Neither currency stability nor balanced and sustainable growth: How SARB policy is violating South Africa’s constitution.

According to the Constitution of the Republic of South Africa, the SA Reserve Bank’s primary mandate is to “protect the value of the currency in the interests of balanced and sustainable economic growth”.

The policy framework the SARB uses to achieve its constitutional mandate is set by parliament in the SA Reserve Bank Act.  Unlike the constitution, this policy framework can be changed fairly easily and legally, as long as the proposed new policies are in line with the SARBs constitutional mandate.

In the late 90s, then Finance Minister Trevor Manuel liberalised SA’s monetary policy, relaxing exchange controls and allowing large companies to delist from the JSE.
Then, in February 2000, the SARB policy framework was changed to give the SARB Monetary Policy Committee one task only: Keep inflation between 3 to 6%.

The net result of these changes can be observed in this graph below:  (Note what happens around 2000).

Since then, the SARB has only used one instrument to keep inflation within its 3 to 6% target: The SARB repo rate.  But while other central banks also use other instruments to cool and heat economic growth such as adjusting the capital reserve requirement of commercial banks, the SARB inexplicably does not, despite its very purpose being to use whatever tools it can to achieve its constitutional mandate.

Even stranger, the 3 to 6% inflation target has never been adjusted, even when our inflation has been mainly cost push (as in recent years) and not driven by demand from an overheating economy.  This is especially strange considering inflation targets vary greatly from central bank to central bank.  The 3 to 6% inflation target is a relatively arbitrary one.  (Click here to see a list of varied inflation targets of central banks around the world).

Slowing an economy already on the brink of recession and with extreme unemployment in order to try and control cost push inflation is pure madness.   (For more on the folly of controlling cost push inflation with the repo rate click here).

Raising the repo rate (slowing the economy) to keep mostly cost push inflation within an arbitrary target when growth is around 0%, unemployment is near 30%, and ratings agencies are threatening to downgrade us due to “poor growth”, also seems a tad unconstitutional, and yet that is exactly what happened over the last few years.  At the time, not a word was uttered by the “defenders” of our constitution.  We now have record unemployment, recession and junk status.

Parliament has the constitutional obligation to adjust the Reserve Bank Act whenever necessary to ensure the SARB has all available policies in its framework to “protect the value of the currency in the interests of sustainable and balanced growth”.  Inexplicably, despite the fact that the ruling party is rightly blamed for our slow growth and despite the growing lack of faith in them as recent polls show, the ANC have not tried any other policies other than the rigid narrow band inflation targeting and the liberalised exchange controls that have proven themselves utterly ineffective.  Even now, as the economy contracts into recession, unemployment reaches record levels, record debt and the cost of borrowing skyrockets due to ratings downgrades blamed repeatedly by the ratings agencies themselves on “slow growth”, none of the Ministers of Finance has even once adjusted the inflation target upwards to allow economic growth during times of cost push inflation as they are mandated and constitutionally bound to do.

But it is not just the government that is to blame for the rigid, unimaginative and limited policy framework of the SARB.  The general public, and the opinion makers and thought leaders who inform them, have also allowed the SARB and government to ignore their constitutional obligations.  We should all educate ourselves on the consequences of monetary policy, not just because it’s a fascinating topic, but because it impacts our pockets more than any other single factor:  With the Repo rate at 7%, the SARB pulls around R220 billion per year from our economy.  A massive amount.  Money that would otherwise be saved, invested or spent on our businesses.

Most South Africans still labour under the illusion that the SA Reserve Bank Act and the SARB policy framework is the best we can do to maintain a strong, stable currency in the interests of balanced and sustainable growth.  Recession, record unemployment and junk status are seemingly not impacting on that religious conviction.

While rightly rushing to defend the words of the SARBs constitutional mandate, none seem concerned that the SARB policy framework since the late 90’s has proven itself woefully inadequate at “protecting the value of the currency in the interests of balanced and sustainable growth”.

