Weak or strong? Rand at crossroads

Calls for the government to weaken the rand are getting louder

Even the Organisation for Economic Cooperation and Development says the relatively strong currency is having an impact on the economy and says the government could intervene more.

However, weakening the rand has major implications, not least for inflation and the huge quantities of foreign capital needed to pay for upgrading SA's infrastructure.


The rand climbed to a three-month high of 7.2850 to the dollar this week. Although it has only firmed 1% this year, its current level is perceived as uncompetitive for the economy and exports.

The rand gained 30% against the dollar last year and is 40% stronger than a low of 11.88 in October 2008 during an investor exodus from emerging market assets at the start of the sub-prime financial crisis.

However, it has actually weakened by 6.8% since January 2008 and 4.5% since January 2007, when the economy was growing at 5% a year.

It is 20% weaker than in 2005.

Labour federation Cosatu would like to see the rand weakened to 10 against the dollar to support the manufacturing sector, which shed thousands of jobs during SA's first recession in two decades last year.

A weaker rand would also help the competitiveness of exports as the country seeks to diversify into emerging markets such as India and China. More than a third of SA's exports now go to Europe.

However, there is a counter argument that a weaker rand is not the answer to SA's problems.

The strong rand has had a positive impact on inflation, helping cool it to 4.2% in June from a peak of nearly 14% in 2008. Easing inflation gave the Reserve Bank room to slash interest rates by a total of 550 basis points from 2008 to their lowest level in three decades. A weaker currency would drive up food prices and inflation and leave poor households hungry.

Even for the manufacturing sector, a weaker currency would be a short-term fix only. It would not address problems such as the rigid laws that make domestic labour uncompetitive relative to Asia, and the lack of capital investment and innovation.