Rand drop and interest rate hike: economic mismanagement by government a major factor

The DA calls on Finance Minister Pravin Gordhan to use his forthcoming budget speech to set out a bold plan to tackle our twin deficits, contain increases in public sector salaries and restore confidence in our economy and our currency.

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Although many factors have influenced the Rand’s recent depreciation, and yesterday’s Reserve Bank’s decision to increase interest rates, much of the blame for the mismanagement of the economy can be laid at the door of President Zuma’s ANC.

The Rand dropped to five-year lows earlier this week.

Our currency has lost almost a quarter of its value against the dollar in the past year and has been the world’s second worst performing currency in this regard.

Had Argentina not decided to stop intervention in the Peso last week, the Rand would have been the worst performing major currency in the world today.

Other developing countries like Poland, India and Chile have experienced currency depreciation as part of a generalised shift of sentiment around emerging markets, linked to the US Federal Reserves’s tapering policy, but South Africa’s depreciation has been an order-of-magnitude worse – indicating structural problems in our economy and a lack of confidence on the part of the markets.

Government’s inability to contain increases in the fiscal and current account deficits has probably been a major contributor to Rand weakness, and our overly rigid labour regime – which entrenches the power of majority labour unions and worsens the negative effect of industrial action – has driven negative sentiment amongst investors.

Rand depreciation has led to imported inflation in recent months.

This effect has been compounded by increases in debt service costs of 6.4% per annum and in compensation of government employees of 8.3% per annum in the period 2008-2012. Along with generalised increases in administered prices, the Monetary Policy Committee really had no choice yesterday but to increase interest rates.

The move was necessary to combat inflation driven by government’s economic mismanagement, but our economy will suffer as a result.


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