The government’s economic policies are making South Africans poorer, with inflation continuing to erode incomes and the weakening rand decreasing their purchasing power relative to international peers.
This is the view of Efficient Group chief economist Dawie Roodt, who commented on why the rand is consistently trading below its fair value.
Roodt estimates that the rand trades around 50% below its fair value versus the US Dollar on average.
This is predominantly due to poor economic policy from the South African government.
“A weaker currency means we are all poorer,” Roodt said, and the only way to fix this over the long term is to improve the country’s economic policy.
A stronger currency would enhance South Africans’ global purchasing power and reduce the cost of imports into the country. This would make South Africans relatively wealthier.
Roodt said the Reserve Bank is doing all it can to bolster the rand’s value by raising interest rates, but it is fighting an uphill battle against poor government policy.
South Africa needs better macroeconomic policies but “the government is simply not up to it and has no appetite to implement the necessary changes”.
These changes would be politically unfavourable, but more importantly, “the government is simply too incompetent to know what is good for the economy and the currency”.
“If there is one reason for South Africa having a weak currency, it is the ANC government,” he said.
Much can be done, according to Roodt, to strengthen the currency to levels below R16.50/USD if the correct economic policies are implemented.
Reserve Bank versus government
Roodt has previously said that he feels “very sorry for the South African Reserve Bank”, which is trying to reduce inflation while government policy accelerates it.
He said the Reserve Bank is doing the right thing in trying to bring inflation down by raising interest rates while calling on South Africans to support its efforts.
But, the SARB is limited in what it can do. It cannot address structural economic problems keeping inflation elevated, such as electricity prices and deteriorating infrastructure.
He is most concerned about the clash between the SARB’s monetary and the National Treasury’s fiscal policy.
The SARB is putting its foot on the brakes to reduce demand and slow the economy down. The Treasury, in turn, is stepping on the gas.
Treasury is trying to boost the economy at the wrong time, with inflation remaining elevated.
This macroeconomic clash between the SARB and the government will result in low economic growth with high inflation.
The government’s commitment to expansionary fiscal policy undermines the Reserve Bank’s attempts to bring inflation down.
Roodt said politicians like inflation because it erodes the value of the government’s debt, allowing it to spend more while not increasing debt in real terms.
Thus, he “suspects that, in future, politicians will put more pressure on the reserve bank to relax monetary policy”.
The losers of this will be South Africans, with economic growth being limited by this macroeconomic confusion.