South Africa’s government is scratching its head about how to stabilise the volatile rand, whose depreciation benefits sectors such as manufacturing but also triggers inflation, Finance Minister Pravin Gordhan said.
Briefing journalists after last week’s annual World Bank and International Monetary Fund meetings, Gordhan said he was not sure how Africa’s biggest economy could manage fiscal credibility and grow the economy at the same time.
The rand lost 22 percent against the dollar in the first three weeks of September as investors worried about Europe’s deepening debt crisis ditched emerging market assets.
It has bounced back to around 7.80/dollar after hitting a 28-month low of 8.4950 last Thursday, but it is a highly liquid currency, making it vulnerable to swings in portfolio flows.
“The volatility is certainly unhelpful. While (the depreciation) does benefit some sectors like manufacturing, if it continues in that direction, it will have an inflationary impact as well,” Gordhan said, adding that global uncertainty was a factor working against currency stability.
“We are watching carefully and scratching our heads about what to do next,” he said.
Asked how South Africa could contribute to stabilising global markets, Gordhan said: “If the IMF increases its firepower from $400 billion then we as members would have to make contributions to that. That would mean a couple of hundred million dollars but that’s minor compared to other (countries).”
The IMF said at the weekend it would decide by April whether its resources were sufficient to prevent a global credit crunch if Europe’s debt crisis spread to the rest of the world.
IMF Managing Director Christine Lagarde said its current lending capacity of $400 billion “pales in comparison with the potential financing needs of vulnerable countries and crisis bystanders.”