Give the falling rand a parachute

Saturday, 16 November 1996

Trevor Manuel wouldn't need a parachute if he wasn't being pushed...

Financial pundits have generally been dismissive of the ANC government's attempts to bring our currency under control as it continues its rollercoaster ride.

This week was more of the same. The rand recovered somewhat as the dollar weakened, but then plunged yet again.

But apart from scrapping all exchange control regulations, there have been no real suggestions as to how the problem could be tackled.

As Finance Minister Trevor Manuel wryly remarked in an interview earlier this week: "You are asking me to jump without a parachute?"

Conventional wisdom would have it that the Reserve Bank would need about 12 weeks of import cover -- hard currency reserves that ensure inflow of goods and services do not grind to a halt.

Our reserves are currently hovering around 5-6 weeks, which translates to about R10-billion.

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But if we begin to speculate as to exactly how much money would be in line for capital flight should exchange control be lifted, the answers are quite staggering.

For starters, there's about R14-billion in "blocked" rands -- money that emigrants have not been able to take out of the country. To put that in perspective, this year's national housing budget is about one tenth of that figure.

Then there's the Johannesburg Stock Exchange. The JSE is the largest stock exchange in Africa, but more significantly is the 14th largest stock exchange in the world by market capitalisation.

For those who dislike jargon, market capitalisation is the amount of money represented by the stock exchange -- the number of shares in issue multiplied by the value of those shares.

In the case of the JSE, the cash value is roughly R1,2-trillion. That's R1,2-million million.

Some 80% of those shares are controlled by a handful of large companies such as Anglo American, De Beers, SA Breweries, Liberty Life, Richemont. and others.

This is an anomaly by international standards.

The reason is exchange control.

If exchange controls were lifted tomorrow, large companies would take out a significant portion of their capital from the JSE and move it to other markets.

This is not an immoral decision, particularly in the case of insurance companies who would need to guarantee the best possible return for policy holders.

But the JSE will plummet as a result. And it will be small investors -- like people who sink money into unit trusts that do not have an offshore component -- who will suffer the most.

In July, I visited the International Monetary Fund offices in Washington and posed the question: What could Trevor Manuel be doing that he is not currently doing to fix the economy?

The answer was, simply, not much.

The IMF had held consultations with the government in February where the government was commended by the IMF for essentially sound financial policies.

But two problems were stifling the economy -- attacks on the rand, and no significant increase in employment.

Our level of education, even among standard 10 school leavers, is too low. The wage gap between skilled and unskilled labour is too high. This combination led to lack of competitiveness.

This was not the fault of organised labour. If it was, there would be large scale unemployment of skilled labour -- a problem which does not exist.

Elimination of exchange control should be gradual, they said. The end of the financial rand and the introduction of asset swaps had been very successful.

Further steps should be gradual increase in margins, 4% this year, 5% next year, and so on.

Concurrently, investment in education should be substantially increased. New approaches to increasing employment might include wage substitution by on-the-job training.

Land reform needed to take place, but this should be market oriented. Taxes on farms bigger than 10 000 ha could be used to finance the R15 000 allocation to small farmers. Increasing rural employment was the goal.

Given that the IMF feels that the ANC is doing everything correctly, who are the people who want exchange control scrapped immediately? What do they stand to gain? What do the rest of us lose?