July 13 (Bloomberg) -- South African Finance Minister Pravin Gordhan said the government’s efforts to ensure a competitive exchange rate, including a buildup of reserves and fewer exchange controls, were having the desired effect.
The rand has fallen 3.3 percent against the dollar this year, trimming its gains against the U.S. currency since the beginning of 2009 to 37 percent. Labor unions and businesses have called on the government to do more to weaken the rand, saying the currency’s strength is undermining exports.
“Policy measures implemented thus far have helped to prevent further nominal appreciation” of the rand “despite the fact that aggregate capital flows have remained positive,” Gordhan said in a written reply to a parliamentary question circulated via e-mail today. “Fiscal and monetary policy have been adjusted to support the economic recovery. Real interest rates remain low and supportive of growth.”
The rand traded at 6.8536 per dollar at 11:17 a.m. in Johannesburg, up from 6.8764 late yesterday.
South Africa’s exchange rate policy has to take into account “the national interest,” Gordhan said.
“If we spend more on reserve purchases, we either need to borrow more or spend less on something else,” he said. “If we impose capital controls, we risk raising the cost of domestic capital and not have enough inflows to finance the current account deficit.”
South African manufacturing output increased 0.6 percent in May, the government statistics agency said yesterday, less than the 2.4 percent median estimate of 15 economists surveyed by Bloomberg.
“There are a lot of pressures on manufacturing; lack of demand from Europe, uncertainty in the global economy, the overvaluation of the rand, competitiveness issues,” Gordhan told reporters in Johannesburg today. “Over the last six to nine months manufacturing has coped reasonably. We need to do more as government to support the manufacturing sector.”
Gordhan reiterated that there were benefits of having a strong rand, including the fact that it helped contain fuel price increases.
“If the rand were to weaken to 8 rand per dollar and the oil price rose back to $125 a barrel, then the petrol price would rise above 11 rand a liter,” from 9.92 rand currently, he said. “This would impact negatively on household spending power, increase inflation and ultimately result in higher interest rates, which would reduce economic growth.”
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