What’s the use of defending a constitution while ignoring the fact that is being violated?

The evidence shows us that, since exchange controls were relaxed by finance minister Trevor Manuel in the late 90’s (when large corporations were also allowed to delist from the JSE) and inflation targeting were adopted, the rand’s value has been far more volatile, despite assurances that the a “free market” would lead to currency stability.

The graph above shows that the changes to the SARB policy since the late 90’s were clearly unconstitutional, as they have led to extreme currency volatility without any improvement in the long-term decay in the Rand’s value to speak of.  Is the silence on this issue from the mainstream commentators because they believe the mythical “free market” is more sacred than our constitution, or the wellbeing of our people?  Is the constitution being sacrificed on the altar of the cult of the free market?  What good is protecting the wording of our constitution if we turn a blind eye to its violation?

So much for maintaining the value of the currency, but how about achieving balanced and sustainable growth, the end goal of the SARB’s constitutional obligation?

 

img_1763

Firstly, for growth to be sustainable, it must exist.  We currently do not have long-term economic growth to speak of, and are in recession (negative growth).

Secondly, for growth to be sustainable, it must be inclusive.  It is not sustainable if it does not reduce poverty and inequality in the long run.  It is especially not sustainable if unemployment is at 28% and growing as we have here in South Africa.  Increasing inequality in the face of abject poverty leads to more unrest, and political instability, and if not addressed, eventually, civil war or revolution.
We simply cannot afford to allow our future growth to exclude our poorest.

Thirdly, for growth to be balanced it must be inclusive.  It is not balanced unless the lives of all our people and not just the rich are being improved by it.  That is self-evident.

Fourthly, to be sustainable, balanced growth has to be environmentally friendly.

Clearly we do not have enough growth of any kind under the current SARB policy framework, and what little growth we have had is not balanced or sustainable.

With 28% unemployment and massive tracts of under-utilized land and capital, SA is ideally suited to protecting the value of the currency and achieving balanced and sustainable growth through increasing the supply of local goods, energy and skills through subsidies, zero interest loans and grants etc.  Click here to read how investing in education and environmentaly friendly, local production in which workers share in profits is an effective means to reduce inflation, protect the value of the Rand and achieve balanced and sustainable growth).

South Africans have proven to be fierce defenders of the wording of our constitution, but what’s the use of defending the constitution while ignoring the fact that it’s being violated?

If we are to truly defend our constitution, we must be as passionate at demanding that all institutions, especially the SARB, actually carry out their constitutional obligations.

Posted in capitalism, central banks, corruption, debt, democracy, economics, employment, entrepreneurs, equality, financial, freedom, government, human rights, inequality, inflation, leadership, non-racialism, politics, prosperity, quantitative easing, Rand, Rand depreciation, Reserves, revolution, SARB, socialism, South Africa, South African economy, Uncategorized, wealth creation | Leave a comment

The SA Reserve Bank’s constitutional mandate: Creative ways to “protect the value of the currency in the interest of balanced and sustainable growth”.

The SARB has around R600 billion in reserves currently.  It is constitutionally obliged to use those reserves to “protect the vallue of the currency in the interests of balanced and sustainable growth” in every way it possibly can.

The long-term depreciation of the Rand has been driven by the large current account deficit SA suffers from.  The current account deficit means more money is leaving SA than is coming in, and the largest portion of our deficit is made up of foreign investors extracting dividends and interests on their investments here.  In order to protect the value of the Rand, the SARB should be doing everything in its power to increase exports from SA and reduce imports, and ensure that South Africans gain a greater share of ownership in the companies operating here, so that less profit from local industry flows offshore.

One way it could achieve this is through zero interest loans, grants and subsidies to local energy producers, farmers and manufactures.

Clearly with 28% unemployed, and vast resources of under-utilized capital and land, we have massive scope to limit inflation and achieve sustainable and balanced growth through increasing the supply of local agricultural and manufacturing goods and energy.

