tag:theconversation.com,2011:/au/topics/rand-28834/articlesRand – The Conversation2018-10-21T09:34:04Ztag:theconversation.com,2011:article/1049602018-10-21T09:34:04Z2018-10-21T09:34:04ZZimbabwe’s economy is collapsing: why Mnangagwa doesn’t have the answers<figure><img src="https://images.theconversation.com/files/240644/original/file-20181015-165918-1dmrkek.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A KFC in Harare, like many other shops, has shut down as a result of Zimbabwe's financial crisis .</span> <span class="attribution"><span class="source">EPA-EFE/AARON UFUMELI</span></span></figcaption></figure><p>When President Emmerson Mnangagwa <a href="https://theconversation.com/zimbabwes-first-mugabe-free-election-mnangagwa-promises-western-cash-but-little-else-99228">campaigned</a> in July for Zimbabwe’s presidency, he promised to be a business friendly leader, and to return his country’s economy to twentieth century times of plenty and prosperity.</p>
<p>But Mnangagwa has already shown himself incapable of jettisoning the state centrist, rent-seeking predilections of his predecessor. A “big-bang” sharp break with Zimbabwe’s recent past is essential to reassure consumers and capitalists. Yet Mnangagwa and his cronies have so far rejected anything forward-looking and sensible.</p>
<p>Mnangagwa’s administration is struggling to overcome the national <a href="https://www.iol.co.za/news/africa/shops-shut-doors-as-zimbabwe-financial-crisis-deepens-17414862">economic destruction</a> wreaked on Zimbabwe over two decades under Robert Mugabe. This included profligate spending, immense debt pileup, colossal corruption, and ravaging of the country’s once immensely productive agricultural sector.</p>
<p>As a result, Zimbabwe now lacks foreign exchange with which to buy petrol and ordinary goods to stock the shelves of its supermarkets. In the last few weeks many shops – such as Edgars, a long-time clothing store; Teta, an eatery; KFC, a fast food outlet – have simply <a href="https://www.iol.co.za/news/africa/shops-shut-doors-as-zimbabwe-financial-crisis-deepens-17414862">shut their doors</a>. Queues for petrol stretch for miles. </p>
<p><a href="http://nehandaradio.com/2018/10/13/zimbabwe-currency-crisis-no-cash-no-bread-no-kfc/">Banks have no US dollars</a>, or South African rands or Botswana pulas (the notional national currency), and therefore cannot supply stores or customers with the funds to carry on business as usual.</p>
<p>The locally created <a href="https://zwnews.com/latest-us-dollar-zimbabwe-bond-note-trgs-exchange-rates-today-9-october-2018/">Zimbabwe bond note</a> which is officially supposed to trade 1 to 1 with the US dollar, has been trading as high as 10 to 1 on the Harare black market according to unconfirmed local shopping experiences. In its October 20th edition The Economist reported that the bond note, known unofficial as <a href="https://www.news24.com/Africa/Zimbabwe/zimbabwes-bond-notes-being-traded-outside-borders-report-20170516">the zollar</a>, was trading for as little as 17 cents, or roughly 6-1.</p>
<p>The new administration has naturally resorted to <a href="https://www.iol.co.za/business-report/international/zimbabwes-currency-crisis-shows-little-sign-of-abating-17052960">printing</a> its own faux money. That inevitably has led, as always, to hyperinflation and monetary collapse.</p>
<p>China may yet help Mnangagwa – but in exchange for multi-years worth of precious minerals and Virginia tobacco at discounted prices. With Zimbabwe’s leadership so thoroughly tainted by decades of peculation and mendacity, and devoid of any real notion of “the public interest,” Mnangagwa’s regime is otherwise unlikely to clean up the prevailing fiscal mess because of its refusal to break sharply with the fiscal derring-do of the Mugabe era. Its principals continue to profit from Zimbabwe’s economic mayhem.</p>
<h2>What went wrong</h2>
<p>Zimbabwe’s economic weaknesses are unsustainable. Governments in such parlous straits would turn, even now, to the International Monetary Fund, for a bailout – as <a href="https://www.scmp.com/news/asia/south-asia/article/2168507/pakistans-khan-slams-imf-then-seeks-bailout-why-change">Pakistan</a> has just done. But Zimbabwe is already in arrears to the international lending institutions and has very few helpful friends left. </p>
<p>Government is running a hefty overdraft. And it’s been unable to collect as much as it needs from the national tax base. Its now attempting to impose a <a href="https://www.fin24.com/Economy/Africa/zimbabwe-slaps-catastrophic-tax-on-electronic-transactions-20181001">2% tax </a> on internal electronic financial transactions. This only shows desperation. If implemented, it could yield twice as much revenue as is derived annually from VAT. But that losing manoeuvre has already helped drive commerce underground. It has also undermined what little confidence consumers and financiers have in their current rulers.</p>
