THE Manufacturing Circle says its monetary policy stance has not changed: it firmly supports a competitive and stable rand to drive manufacturing growth. But it says its recent comments to journalists that the weaker rand is providing a "breather" to manufacturers in the face of other domestic policy challenges may have caused a misunderstanding of this position.
The body represents a number of SA’s medium to large manufacturers, across a range of industries. It says "prevailing economic conditions" in the country have for some time produced consensus among its members that if the rand trades consistently from R8.50 -R9.50 to the dollar, this would provide significant support to local manufacturing.
"We believe this should be pursued through a review of our monetary policy, which should consider the use of a host of policy tools in addition to inflation targeting," executive director Coenraad Bezuidenhout says.
"This could include the adoption of a periodically reviewed currency band, the use of capital controls and macroprudential regulation."
Investec chief economist Annabel Bishop says devaluing the rand to increase demand for South Africa’s exports raises the question of whether a weakening currency would really increase competitiveness and be positive for growth and job creation — especially as the cost of labour in many sectors is increasing at double digits.
Longer term, this will produce sharply higher inflation and have a negative effect on the poor almost immediately, particularly in relation to food costs. She says the rand’s weakness of the past two years demonstrates this, with workers agitating for higher wages to meet the higher cost of living.
Rand weakness also makes the cost of importing goods, particularly machinery and other technology used in production, "exorbitant or unaffordable". This negatively affects infrastructure expansion and electricity tariffs will be pushed up further as the cost of importing capital equipment for new power stations rises.
A substantial currency depreciation would also affect SA’s ability to benefit from economies of scale, and ultimately result in a substantial lowering of living standards for those who are already employed.
ArcelorMittal SA said in a submission to the National Energy Regulator of South Africa that electricity had "become an unaffordable source of energy". The country’s biggest steel maker is one of Eskom’s main electricity consumers. But it believes the existing electricity tariff is already past the "tipping point for its own sustainability".
As the "major supplier to all economic sectors" in South Africa — manufacturing, engineering, building, construction, packaging, mining and exports — it says government needs to restructure supply to include independent power producers on "free market principles".
The Manufacturing Circle’s fourth quarter bulletin for last year, released earlier this month, concluded that South Africa will see "fragile" or "stable" manufacturing conditions in the next two years. This is because of the failure to resolve the country’s labour issues, increasing bureaucracy, and a lack of government policy cohesion. This is coupled with weakness in the construction sector; high unsecured lending that may lead to lower credit access; an increase in imported manufactured goods; and electricity, labour and fuel costs.
Iraj Abedian of Pan-African Investment and Research Services, in presenting the Manufacturing Circle quarterly review, said although manufacturing confidence was perceived to be stable in the fourth quarter of last year compared with the third, prospects for the domestic economy and manufacturing conditions remain bleak.
Ms Bishop says to achieve competitiveness in a country it is tempting to devalue the currency or keep wages too low. But by dropping the cost of goods sold globally and paying more for imports, workers become trapped with lower wages, and inflation rises relentlessly.