Posted by: michaeldavidpower | November 17, 2009

The Rand Debate – FX Reserves

The following is a letter I wrote to Business Day addressing the oft quoted idea that South Africa does not have enough FX reserves to fix the value of the Rand at a lower (more competitive) rate:

If we are to have a sensible debate on the value of the Rand, one canard that needs to be shot down immediately is that “we do not have sufficient foreign exchange reserves to maintain a fixed exchange rate.” Whilst this is perfectly true if the rate of fixing were still to yield a current account deficit, it is not so if the outcome of that fixed rate were to yield a healthy current account surplus (say in excess of 2% of GDP). Because the latter surplus would automatically be adding to our foreign exchange reserves meaning there would be no daily capital deficit to finance, in a very real and practical sense, you do not actually need foreign exchange reserves to defend such a policy: you cannot push a man off his chair if he is already sitting on the floor.

Whilst I would strongly advise that we do not try and go ‘half-way’ and fix the Rand at a lower rate but one which would still generate a current account deficit so requiring a daily inflow of capital from abroad to balance our external account, fixing it a level which does generate a healthy current account surplus brings into play a whole new set of circumstances not familiar to most South Africans. Economists who argue otherwise should take note of the exchange rate policies and the beneficial effects of those policies which China has been pursuing for many years and which the rest of South East Asia have followed since the Asian Crisis of 1997.

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