South Africa’s Finance Minister Pravin Gordhan said it was not easy to come up with solutions that will address the rand’s strength on the back of surging capital inflows.
The strong rand has been a sore point between the ruling ANC party and its leftist allies who want the rand to be weakened to about 8.50 to the dollar.
The rand has gained about 30 percent in the past 2-1/2 years, mainly as investors have flooded emerging markets after ultra-loose monetary policy in developed nations.
The rand has weighed on the manufacturing sector, constraining growth in the economy’s second biggest sector, Reuters reports.
“We are well aware of the difficulties we face because of the persistent strength and volatility of the rand,” Gordhan said in his budget vote speech.
“But, improving the transparency and stability of global currency and capital markets has to be a multilateral project, involving clear guidelines for both ‘sending’ and ‘receiving’ countries.”
The rand was last trading at 6.73 to the dollar, not far from one-month highs of 6.6750 hit Monday.
South Africa rejected last year the idea of introducing a tax on capital inflows such as those implemented by Brazil to curb the flood of money that has appreciated emerging market currencies.
“There is no magical formula or panacea on this particular question (capital inflows) and you know the South Africa formula: that we will accumulate reserves to the extent that our affordability factor allows,” Gordhan said.
In recent rhetoric, the government has shown increased tolerance for the rand’s gains, which have helped to keep inflation inside the central bank’s target of between 3 and 6 percent since February 2010.
Data on Tuesday showed the central bank’s reserves accumulation slowed in May, with gross reserves falling to $50.119 billion from $50.602 billion.
JOBS AND MORE JOBS
Gordhan’s budget vote speech was mainly focused on the governments 9 billion rand jobs fund to quicken the pace of employment creation.
President Jacob Zuma’s administration has prioritised job creation and aimed for 5 million new jobs by 2020.
Such a target will be hard to meet though, as the economy needs to grow by about 7 percent a year, double the current forecast of 3.4 percent this year.
Even though South Africa exited a recession in the third quarter of 2009 — the first downturn since 1992 — the continent’s largest economy still shed jobs in the first quarter of 2011, taking unemployment to 25 percent of the labour force.
“Employment growth is far too slow, however. We face a very serious unemployment challenge,” Gordhan said.
Millions of black South African continue to live in poverty and squalor, even 17 years after the end of apartheid. This has fuelled violent protest in the townships that have potential to threaten South Africa’s social stability.