<p>The Mnangagwa government has also reimposed import and <a href="http://businessdaily.co.zw/index-id-national-zk-38015.html">exchange controls</a>, thus creating additional incentives to avoid regular channels of commerce. Those controls also permit officials to allocate “scarce” resources and licenses to import, export, and so on. These are well-known occasions for corruption and for giving rent-seeking opportunities to cronies.</p>
<p>It wasn’t always this bad. Despite the massive loss of formal employment that occurred under Mugabe, the informal sector flourished and Zimbabwe’s poor probably benefited. This was partly because under the unity government of 2009-2013, when Tendai Biti of the Movement for Democratic Change was finance minister, there were no such controls and there were plenty of US dollars and no questionable bond notes and Treasury bills. Hard currency (the US dollar) permitted Zimbabwe to start growing economically after the long Mugabe slide, and individuals and businesses to prosper. The country ran a budgetary surplus. </p>
<p>But this all came to an end when the government of national unity <a href="https://pindula.co.zw/Government_of_National_Unity">collapsed</a> in 2012. </p>
<h2>What needs to happen</h2>
<p>To begin to restore the economy, the government needs to acknowledge corrupt dealings and repatriate the huge amounts of cash that have fled the country as laundered money. </p>
<p>The regime could also try to take <a href="https://www.theguardian.com/world/2017/nov/17/robert-grace-mugabe-missing-millions-money-zimababwe">ill-gotten gains</a> away from Mugabe and Grace Mugabe, as <a href="https://www.csmonitor.com/World/Asia-Pacific/2018/0703/Former-Malaysian-leader-arrested-for-theft-money-laundering">Malaysia’s new government</a> is doing to its previous kleptocratic prime minister and his wife.</p>
<p>Gestures in that direction would help to begin to restore confidence, a step towards eventual prosperity. So would promises to restore the rule of law. Investors might also return if a sound currency was likely. But that would only follow shedding of ministers, civil service layoffs, military reductions, and many other indications that Mnangagwa and his minister of finance were serious about reducing the debt hangover.</p>
<p>Cutting some sort of deal with the IMF would also be worthwhile, but that could mean giving control over the Treasury to foreign advisors. Zimbabwe is and, since Biti’s day, has been, a basket case. It’s time to acknowledge that fiscal reality and to do something about it.</p><img src="https://counter.theconversation.com/content/104960/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Robert Rotberg does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Emmerson Mnangagwa’s administration is struggling to overcome the national economic destruction wreaked on Zimbabwe over two decades under Robert Mugabe.Robert Rotberg, Founding Director of Program on Intrastate Conflict, Harvard Kennedy SchoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/765352017-05-16T00:11:39Z2017-05-16T00:11:39ZSouth Africa’s Reserve Bank is in the eye of a storm. Academics quiz the governor<figure><img src="https://images.theconversation.com/files/169306/original/file-20170515-6984-1jg5u3u.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South Africa's Reserve Bank Governor Lesetja Kganyago.</span> <span class="attribution"><span class="source">Reuters/Rogan Ward</span></span></figcaption></figure><p>Central banks everywhere play a critical role in shaping the direction of a country’s economy. The South African Reserve Bank is the central bank of South Africa. Its main mandates are to ensure financial and economic stability and to regulate the banking sector. It achieves the first thorough monetary policy which involves targeting inflation to prevent borrowing costs from rising and competitiveness of the economy from deteriorating. But the bank has been criticised for focusing too much on curbing inflation – it keeps inflation within a target range of 3% to 6% – at the expense of economic growth. And the banking regulation arm is also facing a barrage of questions. The Conversation Africa organised three economic scholars to pose questions to the Reserve Bank Governor Lesetja Kganyago.</p>
<hr>
<p><strong>Nimisha Naik, Wits University</strong> - <em>How should the Reserve Bank respond to the country’s recent credit rating <a href="https://theconversation.com/what-a-downgrade-means-for-south-africa-and-what-it-can-do-about-it-75704">downgrade</a>? What approaches can it take to limit the potential decrease in investments to South Africa?</em></p>
<p><strong>Lesetja Kganyago:</strong> A rating downgrade implies higher risk for investing in a
country. As such (everything else being equal) a higher return is required to attract the same amount of foreign capital necessary to finance South Africa’s current account deficit. </p>