If local consumers buy more local product, and import less foreign product, and if local producers export more, that leads to a healthier current account, and a stronger rand.  Thus, by investing only in local owned ventures, the constitutional obligation of protecting the value of the currency would be carried out, and by increasing employment, it remains true to the end goal of the SARB’s mandate: balanced and sustainable growth.

In order to ensure growth is sustainable, as our constitution obliges it to do, the SARB should invest only in the most environmentally friendly local energy industries, farming methods and products available.

Growth is neither balanced nor sustainable if it is not inclusive.  In order to ensure growth is balanced and sustainable, as it obliged to do, SARB investment should only be in industries and farms in which the workers share in the profit, through profit-sharing schemes and by making a sensible company CEO to worker pay gap a pre-requisite qualifying criteria.  For more on the many benefits of profit sharing and salary gap moderation click here.

The SARB could also invest in setting up startup capitalist companies that are wholly worker owned, in which each worker including the executive has an equal share in the company.  Executives and workers could still be paid market related salaries, to attract sufficient expertise and reward skill and talent, but all profit would be shared equally amongst all workers.  In this scenario the economy would grow and demand would rise, but because supply would rise along with it, and we’d export more and import less, price increases would be limited and Rand value would be protected as much as possible.

It would also limit corruption, as most bribes are funded by people with large purses, and by ensuring all profit goes to workers, you reduce the possibility of corruption, and ensure that even if there is corruption, it benefits entire communities, reducing poverty broadly and improving the economy in the long run.

The SA Reserve Bank Act allows the SARB to set up and invest in any company as long as it is in the interests of the SARBs constitutional mandate.

Imagine the effect on our economy and national psyche if the SARB used a few billion to set up a locally owned and designed car manufacturing company (using local expertise currently being used to build cars for foreign companies), in which its workers shared all the profit.  The same could be said of many of the goods SA consumers import from overseas, which weakens the Rand.

And what would happen if the SARB invested in buying under-utilised agricultural land and paying people to farm there, allowing the workers on each farm to share in all the profit?  You’d bring down food inflation, increase exports of farm produce (strengthening the Rand), reduce urbanisation, reduce unemployment and tackle the land issue.  All of this would “protect the value of the currency in the interest of balanced and sustainable growth”!

Education is similar.  The price of expertise is also determined by its supply.  Investing in educating our people is one way to limit future inflation in prices of personal services and skills, not just because supply of skilled workers will increase, but also because more people will be empowered to be successful entrepreneurs, creating a more efficient and competitive manufacturing, agricultural companies, raising output in those sectors too.

If all these actions are constitutional, logical and possible, surely they should be considered!  And once we are aware of what is possible, is it not the duty of every constitution loving citizen to demand that the SARB carries out its constitutional obligation and implement all policies and instruments logical and possible?

Posted in capitalism, central banks, corruption, debt, democracy, economics, education, electricity, employment, entrepreneurs, equality, eskom, financial, freedom, government, human rights, inequality, inflation, leadership, non-racialism, politics, prosperity, quantitative easing, Rand, Rand depreciation, Renewable energy, Reserves, revolution, SARB, socialism, solar energy, South Africa, South African economy, wealth creation, wind energy | Leave a comment

Gateway Legislation: How to tackle corruption in SA

To understand how best to deal with corruption, we first have to understand the system and its weaknesses.  In SA we have a system where state companies are being privatised and private companies are competing for state tenders.  This kind of system will always be prone to corruption because on the one hand you have companies bargaining for their own benefit, while on the other you have state officials with no stake in the negotiations, except a possible bribe, and who are dealing in billions in other peoples money (the taxpayer’s).

Whenever you have people dealing with money that’s not theirs, that is a weak point for the corrupt to target. As long as we have privatization and tendering, you can be pretty sure there will be corruption of some sort. As history has shown, there is nothing we can do to effectively stop corruption.  It is built into the system.

So what can be done about it?

