South Africa in fresh attempt to curb rand volatility

South Africa's ruling African National Congress (ANC) party is set at the end of September to consider a short-term capital inflows tax to remedy the volatility of the rand.

In a discussion document for the party's national general council, to be held near the end of next month, the ANC flagged the problem posed by capital inflows, sparked by increased foreign purchases of South African bonds and equities, as global risk appetite returns. By pushing up the value of the rand, inflows have subsidised the cost of imports by lowering the price of goods such as clothing, food and petrol. However, they have also had a hand in decreasing the competitiveness of South African exports. The rand has fluctuated over the course of the year. It hit a low of R7.908 to the dollar on 25 May, but traded at R7.286 to the greenback at 11:30 London time on Tuesday.

Local businesses have also suffered as cheap imports have limited demand for South African goods in the country, the ANC said. The party considers the debate on taxing short-term capital flows to a key one, given the wide support, from South Africa's manufacturers, for a weaker currency.

While the South African Reserve Bank (Sarb) is not impervious to businesses' concerns, officials have expressed reservations about interfering with rand levels- the intended outcome of a short-term inflows tax. In a June interview in Basel, Gill Marcus, the governor of the Sarb, told CentralBanking.com that although the central bank understood manufacturer's worries about the strength of the currency, it was not about to meddle with free-market forces. "If you're a manufacturer, then you are going to see [the rand's strength] as a problem, and we are concerned about that. But there's no simple answer," she said. "Greece is estimated to have lost 30% of its competitiveness because its membership of the euro area effectively means that it has a fixed exchange rate," Marcus added. The central bank declined to comment on the contents of the discussion document.

Pravin Gordhan, the South African finance minister, has also defended the country's flexible exchange rate regime.

"We agree with the Treasury's view that a tax on short-term speculative flows needs to be carefully considered, given South Africa's still heavy reliance on these flows to finance its current account deficit, owing to the country's poor savings record," said Jeff Gable, Ian Marsberg and Jeffrey Schultz, analysts at Absa Capital, a subsidiary of Barclays, a bank. "A weaker currency also needs to be taken in the context of the possible negative implications for inflation," they added.

Revisiting the inflation targeting debate
The ANC's discussion document also reopens the inflation targeting divide, suggesting that the framework is responsible for interest rates in South Africa which are higher than in developed economies. "Fiscal policy has been reasonably expansionary, as measured by the growth in expenditure for most of [the last decade], and strongly countercyclical since 2008," the ANC said. "But debates remain as to whether monetary policy has been sufficiently supportive of equitable growth."

The Sarb pushed hard for the adoption of inflation targeting, finally succeeding in February 2000, against resistance from members of the ANC. Marcus said in June that there was no question as to whether the framework had benefitted South Africans. "High prices and inflation are bad for the poor, and if your society understands that, then they accept the measures that you take," she said. As in the rand debate, here too, the government has supported the Sarb's position, with Gordhan in July praising the framework for providing investors with "confidence in times of crisis," and giving the central bank the flexibility it needs.