<p>As markets shift to reflect the higher return needed, the country’s currency might weaken. This adjustment may be compounded by foreign funds having to divest from South Africa as their investment mandates prevent them from holding non-investment grade assets. </p>
<p>But a credit rating downgrade need not trigger a reaction from the Reserve Bank, unless its impact on capital flows and the exchange rate jeopardises price stability.</p>
<p>Raising the repo rate – the rate at which the central bank lends to commercial banks – by itself would do little to attract new investments. This is because only a small part of capital flows into the country consist of short-term money market investments. Most are made up of purchases of longer-term bonds and equities. </p>
<p>But failure to deal with the inflationary consequences of currency depreciation, which pushes up import prices and potentially all prices, would also push up both short and long term borrowing costs. This could eventually endanger the policy framework we have in place. As the commitment to low inflation weakens, investors will push up their expectations of future inflation, which further increases borrowing costs. This would, in turn, exacerbate capital outflows and push the currency down and prompt stronger inflation, in a vicious cycle.</p>
<p>The Reserve Bank has tended to think that, over time, such a negative outcome from a downgrade has become less likely. Market expectations of higher borrowing costs had already reached levels similar to those of lower-rated, non-investment grade countries even before the 3 April Standard and Poor’s <a href="https://theconversation.com/what-a-downgrade-means-for-south-africa-and-what-it-can-do-about-it-75704">rating event</a>. This implies that the market had mostly “priced-in” the downgrade. </p>
<p>Also, at the moment the global context is unusually supportive of emerging markets. Interest in riskier assets is being sustained by higher commodity prices and better global growth prospects. These factors in turn suggest that short-term selling of rand-denominated assets may be relatively muted.</p>
<p>Nonetheless, further downgrades, in particular to “local currency” ratings, would again lower prices of assets and raise the cost of financing in the economy. This would be clearly negative for South African borrowers, domestic financial institutions and economic growth more generally.</p>
<p><strong>Professor Alan Hirsch, University of Cape Town</strong> - <em>The recent budget showed that the National Treasury is tightening fiscal policy. Does this provide scope for monetary policy loosening?</em></p>
<p><strong>Lesetja Kganyago:</strong> There are two major channels through which fiscal policy tightening can interact with the monetary policy stance. Firstly, curbing private and public-sector spending growth normally dampens demand-driven price pressures. These are pressures caused when demand for goods and services cannot be easily met by increased production of those goods and services, resulting in higher prices for them. Secondly, reassuring investors about the medium-term sustainability of debt levels limits the risk of capital outflows – and therefore downward pressure on the rand. </p>
<p>The moderate tightening in South Africa’s fiscal stance over the past three to four years has gradually lowered the amount of annual borrowing from around 4% to about 3% of GDP. This is expected to continue over the next two years. </p>
<p>Some of this fiscal restraint has occurred through tax increases. Expressed as a share of pre-tax disposable income, <a href="http://www.treasury.gov.za/documents/national%20budget/2017/review/Chapter%204.pdf">direct household taxes</a> increased by 1.5 percentage points between 2012 and 2016. </p>
<p>Another part of the fiscal consolidation has happened through a nominal spending ceiling which is an absolute rand value for spending in a given year.</p>
<p>A sustainable fiscal trajectory for deficits and borrowing is an important influence on the cost of capital in the economy generally. Greater borrowing by the public authorities can put upward pressure on interest rates.</p>
<p>While government spending has contributed to South Africa’s recovery from the global recession of the 2009-2010 period, the impact of the higher cost of borrowing weighs more heavily on economic activity as borrowing continues year after year. This appears to be where the country is now. Spending contributes less than it did earlier to sustained economic growth, in part because the cost is higher. </p>
<p>As a contribution to short-term economic growth, government and private debt has probably become a constraint. Fiscal space is being re-opened as government debt levels stabilise and the economy’s growth rate strengthens. <a href="http://www.resbank.co.za/Lists/News%20and%20Publications/Attachments/7718/02Quarterly%20Economic%20Review%20%E2%80%93%20March%202017.pdf">Household debt levels</a> have also come down in recent years, especially in 2016. This also creates space for stronger consumption growth over the longer-term.</p>