Instead of trying only to prevent corruption using prohibition, the answer lies in something I call Gateway Legislation.  Gateway legislation is legislation that channels the proceeds of an activity so that it ends up benefiting the whole of society, turning something like corruption into something that will benefit the whole of society.

Sound far fetched?

Well ask yourself what would happen if instead of just trying to ban corruption we also made sure any company being privatised or doing business with the state complied with the following?
1) It must be South African owned and staffed.
2) It pays all its workers a living wage and the pay gap in the company between workers and executives is a reasonable multiple (say 1 to 10).  For more on the many benefits of salary gap moderation click here.
3) workers in that company own a reasonable amount of shares and thus share in any gains from state contracts. 

An added benefit of Gateway Legislation is that it will speed up economic transformation.  Our current race based empowerment programs, while necessary, have only been marginally successful.  Workers in companies making billions are still surviving on poverty wages, while CEO’s and shareholders make a fortune.  Its arguable that non-racial Gateway Legislation like salary gap moderation will be much more effective at spreading wealth than race based BEE programs have been.

We know we will never get rid of corruption, but with Gateway Legislation in place, instead of ending up in some tax haven overseas, or some billionaire tendrepreneurs trust fund, the proceeds from any government contract, corrupt or not, would be spread into our poorest communities, stimulating and growing our economy and tax base, and creating demand for the goods and services the rest of us are selling.  What are we waiting for?

 

Posted in capitalism, cheating, corruption, democracy, economics, entrepreneurs, equality, financial, freedom, government, human rights, inequality, leadership, politics, prosperity, Rand, Reserves, revolution, socialism, South Africa, South African economy, Uncategorized, wealth creation | 4 Comments

How to get SA working in one easy step

Agriculture is the foundation of any economy.  Our farmers should be treasured.

When I traveled by train from Hong Kong to Beijing at the turn of the century, I was amazed that there was very little land lying fallow.  From the edge of the track till as far as the eye could see, the land was cultivated from lake to mountaintop.

South Africa has the potential to be an agricultural powerhouse, producing enough quality food to feed our entire population well, and have enough spare to sell to the rest of the world.  We have so much land that is going unused.  Is it that hard to invest in it?  We have 30% unemployment right now, many people are on welfare, and there are growing calls for land distribution.  How many of our people would choose to farm instead of live unemployed in urban squatter camps?

Not everyone wants to be a farmer.  Even people with land often don’t utilise it.  We can identify the land that is not being used productively.  Then we can find out which of our citizens would actually like to farm.  Once that is done it is very possible to distribute the unused land in workable sized farms to each citizen who wants to farm, on condition that they make the land productive or face losing it.  This form of distribution is completely non racial.

The government should be subsidising farm produce here just as the US, Europe and China do.  Its a no brainer.  By subsidising farm produce, you maximise the utilisation of land and increase production of food.  Increasing the supply brings down the cost of food (controlling inflation) and therefor also brings down the cost of labour relative to foreign currency, which makes our other industries like manufacturing more competitive and viable as exporters.

Because farms can be large and require labour, the subsidisation of farm produce should be only on condition that all farm workers are paid a good wage.  In doing so, we guarantee money flows into all communities, generating demand which in turn supports all producers.  More equality also means more peaceful and stable communities, which encourages investment, and raises the quality of life.

How else can you stimulate demand by spreading capital into communities, control inflation, improve workers lives and make their produce more competitive internationally in one simple process?  By subsidising farm produce, you’re effectively subsidising the whole economy.

Lets do what they do overseas and give farmers a guaranteed fee for each cow, sheep, ton of wheat, olive oil etc that they produce.  Lets get our farms and our people working.

The NDP will not lead us to prosperity unless it includes the subsidisation of farm produce.

What has the NDP achieved?  Our growth is near 0%, unemployment is at 30% and our population is increasing.  If we don’t make the country work, we will begin to fight for an ever decreasing share to survive.  We need to get the economy going and people working productively so we can generate inclusive wealth and make sure all our people eat well.

