Factory output ‘not tied' to lower exchange rate

He and Reserve Bank deputy chief economist Johan van den Heever stressed during briefings to Parliament's trade and industry committee that the level of the exchange rate was just one of a number of factors affecting economic growth and job creation. However, this was of little help to MPs trying to form a view on the Department of Trade and Industry's industrial policy action plan, which highlighted the importance of a competitive exchange rate and a low cost of capital to accelerate economic growth.

The plan also placed great emphasis on expanding the manufacturing sector by promoting identified sectors to create jobs.

Reasons for decline?

The labour movement has also criticised the Bank for maintaining interest rates too high, thereby constraining growth.

African National Congress MP Ben Turok said choices and decisions had to be made with a focus on one or two variables in order to drive an industrialisation strategy which aimed to reverse the shrinkage of the manufacturing sector. He asked whether a competitive real exchange rate and low interest rates should not be regarded as critical factors on which to focus.

Van den Heever acknowledged that the share of manufacturing as a percentage of gross domestic product (GDP) had diminished but said this was not due solely to the exchange rate. The integration of SA into the global economy and the lowering of import barriers after the end of apartheid had increased competition and contributed to this decline. More recently, the global financial crisis and the fall off of demand had played a substantial role.

“Real GDP growth in manufacturing seems more sensitive to local and international income and expenditure than the exchange rate,” Van den Heever said.

Loewald noted that manufacturing production was growing but not as fast as the service sector, so was declining as a proportion of GDP.

No ideal exchange rate

Van den Heever reiterated the view of the Bank and the Treasury that there was no ideal exchange rate for the rand and it was “dangerous” to target a specific value. He also dismissed the notion that SA's interest rates were too high, adding that it was wrong to say that interest rates were the key determinant of the success or failure of industrial development.

Regarding the cost of capital, Van den Heever said the nominal rate on long-term bond financing had been high from the mid-1970s to about 2000, but this was mostly due to high inflation. Real bond yields had not been very high in recent years despite rising capital expenditure.

The Bank believed that it was important for it to concentrate on creating a low inflation environment and stability in the exchange rate.

Source: Business Day