<p>As the fiscal consolidation progresses and deficits work down, both inflation and interest rates should moderate. This is helpful to monetary policy. It has, and should, continue to facilitate the Reserve Bank’s gradual and flexible approach to getting inflation sustainably down towards the middle of the target band of 3% to 6%.</p>
<p><strong>Professor Alan Hirsch</strong> - <em>As global interest rates rise this year, will the Reserve Bank be able to delay reciprocal increases in order not to stifle South Africa’s meagre growth. And to allow its currency to continue to favour exporters?</em></p>
<p><strong>Lesetja Kganyago:</strong> The rise in global interest rates will tend to depreciate other currencies, except those of economies that will get a strong and direct growth benefit from more robust growth in the US. But domestic conditions are critically important. The inflation targeting framework provides room for flexibility, allowing the Monetary Policy Committee to choose what weight to place on external and internal factors in deciding policy. </p>
<p>Policy is not bound to follow interest rate decisions of major central banks. This is unlike countries that use the exchange rate targeting framework for achieving low inflation. As the Monetary Policy Committee has noted, domestic economic growth has been weak and this requires policy settings that are supportive. For these reasons, “de-coupling” of interest rates is a common feature of growth and policy cycles. </p>
<p>This implies that some currency depreciation has been expected in recent years. And indeed this has happened. In this context it’s been important for policy to focus on whether depreciation will generate future inflation. Up to now we have been fortunate this “pass-through” into domestic prices has been less than would normally be expected. </p>
<p>This may, in part, be because of lower commodity prices and terms of trade and the more generally weak economy. The upshot is that we have gained competitiveness as the nominal exchange rate has depreciated, without much stronger growth in domestic inflation. This has helped to keep interest rates at near historically low levels since 2010. This has supported the recovery in the economy, while still keeping expectations of future inflation just within the target band.</p>
<p><strong>Professor Jannie Rossouw, Wits University.</strong> - <em>Does the existing structure of private shareholders still serve the best interest of the Reserve Bank and South Africa?</em></p>
<p><strong>Lesetja Kganyago:</strong> The Reserve Bank’s shareholding <a href="http://www.resbank.co.za/AboutUs/History/Background/Pages/OwnershipOfTheSouthAfricanBank.aspx">structure</a> is unusual, yet not unique in the world of central banking. At present, eight central banks in the world have a degree of private ownership. These include the US Federal Reserve, the Bank of Japan and the Swiss National Bank. </p>
<p>Historically, most central banks were privately-owned. This pattern changed drastically after the Great Depression of the 1930s. Back then, many governments felt that the <a href="http://www.bis.org/publ/work326.pdf">conflict</a> between private shareholders’ interests and the public policy mandate of these institutions had in some cases prevented appropriate policy responses.</p>
<p>But several safeguards ensure that the Reserve Bank’s shareholding structure does not pose such risks in South Africa. In fact, the Reserve Bank’s private shareholders have no influence on the Reserve Bank’s key mandates of price and financial stability. </p>
<p>The Governor and his or her deputies are appointed by the president of the country. And the <a href="https://www.resbank.co.za/AboutUs/Legislation/Pages/default.aspx">SA Reserve Bank Act</a> can only be amended by Parliament. The Reserve Bank’s functional independence is enshrined in the Constitution. Equally, as per the spirit of the constitution, the inflation targeting framework has been determined through a consultative process between National Treasury and the Reserve Bank.</p>
<p>Provisions of the Act further stipulate that no individual shareholder, including his or her associates, can hold more than 10,000 of the existing 2 million shares. It also caps the dividend at 10c/share. These prevent any attempt by shareholders at extracting significant profits from the institution, for instance through the sale of its assets.</p>
<p>Overall, the role of the Reserve Bank’s private shareholders remains one of oversight and can improve governance. This happens, for example, through the tabling of an annual report and financial statements at the annual general meeting of shareholders. </p>
<p>While international experience does not suggest that the shareholding structure of a central bank meaningfully affects its performance, there is equally no obvious case for changing such a structure in South Africa at present.</p>