 

 

 

Posted in capitalism, democracy, economics, employment, entrepreneurs, equality, financial, freedom, government, human rights, inequality, inflation, leadership, non-racialism, politics, prosperity, racism, Rand, Rand depreciation, revolution, socialism, South Africa, South African economy, Uncategorized, wealth creation | 2 Comments

In the democracy of the future there will be no politicians

The fourth industrial revolution will spark the first real democratic revolution.

There was once a time when politicians were a necessary evil.  Our communications systems and technology were limited, so we needed someone to represent the masses in the decision making processes of the state.  But politicians have always been corruptible, which has led to “state capture” by powerful elites and corporations.   Since the dawn of democracy in ancient Greece, democracy has been fallible.

The systems of democracy as they exist around the world now are by and large farcical.  The constitution of South Africa, for example, has been hailed as one of the most advanced in the world, but its democratic system is a joke.  South Africans do not vote directly for politicians but instead vote for political parties.  The central committees of those parties then decide who the members of parliament and the president will be.  Political parties are dependent on funding, and SA law protects the secrecy of party funders so that no one knows who funds them except the party leadership.  MPs must vote as they are told to by the party leadership, or they are replaced, so all MPs from each party toe the party line and vote, not according to their conscience, but out of a desire to keep their position.   Control the party leadership and you control parliament, and that is exactly what the Gupta family has allegedly done.   In fact as Professor Sampie Terreblanch explains in his book ‘Lost in Transition’, the SA government has been controlled by corporations since 1652.  We have never had true democracy and it is not possible to have it until the system changes.

Democracy in the USA is no less corrupted.  Bernie Sanders has built a remarkable support base simply by unifying the masses who are disgusted with the powerful influence of Wall Street in Washington DC.

Economic inequality distorts democracy.  Governments around the world are often persuaded through corruption and party election funding to pursue policies which benefit the rich elite and large corporations at the expense of the poor majority. The poorer the masses become compared to the elite, the less influence they have on their government compared to the rich and powerful.

Revolutions come and go, but history has shown us that, because of the systemic weakness of traditional democracy, it doesn’t take long for the new leadership to be corrupted and to revolve back to square one.  Political evolution is now possible.

For the first time in history, we have the technology to do away with politicians as we know them.  Instead of spending money on parliament and its politicians, we can save billions and instead use a fraction of that money to provide each person with a smart phone, and an App that allows us all to vote on any issue or legislation and to propose new legislation to be voted on.  It is highly likely that new technologies like blockchain can be used to make cyber democracy far less corruptible than traditional democracy.

We would still need administrators to carry out the will of the people, so government would still need to exist.  And political parties or interest groups would still be useful to propose new legislation and to campaign for voters for their cause.  Once a proposed law has reached the required amount of supporters it could then go to the judiciary who can decide whether the proposed law is constitutional and if so a date for the vote can be set.  Interested parties can then campaign on social media to sway the voting public.  To qualify to vote, each voter would have to study the arguments for and against the proposed bill, and pass an online test to demonstrate they understand both sides of the argument.

Politicians as we know them have become obsolete.  The fourth industrial revolution has already led to many good people losing their jobs, lets ensure some rotten people lose their jobs in the process.  Its time for the real democratic revolution to begin.

 

 

 

 

Posted in Uncategorized | Leave a comment

Let’s reverse racism for real

What is the word for the admiration we feel towards other culture’s traditions, languages, music, dance, business sense, entrepreneurial spirit, traditional wisdom, sporting ability, physical beauty etc?  I experience that kind of admiration for other cultures fairly often.   It is something that I’m sure each of us experiences regularly, so why don’t we have a word for it?

We have infinite capacity to be fascinated with and to love the differences we see in each other.  If you observe the influence of cultures upon each other you can see how much we have all gained from our interactions.  African, European and Asian music and dance, “Eastern” meditation, yoga, Karate etc, have made all our lives richer and our minds broader.  We’ve integrated those traditions into our cultures because we admire and respect them.  What do we call that love, admiration and respect for other races and cultures?

