Nokwanda Mathenjwa
According to analysts the South African rand is expected to reach R20.50 to the dollar in 2024 due to rising inflation, increasing interest rates and a potential global recession.
Having experienced a slump trading at 17.45 against the dollar in the past few weeks, the rand has bounced back to R17.40 in past few days. The impact of currency volatility is not only beneficial or detrimental to asset management, as it most commonly reported on; it also affects the country’s production economy.
When the rand is weaker it makes it more expensive to pay for the foreign currency requirement for import products, thus reducing the demand (volume) for imported goods (products from a foreign country). This means with an intentional policy, plan and strategy South Africa can substitute imports by ramping up the domestic production of goods.
The goods can be consumed by local consumers, while some can be exported. With a weaker currency South Africa’s exports become more attractive to foreign markets due to their reduced price, thus enabling this increased export market share to boost growth, create local jobs and increase company profits.
With a rebounded and stronger (appreciating) currency it becomes cheaper to purchase imports at their foreign currency, thus increasing the volume (demand) of imports in the domestic market. This foreign currency affordability means, less investment is geared towards localisation, which has amongst other factors resulted in the regression of local industries, economic growth, job generation and the growth of local firms.
Additionally, currency appreciation subsequently makes economic profits less competitive and attractive as foreign markets need to pay more for a domestic country’s goods, therefore resulting in a drop in the demand (volume) for exports.
If South Africa has an intentional, agile and robust export-led strategy our export revenues could experience income surges from currency devaluations. Increasing incomes would complement our struggling tax revenue and have spill over effects on economic growth and development.
This is why: Export-led growth is important for the country’s growth and development. Exports are the only component of autonomous demand, most factors of production (labour and capital) are endogenous to demand, they respond to demand they do not drive or create demand as exports do.
Exports have both a direct and indirect impact on a country’s income; if an economy increases its export growth, economic income will also increase (direct impact). This allows domestic consumption, investment and government spending to increase at a rapid rate, until national income has increased enough to induce an increase in imports equivalent to the increase in exports (indirect impact).
Exports therefore should encourage imports, meaning imports should be supported by exports. Driving demand through exports also incentivises government to spend more and indirectly allows foreign exchange to pay for the capital import requirement for domestic growth. This means government need not borrow foreign capital to fund imports.
Asian countries export volume effect increases the growth rate by more than double (6%) when compared to African economies (between 2% to 6%). Although some Asian economies still rely heavily on capital imports (imports of products), others have transcended this phase and have accumulated large balance of payment surpluses (exports have become greater than imports) and become capital exporters.
While most African countries, like South Africa have built growing current account deficits (imports exceed exports) financed by capital inflows. According to Hussain (1999), this foreign income attraction has come at the expense of export growth.
The quality of exports that generate significant income matters. South Africa needs to shift its export commodities from primary, unbeneficiated or processed commodities to productive manufactured goods, as they have a substantial impact on growth and higher incomes which lead to income growth. With a higher share of manufactured goods in total exports, the country will experience a higher net export effect and higher growth rates, as it transitions from resource intensive to knowledge intensive manufacturing.
Promoting export growth in higher ends of the global value chain can be achieved by improving the structural demand features in export markets such as technical sophistication, product differentiation, delivery service and technological advancements.
Nokwanda Mathenjwa holds an MPhil Economics in Industrial Policy, from the University of Johannesburg. She is the President of the Young Global Economists Society and a Mandela Washington Fellow.