<p><strong>Professor Jannie Rossouw</strong> - <em>What needs to happen before there can be a debate about a lower inflation target, say 3% - 5%?</em></p>
<p><strong>Lesetja Kganyago:</strong> South Africa’s inflation target range is both relatively wide and high by international standards, including among emerging countries. At the time the 3%-6% target <a href="https://www.resbank.co.za/MonetaryPolicy/DecisionMaking/Pages/default.aspx">was adopted</a> in the early 2000s, South Africa remained an economy in transition, having recently faced renewed exposure to global economic volatility.</p>
<p>The economy was thus exposed to shocks, and it was felt that a relatively wide and high target would be more credible in such a vulnerable environment. The strategy seems to have borne fruit: compliance with the target has improved over time despite greater currency volatility. Inflation, as well as inflation expectations and wage growth, display lesser volatility than in the early years of the targeting regime. And the policy appears to have gained growing acceptance, over the years, from respective stakeholders. </p>
<p>But a relatively wide target can create uncertainty as to the actual objectives of monetary policy. In the South African case, this lack of clarity has resulted in an anchoring of inflation expectations at the upper end of the target range, which now restrains the margin of policy manoeuvre in the event of exogenous shocks. </p>
<p>In addition, the <a href="http://www.inflation.eu/inflation-rates/south-africa/historic-inflation/cpi-inflation-south-africa.aspx">persistence of higher inflation </a> in South Africa relative to its major trading partners introduces a medium-term depreciation bias to the currency, which will raise the risk premium on domestic interest rates. Achieving a lower inflation rate would help ease these constraints on the economy. Whether a more efficient target (using a point, a lower target, or being more explicit about where in the band is the best inflation rate) could help achieve such an outcome is an open question for economists to consider.</p>
<p>The target was <a href="http://wwwapp.reservebank.co.za/internet/Publication.nsf/LADV/E1BAD4FBC856AE9042256EF40046DEBB/$File/OCCNo19.pdf">revised to 3%-5%</a> in 2001 but after the currency depreciation that same year the range was revised back to 3%-6% with the proviso that once inflation is back within the target then the 3%-5% target range will be reinstated. This has not happened yet.</p>
<p><strong>Professor Alan Hirsch</strong> - <em>What has the Reserve Bank learned from the <a href="https://www.ft.com/content/75fccfd8-f8d6-11e6-9516-2d969e0d3b65">Barclays/ABSA saga</a>? Will it be more circumspect in allowing foreign investors to buy thriving South African banks in the future?</em></p>
<p><strong>Lesetja Kganyago:</strong> The Barclays Plc separation from Barclays Africa Group (trading in South Africa as Absa Bank) has renewed the policy debate on foreign ownership of the large South African banks at the Reserve Bank. The debate is also back because of the regulatory reforms imposed by the <a href="http://www.bis.org/bcbs/about.htm">Basel Committee</a> and the <a href="http://www.fsb.org">Financial Stability Board</a> on <a href="http://www.fsb.org/2016/11/2016-list-of-global-systemically-important-banks-g-sibs/">global systemically important banks</a> following the global financial crisis. </p>
<p>These reforms imposed various additional requirements on global systemically important banks. This has filtered down to their significant subsidiaries operating in different jurisdictions, including emerging markets. These subsidiaries then need to compete with other local banks that don’t need to meet those global systemically important banks requirements, contributing to an uneven playing field.</p>
<p>The Reserve Bank is supportive of and welcomes foreign ownership of South Africa’s large banks. But it remains cautious against controlling ownership by a global systemically important bank, as this could result in onerous regulatory requirements being imposed on the local operation.</p>
<p>The actual separation is also closely monitored as the local banking operations have become closely aligned and integrated on IT systems, infrastructure and processes with their parents. As such any separation needs to ensure that the local subsidiary remains operationally stable during and after the separation.</p>