I guess the fact that we don’t have a specific word for that kind of love tells you something about human nature:  We tend to dwell on the negative….So much so that we don’t even have a word to describe the love we have for each others races and cultures, and yet we see the word “racism” everywhere, every day.  True, this world has an horrific history of war, oppression and genocide, but there are many stories of love to be told too.

They say love has no bounds, and South Africa is a perfect example of this.  My great grandfather was a British soldier during the Boer war, and my grandmother was a Boer prisoner in a British concentration camp.  They fell in love through the barbed wire fence of the camp he was guarding and, to the great consternation of her family, after the war they married.

South Africa is full of stories like that.  Long before Europeans arrived 350 years ago, people fell in love across tribal boundaries even through wars and genocide.  I’ve been told that the isiXhosa language got its distinctive clicking sound from the Khoisan language. Anyone who has doubts about our interracial past should visit Cape Town, and admire our beautiful people blended from many diverse cultures and ancestory.

People fell in love with each other across colour lines even through the time of Apartheid where people were thrown in jail for transgressing the “Immorality Act”.  When I was a young boy my parents took me to visit a friend of my father who grew up classified “European” but had fallen in love with an “Indian” woman.  Because it was illegal for them to love each other, he somehow managed to get himself reclassified as a “coloured” person so that they could marry and he could live with her in her area.

These stories of love define who we are as a nation just as much as the stories of evil define us.  The majority of South Africans are good people.  You only have to see young children playing together to know that no-one is born hating another person because of their skin colour.  Racism is not our natural state.  We can’t afford to let it define who we are.  But racism does clearly exist, and it will define us until we uproot it and discard it.

There is nothing that perpetuates and epitomises our systemic racism more than the inherent salary gap in SA companies.  It averages around 300 to 1 currently.  The income gap is behind our growing inequality and all the social ills that come with that inequality.

Statistics from the World Bank and the UN show, when comparing developed countries, that there is a direct and undeniable correlation between higher inequality within a country and higher levels of social problems.

These statistics show that countries with greater inequality, regardless of average wealth or GDP per capita, show lower life expectancy, lower math’s and language grades, lower levels of trust within communities and social mobility, and higher levels of infant mortality, rape, homicide, imprisonment, high school dropouts, teenage pregnancy, obesity, mental illness (including drug and alcohol addiction), and many other social ills than more equal countries!

 Greater inequality also leads to less representative democracies and in turn even greater inequality, because governments are often persuaded through corruption and party election funding to pursue policies which benefit the rich elite and large corporations at the expense of the poor majority. The poorer the masses become compared to the elite, the less influence they have on their government.

The cost of our ever increasing inequality in South Africa is clear: Hundreds of billions lost in recent strike action, increased borrowing costs because of our ratings downgrades (uncertainty caused by inequality and industrial unrest leads to lack of investment in business and growth), crime, violence, drug problems, racial animosity, poor education, loss of investor confidence due to the unrest, the damage to South Africa’s image etc.

Our growing inequality is simply unsustainable, and simple mathematics shows that inequality can’t decrease while income inequalities increase. Income inequality in South Africa has been rising steadily over the last 20 years despite the end of apartheid and despite the implementation of race-based affirmative action policies. We have simply not addressed the underlying cause of income inequality: the irresponsible manner in which salaries are decided.  The salary gap is not caused by “market forces”.   The salary gap is a choice.  We can change it.

Without such extreme income inequality, systematic racism would not be able to exist.  If you really want to change the legacy of racism, and live in a safer, happier and more prosperous nation then please read about the many benefits of salary gap moderation, and then join the Responsible Market Foundation.

I started the Responsible Market Foundation in 2015 to raise awareness of the benefits of salary-gap-moderation and to incentivise salary-gap-moderation (SGM) as a means to reduce income inequality and to bring about more freedom, prosperity, respect, trust and non-racialism.

