Calls for in­ter­ven­tion ig­nore cost to tax­pay­ers

If there had been any ma­jor in­ter­ven­tion by the Re­serve Bank in the cur­rency mar­ket the US dol­lar value would have in­creased

Finweek English Edition - - Front Page - gre­tas@fin­ GRETA STEYN

YET AGAIN we’ve had calls for a weaker rand – this time from labour, band­ing to­gether with a num­ber of man­u­fac­tur­ers who claim they can’t be com­pet­i­tive with the rand at around US$1/ R7,50. But it’s not just those vested in­ter­ests who have ar­gued for a weak rand: there have been re­ports Trade & In­dus­try Min­is­ter Rob Davies – speak­ing on the side­lines at the World Eco­nomic Fo­rum’s meet­ing on Africa in Dar es Salaam – also in­di­cated the rand is over­val­ued.

One can’t be sure how ac­cu­rate those re­ports are. The of­fi­cial Govern­ment po­si­tion has been ar­tic­u­lated by Fi­nance Min­is­ter Pravin Gord­han, who said in his Bud­get speech: “We have agreed with the Re­serve Bank we’ll con­tinue to take steps to counter the volatil­ity of the ex­change rate and to lean against the wind dur­ing pe­ri­ods of rapid cap­i­tal in­flows, in­clud­ing re­serve ac­cu­mu­la­tion and fur­ther ex­change con­trol re­form.”

But re­serve ac­cu­mu­la­tion isn’t tak­ing place. Re­serve ac­cu­mu­la­tion oc­curs when the Re­serve Bank buys US dol­lars or euro in the mar­ket in ex­change for rand. The trans­ac­tion causes the rand to weaken due to the ex­tra sup­ply of rand. There’s been no ev­i­dence in the monthly re­serve fig­ures from the Re­serve Bank that re­serve ac­cu­mu­la­tion has been tak­ing place. But Re­serve Bank Gover­nor Gill Mar­cus ex­plains that’s be­cause the re­serves are quoted in US dol­lars and fluc­tu­a­tions in in­ter­na­tional cur­rency mar­kets have re­sulted in the dol­lar value of the re­serves re­main­ing more or less the same, at around US$39bn. But if there had been any ma­jor in­ter­ven­tion by the Bank in the cur­rency mar­ket, the dol­lar value would have in­creased.

Mar­cus said in a speech the Bank’s re­serve ac­cu­mu­la­tion had re­sulted in a loss for the Bank in the 2009/2010 fis­cal year of R1bn. That’s a cru­cial fac­tor that could ex­plain why the Bank hasn’t been ac­tive in the cur­rency mar­ket. The rea­son may be that it’s too costly.

The cost arises from the fact that any buy­ing of forex has to be fol­lowed by ac­tion to “ster­ilise” the in­flow of rand into the money mar­ket. If no ac­tion is taken there’s an in­crease in money sup­ply and down­ward pres­sure on in­ter­est rates and mon­e­tary pol­icy won’t work. The Re­serve Bank or Govern­ment has to take ac­tion to drain that liq­uid­ity from the money mar­ket.

In the past (2004 to 2006) Govern­ment is­sued bonds to draw the rand out of the mar­ket. The money in­vested in those bonds was de­posited at the Re­serve Bank, where it wasn’t de­fined as money sup­ply. That worked well dur­ing pe­ri­ods when Govern­ment had ex­tra rev­enue and could bor­row com­fort­ably. It al­lowed the Bank to at times buy $1bn/month of forex.

But now Govern­ment’s debt is a prob­lem, Trea­sury is prob­a­bly less keen to bor­row to drain liq­uid­ity from the money mar­ket. In that case, the Re­serve Bank can is­sue deben­tures, which is what hap­pened over the past fis­cal year. The loss made arises from the fact the in­ter­est paid on the deben­tures (say, around 7%) is so much lower than the in­ter­est earned on the re­serves.

In­ter­est rates on dol­lars and euro are close to zero. That loss doesn’t show up in the Bank’s books when Govern­ment is the one un­der­tak­ing the ster­il­i­sa­tion ac­tion. But when the Bank it­self is­sues deben­tures in­stead of Govern­ment is­su­ing bonds, a loss is in­curred, as hap­pened over the past fis­cal year.

It’s un­der­stand­able Govern­ment should be re­luc­tant to is­sue bonds for ster­il­i­sa­tion pur­poses at a time when there’s con­cern about Govern­ment debt. But a ques­tion arises: Why doesn’t Govern­ment spend the money it raised dur­ing past ster­il­i­sa­tion ex­er­cises to meet its Bud­get re­quire­ments now, thus re­duc­ing its over­all bor­row­ing?

How­ever, it seems the cru­cially im­por­tant fact is that it’s ex­pen­sive for the tax­payer to in­ter­vene in the cur­rency mar­ket be­cause of the in­ter­est in­curred. That cost is of­ten ig­nored by those mak­ing calls for Re­serve Bank in­ter­ven­tion in the cur­rency mar­ket.

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