate on the rand was focusing on the costs and benefits of possible policy choices to manage the currency, Economic Development Minister Ebrahim Patel (pictured right) said yesterday.

Patel is overseeing talks between labour and business on the perceived damage of rand strength on SA’s economic recovery.

Calls are mounting for a more “competitive” exchange rate, as the unit’s gains of about 20% on a trade-weighted basis this year may erode global demand for local exports.

“There’s a complex trade-off between policy changes … we are identifying the costs and benefits of each one,” Patel said after a meeting of the government’s appointed economic crisis task team.

A second stage in the talks would look at international experience of attempts to manage exchange rates, he said. “It’s absolutely fundamental to our economic development to have a stable and competitive exchange rate.”

Volatility in the rand is seen as a bigger issue than its level.

The Treasury and Reserve Bank have repeatedly said they are sticking to a policy of allowing markets to determine the level of the rand, although they are open to debate on the issue.

There is also intense discussion of the merits of inflation targeting at a time when price pressures are not driven by demand, amid concern that they may force interest rates up before the economy is back on a sound footing.

“I think we are on the right track, we are doing very well overall,” said Zwelinzima Vavi, general secretary of the Congress of South African Trade Unions. SA was developing a unique approach to the global downturn through social dialogue, Vavi said. “The debate (on inflation targeting) must continue, there are no holy cows.”

Nomura International economist Peter Attard Montalto said the Bank’s inflation target mandate was likely to be modified next year, to include a clause on the need for job creation and sustainable growth.

The MPC has kept its repo rate steady at 7% for each of its past three monthly meetings. It only expects inflation to return “sustainably” to the target in the second quarter of next year, and then hover below the upper end until the end of 2011.

Source: Business Day