COSATU,+Shopsteward,+05-06,+WHY+LOWER+EXCHANGE+RATE

From: The Shopsteward (COSATU), June 2005
=Why COSATU wants a lower exchange rate=

The ‘exchange rate’ means how much foreign currency you get in exchange for a rand. In 2003, the exchange rate climbed from around ten US cents to a rand to around 17 US cents to a rand. The main reason was that foreign investors put more money into South African shares and bonds.

The high rand makes exports more expensive. Suppose a company can produce a towel for ten rands. When a rand was worth 10 US cents, it could sell the towel for a dollar. But when the rand buys 17 US cents, the company has to charge over $1,50. That makes it harder to export – and companies that depend on foreign markets, like the mines and some manufacturers and farmers, are in trouble.

The high rand also makes imports cheaper. Something that cost R10 in 2003 can now be bought for R7. As a result, South African companies that have to compete with imports – like food, clothing and light chemicals - are being pushed to the wall by imports. True, some consumers benefit from cheaper imports. But only rich people can afford most imports, like cars and appliances. A higher exchange rate would probably lead to higher inflation – but it is better for workers to have a bit higher inflation and more jobs.

Government does not control the exchange rate directly. But it can influence it. First, it can take a consistent position that the rand should be lower. That will stop speculators from pushing it up. Second, it can insist on a lower interest rate. That will slow down inflows of foreign money that push up the rand. Third, it can build up South Africa’s foreign exchange reserves. When the Reserve Bank buys foreign currencies, it can push down the rand.