Devaluing our own future
The slide in the external value of the South African Rand reached alarming levels earlier this week when it first breached R12/US$1 on Monday, then swiftly went to R12.48 and then to R12.80. By late Thursday, it has sort of stabilised around R12.25. Meanwhile, the Allshare index on the Johannesburg Securities Exchange crawled back above 52,000 index points indicating some portfolio inflows, which is what “supported” the Rand.
Incidentally, when the JSE Alsi set yet another new record during February, a concomitant strengthening in the exchange rate was not noticeable. The Rand’s spectacular slide of the past two weeks was already foreshadowed in February despite the new record highs in shares. This is a bad omen and it does not bode well going forward, particularly for Namibia with its inseverable umbilical link to the degraded Rand.
Classic development economics often punt a weak currency as a competitive advantage. I think this is BS. The only external value a currency should have is that level at which both its imports and its exports are in balance, i.e. where the Balance of Payments is as close to neutral as is practically possible.
I realise that third world economies need some form of additional stimulus for their export sectors to be competitive with the myriad of manufacturing economies out there, but if the only available short and medium term solutions seem to be a continual degrading of a currency, it is not a long-term solution by any means.
In the eighties I found it confusing and hilarious at the same time when travelling to Europe and finding banknotes for 100,000 lira of one million drachma. At that point in my life, the currencies of southern Europe, were what I and everybody else would call Monopoly money. And they remained Monopoly money until about ten years ago when they became Euro’s. In the late seventies the South African Rand was a very strong currency based on a sound manufacturing base, a positive Balance of Payments, and very favourable Terms of Trade. In short, it was a strong currency based on a strong economy.
The same was true of the German economy and the German currency. I still have a DM5 gold coin that I bought in 1977. You will not believe me if I tell you what I have been offered for that commemorative coin. And this clearly demonstrates the difference between a successful economy that creates prosperity for all its citizens, versus an ailing economy that must be supported by degrading the external value of its own currency, all the time.
Ask yourself this. Would you today choose to hold Deutschmark coins or Krugerrands as collector’s items with proven market values?
So, yes, a currency’s trading value must be a realistic reflection of the demands of its issuing economy, but it must not be used to prop up an inefficient, mismanaged, robbed-blind economy, and then make everybody else in the Common Monetary Area suffer on behalf of the culprit. The long-term end is where southern Europe is today. For us in Africa, the important consideration is to reflect meaningfully over where we want to be in twenty or thirty years from now. I can assure you, a debased currency is not going to get us there. Instead, only the opposite will turn out to be true.
Take for instance the welcome respite to consumers by cheaper fuel prices. All that gain is drowned by the slipping and sliding Rand, not because of any fault on our side, but because an irresponsible government in South Africa is gradually undermining prosperity for the entire region. SA government officials are fond of bragging to foreign investors that locating to the southern paradise gives any manufacturer or importer or investor access to a market of 300 million people. That is all hogwash when the currency in which these investments will trade, lead to the impoverishment of the very citizens who rely on its value.
Namibia is the proud owner of a Eurobond facility for US$500 million. I suspect that that money has now become so expensive, there is not a snowball’s hope that we shall be able to afford to release any tranches of this nest egg.
If we fail to understand the concept Terms of Trade, productivity and competitiveness, and if we fail to realise its implications over the long-term, how are we ever going to understand the more simple, easy notion that a weak currency does not buy export power, it ruins it. Again, check southern Europe, or India if you like.