Rand is overvalued-IMF

| Friday September 24, 2010 00:00

But it also asserts that the size of the currency market and the dominance of nonresidents in that market will limit the government's ability to influence the level of the rand.

In its '2010 Article IV Staff Report', the IMF highlights that nonresidents account for nearly 75% of the daily turnover of $10- to $12-billion in the South African foreign exchange market - daily trade in all currencies has been estimated at close to $4-trillion.

The IMF, therefore, supports the continuation of a floating exchange-rate system, which has been 'an important absorber of shocks, enabling the economy to adjust in the face of the global financial crisis'.The floating exchange rate, the report states, has discouraged private sector borrowing in foreign currency, preventing a buildup of foreign currency mismatches on household and corporate sector balance sheets, and ensuring that foreign investors share in the adjustment burden in the event of rand depreciation.However, the strong recovery in the rand during 2009 and 2010, fuelled by portfolio inflows, and a 20% deterioration in South Africa's export performance in 2009 'point towards exchange rate overvaluation'. The rand rose to a two-and-a-half-year high against the dollar in mid-September, when it traded at R7,054.

The report notes that, while increasing foreign exchange reserves may not have much effect on the level of exchange rate, it could be helpful in absorbing large shocks. Similarly, a 'small tax on inflows' might help slow the volume of inflows, or change its composition. 'However, taxing inflows might be easily circumvented and its effectiveness eroded overtime.'

South African policymakers have stressed their commitment to a 'stable and competitive' currency, but there is growing pressure for direct intervention to weaken the rand. Advocates of intervention have called for the accumulation of reserves by the South African Reserve Bank, as well as for taxes on short-term capital flows, with some of these policies having been debated at the African National Congress' national general council in Durban.

But President Jacob Zuma stressed in his address to the conference that future fiscal and monetary policies should be 'linked with measures to control inflation and improve efficiency across the economy, including through a more competitive and stable exchange rate'. The IMF, meanwhile, expects that the South African economy will grow by 3,25 percent in 2010 and for growth to reach 4,5 percent over the medium term. However, it warns that employment levels are only likely to return to their 2008 peak by around 2015.

The South African economy descended into its first recession in 17 years in 2009, during which the economy contracted by 1,75 percent and nearly one-million jobs were shed. The forecast is higher than the 2,3 percent projected by the National Treasury in February, as well as the latest growth forecast of 2,8 percent released by South African Reserve Bank. It is, however, more or less in line with the expectations of many private-sector economists, who have been forecasting that growth will be around 3% for the year as a whole.

South Africa's gross domestic product (GDP) growth rate fell to 3,2% during the second quarter ended June, having increased by 4,6% in the first three months of the year.-(Engineeringnews)