A fixed exchange rate not ideal for SA: Kganyago
Fixing SA's rand exchange rate against another currency as a way to help the manufacturing sector during and after the 2008 crisis would not have been ideal, says Lesetja Kganyago, Deputy Governor of the South African Reserve Bank (SARB).
Speaking at a recent event, Kganyago said that with lower inflation rates in major currencies, fixing the rand exchange rate would have likely resulted in the need to tighten monetary policy immediately.
"From a policy perspective, fixing the nominal rate would also have severely limited SA's options and forced domestic monetary and fiscal settings to adjust domestic demand to maintain whatever currency peg was chosen."
"Imposing domestic economic volatility to solve exchange rate volatility would be a strange choice to make," he said.
Kganyago also said that SA adopted the right mix of fiscal and monetary policies in dealing with the economic crisis.
The "floating" exchange rate had enabled SA to weather the global crisis without having to impose "jarring" interest rate hikes, Kganyago said. He added that this meant households and firms could pay down debt more rapidly and the recovery initiate sooner.
The capital flows challenge needed fresh thinking, Kganyago suggested.
SA, along with other emerging countries, experienced significant capital inflows in 2009/10.
"Over the medium term, to moderate the real exchange rate, we need fiscal and monetary policy settings that reflect that policy objective and seek to achieve it," he said.
"For fiscal policy this means a credible consolidation path and a return to sustainable public debt levels."
More efficient infrastructure, more competitive firms with sustained productivity growth, and more skilled labour would help SA to achieve a permanently more competitive economy, Kganyago noted.
Job creation is more likely to rebound in sectors that did well prior to the crisis, Kganyago said.
"Stronger public and private investment should be expected to result in better employment creation over the medium term," he said.
Source: I-Net Bridge
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