Economists Chris Malikane, Seeraj Mohammed, Lumkile Mondi and Simon Roberts make an excellent argument in Business Day for Reserve Bank intervention to weaken the rand, something I have also suggested in the past. In brief, their argument is this: South Africa’s relatively high interest rates are attracting large inflows of short-term foreign capital, which are pushing up the price of the rand. The strong rand is having a devastating effect on our manufacturing and export sectors, stalling any possibility of a strong economic recovery. The Reserve Bank can push down the price of the rand by aggressively buying dollars to add to its foreign reserves, but won’t, because, it argues, that would inject money into the local economy, increasing the money supply and causing inflation – unless the bank “mops up” the extra liquidity by issuing bonds. This it doesn’t want to do, arguing that the interest payments on the bonds are expensive, and that government debt issuance to finance the budget deficit would also become more expensive.
That is a fallacious and outdated argument, according to the writers of the Business Day article:
Adherents to a version of monetarism that was discredited 20 years ago think that increasing the money supply will just lead to increased inflation. But, it is clear that right now there is no problem with increasing the local money supply. The commercial banks have stopped lending, and the stock of debt in nominal terms has been static since last year. The tightness in giving new credit is compounding the crisis as firms require greater working capital to deal with difficulties of weak demand and nonpayment by customers, and households need to roll over some debt. Some commentators have been calling for “quantitative easing” — increasing the money supply to encourage banks to lend once again — that has been key to the response to the crisis in industrialised economies.
Morover, the Reserve Bank’s position ignores the cost of not acting to weaken the rand: “jobs and livelihoods accross the economy”.
It seems that the Washington Consensus has fallen by the wayside everywhere else in the world, but at the southern tip of Africa we still cling to it…