The Responsible Market Foundation works to create a network of members, raising support and consensus amongst prominent business leaders, economists, academics, worker’s unions, politicians, opinion makers and celebrities regarding the need for salary-gap-moderation.  The RMF will also commission advertisements, films and journalism promoting the benefits of salary-gap-moderation.

Please help to spread the word about the benefits of salary gap moderation.  Feel free to support us by joining responsiblemarketfoundation.com and liking and following the Responsible Market Foundation on Facebook and Twitter @FoundationRMF.

And please implement salary gap moderation in your businesses today.

 

 

Posted in capitalism, economics, employment, equality, financial, freedom, human rights, inequality, leadership, non-racialism, politics, prosperity, racism, socialism, South Africa, South African economy, Uncategorized, wealth creation | Leave a comment

Raising interest rates to stabilize the Rand is like using a rock to kill a mosquito on your head

The SARB deputy governor and many economic commentators are saying that the SARB will probably raise its repo rate at its next meeting at the end of January to stabilise the falling Rand. But raising the repo rate to stop the Rand depreciating against the dollar is like using a rock to kill a mosquito on your head.  The bank should be using its reserves instead as that is what they are there for.

Raising the repo rate would be crazy when we have near negative real growth (the last 2 quarters growth were -1,3 and 0,7% respectively), and 30% unemployment: Each 1% rate hike pulls R31bn more from the economy each year (money that could have been spent on your businesses), and slows the economy, creating more unemployment poverty and inequality.

In effect, raising interest rates sucks billions from the poorest South Africans (who have nothing to do with the Rand’s decline) in order to ensure that the people causing the Rand’s decline (foreign speculators pulling their investments from SA and some local savers sending their money overseas) get enough returns to keep their money here.

The Rand depreciation has nothing to do with demand side inflation (caused by rising wages and increased borrowing), and demand side inflation is the only reason the SARB should ever raise rates.  The SARB has stated that inflation in SA (4,7%) is currently mostly supply side, and the repo rate does not affect supply side inflation.

As of the 31st December 2015, the SARB had R714bn in reserves which exist specifically to stabilize the currency and prevent its slide.  But last year the SARB governor stated that the reserve bank would not defend the Rand (This statement itself does not inspire confidence in the Rand and therefore aids in the Rand’s decline).

A look at the changes in the total SARB reserves during December show he was serious:  According the the SARB figures, their foreign exchange, gold and SDR reserves all increased in the month of December 2015 from a total of US$45,1bn to US$45,8bn , which means that during last month’s political turmoil and Rand depreciation of 8% the SARB actually increased its reserves by US$640 million. (If they had tried to defend the Rand by selling those reserves to buy excess Rands those reserves would have decreased not increased).

What is the reason for the SARB’s R714bn in reserves of they don’t use them as intended? If we are not going to use them to stabilize the Rand then let’s use them to pay off 1/3rd of our government debt (around R2tn) and save ourselves the interest payments on that debt which add to the Rands decline anyway!  At the very least let’s pay of our foreign denominated debt which is increasing radically as the Rand declines.

Because of the recent ratings downgrade to almost junk (blamed on slow growth) the South African government is borrowing at very high interest rates, while the SARB has a “conservative and risk-averse” approach when investing its reserves, which implies that it is receiving low yields on its $45,8bn reserves.  If this is the case then having reserves that we are not using as intended is costly and imprudent, as it results in higher debt, more flow of wealth out of the country than inflow, and thus (ironically) a weaker Rand.

Perhaps it is time to consider exchange controls or taxes to limit currency speculation.

The falling Rand might not be such a bad thing, as it means more profit for exporters and makes local manufacturing more competitive and thus leads to the creation of jobs. But that job creation becomes less viable if local people have less money to invest in businesses and less to spend on those businesses’ products and services because the SARB has raised rates to kill demand.

 

 

Posted in central banks, debt, economics, employment, entrepreneurs, equality, financial, inequality, inflation, politics, prosperity, Rand, Rand depreciation, Reserves, SARB, South Africa, South African economy | 1 Comment