<p>When the Banking Registrar assesses new investors applying to acquire a stake in any bank, its office conducts a fit-and-proper assessment. This is to establish the strategic intent of these investors. It’s to see whether the investment is expected to be long-term in nature, how the investment will be funded and how the investors plan to fulfil their fiduciary duties, including in terms of governance.</p><img src="https://counter.theconversation.com/content/76535/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jannie Rossouw own shares in the SA Reserve Bank and previously worked for the central bank. He receives research funding from the NRF.</span></em></p><p class="fine-print"><em><span>Alan Hirsch and Nimisha Naik do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The South African Reserve Bank has come under spotlight due to the critical role it must play in enabling the country to navigate rough waters. Governor Lesetja Kganyago shares his views.Nimisha Naik, Lecturer in Economics, Macroeconomics and Mathematical Economics, University of the WitwatersrandAlan Hirsch, Professor and Director of The Nelson Mandela School of Public Governance, University of Cape TownJannie Rossouw, Head of School of Economic & Business Sciences, University of the WitwatersrandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/759372017-04-20T15:48:52Z2017-04-20T15:48:52ZSouth Africa must look beyond individuals to solve the current crisis<figure><img src="https://images.theconversation.com/files/165193/original/image-20170413-25865-1xlm8sr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Former Finance Minister Pravin Gordhan flanked by Deputy Minister Mcebisi Jonas and Director General Lungile Fuzile.</span> <span class="attribution"><span class="source">GCIS</span></span></figcaption></figure><p>When the <a href="http://ewn.co.za/2017/03/31/president-jacob-zuma-s-cabinet-reshuffle">axe</a> finally fell on the embattled South Africa’s finance minister, Pravin Gordhan, and his deputy, Mcebisi Jonas, the reactions played out as many people had predicted. The country was hit by an immediate drop in the value of the <a href="http://www.fin24.com/Economy/cabinet-reshuffle-downgrade-knock-rands-emerging-markets-crown-20170406">rand</a> and a sovereign credit rating downgrade from rating agencies <a href="http://www.ujuh.co.za/sp-official-statement-downgrading-south-africas-credit-rating/">S&P</a> and <a href="http://www.ujuh.co.za/and-now-fitch-downgrades-south-africa-to-real-junk-status/">Fitch</a>. Widespread <a href="http://www.timeslive.co.za/sundaytimes/stnews/2017/04/07/IN-PICTURES-South-Africans-come-out-in-droves-to-join-anti-Zuma-countrywide-marches">protest</a> against President Jacob Zuma has since followed.</p>
<p>The ensuing protests and debates are dominated by a focus on the role of individuals: Zuma is the centre of focus as the wrecking ball; Gordhan and to some extent Jonas, were seen as the saviours. The view is that all hell will break loose once these good men are gone.</p>
<p>Given the current state of the economy and the sensitivities of the markets, it is inevitable that South Africans are likely to fixate on the financial outcomes of Zuma’s moves. But focusing too heavily on individuals’ actions and the outcomes from them is dangerous.</p>
<p>This is not because the role of these individuals and the outcomes are unimportant. But it must be the systems and processes that should matter more for an approach that goes beyond the 24-hour news cycle and into rebuilding a better future. The underlying systems of government and party politics that generate and support leaders need to change if the country is not to repeat the recent calamities.</p>
<p>While people may be justified to protest, shout and tweet slogans like <a href="https://theconversation.com/survey-sheds-light-on-who-marched-against-president-zuma-and-why-76271">“Zuma Must Fall”</a>, it’s a mistake to assume that change in one leadership position will bring about a shift in underlying systems. Likewise, the positioning of Gordhan (and to a lesser extent Jonas) as the saviours speaks to this same problem. Both perspectives are based on an extremely limited conception of how institutions and societies work, hearkening back to the outdated, and ironically colonial, “<a href="https://www.villanovau.com/resources/leadership/great-man-theory/#.WO813aIlHDc">Great Man Theory</a>”.</p>
<h2>It’s the systems that matter</h2>
<p>The Great Man Theory says that leaders are born with a special gift and their unique skills make them indispensable. Worthy successors are thought to be few and far between. Great things can only happen with these chosen people at the helm of institutions or societies.</p>
<p>The prevalence of this view in South Africa is deeply worrying. It shows a shockingly unrealistic understanding of the scope of issues facing the country. It also shifts people’s focus to leaders in certain positions as opposed to systems and institutions.</p>
<p>Good leaders can obviously make a difference, but environments can also exert a profound impact on leaders. Take the American experience: the running joke in the US is that President Donald Trump said he was going to “<a href="http://www.newsweek.com/2017/02/17/donald-trump-drain-swamp-lobbyists-553809.html">drain the swamp</a>” (change the political system), but his recent failings in many initiatives show that “the swamp is draining him”. </p>
