LETTER: Weaker rand would boost sustainable growth

Mamokete Lijane’s most recent column refers (“Lowering inflation target is the right thing to do”, September 4).

Any discussion on any aspect of economic policy in SA should have as its fulcrum how to sustainably grow the economy, and what the drivers of such growth would be. This sentiment is captured in clause 224(1) of the constitution with the following subclause: “In the interest of balanced and sustainable economic growth.”

Stated plainly, the Reserve Bank may not pursue a policy instrument fetish if that policy does not accord with this subclause. Were SA economic policy to adopt a growth strategy that prioritised export-led industrialisation (like China or Japan), a weaker currency would be “in the interest of balanced and sustainable economic growth”.

Lijane’s categorical assertion that “the Bank would fail to meet its constitutional mandate” if the currency depreciates, is meaningless without adding context about the economic growth strategy. She talks about the 10-year average depreciation of the rand compared with trade partners at 16%, but neglects to mention that on aggregate SA runs a balanced trade account with those partners, if not a trade surplus at times.

The problem is that SA needs to accommodate hot money inflows from international investors. A 16% rand depreciation at the 10-year horizon affects the dollar returns of such foreign investors in SA when they convert their rand investments into dollars. Much of this hot money swirls around on the JSE secondary market as nonproductive capital, and contributes to the financialisation of the SA economy.

Lijane also says “falling inflation allows the Bank to lower rates”, but a lower band would mean the Bank does not in fact lower rates in the short to medium term. She contends that this would be offset by significantly lower inflation heading into 2025.

However, Lijane does not consider the opportunity cost SA home and car loan borrowers would have to endure. This is because were the inflation band to be lowered, SA borrowers would forego earlier rate cuts, which would have been triggered by her projected drop in inflation (disinflation).

Ethiopia had a compounded annual GDP growth rate of 7.5% in 1994-2023, while its breakeven inflation for the same period is 11.39%. On what basis does Lijane support her categorical claim that a lower inflation band supports the Bank’s mandate of higher economic growth?

Melo Magolego
Via email

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