<p>It’s certainly possible that a change in leadership at the top may lead to better outcomes and shift the direction of a country. But keeping all of the underlying systems and processes intact will likely guarantee that the future will remain the same.</p>
<h2>Some indicators of underlying change</h2>
<p>To get a better sense of the true impacts of the Zuma <a href="http://www.ujuh.co.za/zumas-cabinet-reshuffle-points-to-the-rise-of-malusi-gigaba/">cabinet reshuffle</a>, South Africans need to assess how it relates to crucial systems, rather than just immediately quantifiable outcomes. For those who are fearing or hoping this most recent political move is a watershed event, the proof of their case will not come in shorter-term outputs, but in real changes to underlying systems, which speak to the strength – or weakness – of institutions. </p>
<p>There have been reports that other cabinet members would <a href="https://businesstech.co.za/news/government/160435/anti-zuma-ministers-threaten-mass-resignation-following-possible-cabinet-reshuffle-report/">resign in protest</a> after Gordhan was removed. Significant resignations by internal senior leaders will be indicative that the current processes for leadership selection and support are no longer holding. If that fails to happen in a meaningful way, it will be a strong indication that the underlying system will not be shaken.</p>
<p>Short of resignation, who will speak out from inside the ANC. There are indications of internal factions in the ANC, exacerbated by the organisation’s 2017 ANC <a href="http://ewn.co.za/2017/01/08/the-debate-over-who-should-succeed-zuma-as-anc-president-heating-up">elective conference</a>. Opening the leadership debates around ANC’s contestations for power will be beneficial. Made public, the rationale and underpinning logic for differences of opinion give insight to both ANC members and the public as to what the real issues are facing the party, its leaders, and the country. If these factional territories are kept hidden rather than staked out in public, it will be a strong indication that the underlying system will not be shaken.</p>
<p>Much of the ANC’s leadership selection and succession processes are highly opaque, making it hard for the public to see just how leaders arrive at their positions. This doesn’t mean there’s anything wrong with that person or those processes, but the lack of transparency allows for every shortcoming to be magnified with suspicions of shady dealings in the background. If the process for the elevation of leaders in the ANC is not made more transparent, it will be a strong indication that the underlying system will not be shaken.</p>
<h2>The bottom line</h2>
<p>The loss of Gordhan and Jonas is no doubt <a href="https://theconversation.com/firing-of-south-africas-finance-minister-puts-the-public-purse-in-zumas-hands-75525">a blow</a> to the National Treasury. Good leadership is always a benefit to institutions. South Africa, like any country, should try to make the most of any good leadership it can find. But this should not blind South Africans to the fact that the finance ministry, and the economy as a whole, can never be wholly dependent on one or two people. </p>
<p>If the country wants real “<a href="http://www.ujuh.co.za/zuma-what-do-we-mean-by-radical-socio-economic-transformation/">radical economic transformation</a>”, it can only come from institutions that are strong throughout and buoyed by the work of many people dedicated to the task of improving the country. </p>
<p>Gordhan himself appears to understand this. Commenting after his dismissal, he said Treasury is in <a href="http://m.ewn.co.za/2017/03/31/gordhan-treasury-is-being-left-in-good-hands">safe hands</a> because its professionals remain committed to ensuring macro-economic stability.</p>
<p>The bottom line is that if South African politics is its own “swamp”, it would be foolish to think that skimming the top (whether that’s in the form of Zuma or cabinet ministers) will be sufficient on its own to improve the situation and keep the country safe from future harm. Anyone who has been in a swamp knows that the most dangerous things lie below the surface, ready to emerge at the right moment for an attack.</p><img src="https://counter.theconversation.com/content/75937/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Timothy London works for the Allan Gray Centre for Values Based Leadership which receives funding from the Allan Gray Orbis Foundation. The Centre is a part of the Graduate School of Business at the University of Cape Town. </span></em></p>The framing of the prevailing political protests in South Africa shows too much focus on the role of individuals. This is dangerous in hearkening back to the flawed Great Man Theory.Timothy London, Senior Lecturer, University of Cape TownLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/755492017-03-31T12:01:19Z2017-03-31T12:01:19ZSouth Africa has lost a key line of defence against corruption. What now?<figure><img src="https://images.theconversation.com/files/163448/original/image-20170331-31747-shdpgu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The sacking of South Africa's Finance Minister Pravin Gordhan has created uncertainty about the future of the country's finances.</span> <span class="attribution"><span class="source">Nic Bothma/EPA</span></span></figcaption></figure><p>South Africa’s currency and bond markets <a href="https://www.bloomberg.com/news/articles/2017-03-30/south-africa-s-rand-extends-slump-as-zuma-fires-finance-minister">plunged</a> after a dramatic late night <a href="http://www.thepresidency.gov.za/press-statements/president-zuma-appoints-new-ministers-and-deputy-ministers">announcement</a> that South Africa’s President Jacob Zuma had fired the Finance Minister Pravin Gordhan and his deputy Mcebisi Jonas as part of a major cabinet reshuffle. </p>
<p>It’s no exaggeration to say that the removal of the finance minister is the greatest threat to public finances experienced in democratic South Africa. </p>
<p>Let’s be clear, the motive for removing the minister and his deputy had nothing to do with the responsible and safe management of South Africa’s economy. Rather it has everything to do with Gordhan and his team’s intent to safeguard the fiscus against irresponsible and corrupt activities. It follows that whoever replaces them will be amenable to facilitating such activities.</p>
<p>It’s hard to overstate the harm that a corrupt finance minister could cause. The first consequence – which became apparent when Nhlanhla Nene was <a href="http://www.fin24.com/BizNews/zumas-blunder-on-nene-costs-sa-billions-when-will-taxpayers-call-enough-20151213">fired</a> and also as speculation mounted about Gordhan’s removal – is based on a simple loss of confidence. This is reflected in the <a href="https://www.bloomberg.com/news/articles/2017-03-30/south-africa-s-rand-extends-slump-as-zuma-fires-finance-minister">sharp depreciation</a> of the rand before and after Zuma’s announcement.</p>
<p>The rand is likely to suffer further. The cost of government borrowing in the market will rise, further compounding the impact of a formal downgrade by ratings agencies which is likely to follow. Higher borrowing costs will mean less money for expenditure, along with a reduced ability to borrow. Imports will become more expensive, potentially fuelling inflation and a hike in interest rates. </p>
<p>There’s also likely to be an outflow of foreign investment, further exacerbating the weakened exchange rate. At its most extreme this could lead to a balance of payments crisis. All of this will harm already low economic growth.</p>
<p>And there are a number of key decisions – such as the approval of an expensive nuclear deal – that could get the green light, severely damaging the country’s fiscal position.</p>
<h2>So why now</h2>
<p>When Zuma <a href="https://www.businesslive.co.za/bd/opinion/2017-03-28-zuma-recalls-gordhan-from-high-profile-roadshow-as-the-world-watches/">summoned</a> Gordhan back from an investor roadshow in the UK earlier in the week, he is said to have to have acted on the back of a flimsy <a href="http://www.heraldlive.co.za/news/2017/03/29/zuma-justify-gordhan-axing-intelligence-report-sources/">intelligence report</a>. Few believe this to be the real reason.</p>
<p>Others speculated that Zuma’s reason for making the move now might be linked to court cases involving the Gupta family and their associates, or the manufactured crisis relating to the distribution of social grants. </p>
<p>The <a href="http://www.fin24.com/Economy/zuma-joins-gupta-court-battle-to-file-motion-against-bank-20170327">court cases</a> relate to attempts by the Guptas to get the executive branch to intervene in the decision of commercial banks to close their bank accounts. They are also linked to an attempt by the Gupta’s associates to <a href="http://citizen.co.za/news/news-national/1471048/treasury-to-respond-to-gupta-associates-bank-bid/">purchase</a> a controlling share in an existing bank. There certainly seems to be a sense of urgency, with the last bank servicing Gupta companies reported to have started closing accounts. </p>
<p>But my premise on why this has happened now is much simpler. The timing of it ensures that the new finance minister, and other new appointments, have a month’s grace before a vote of no confidence in parliament can be tabled in parliament. Two opposition parties have already called for one. </p>
<p>A vote of no confidence against Zuma could succeed if the ANC caucus turned on Zuma and ANC members joined opposition parties to make up a 51% majority. There were hints of such a <a href="https://theconversation.com/zuma-lives-to-fight-another-day-but-fallout-from-latest-revolt-will-live-on-69587">revolt</a> in February ahead of Gordhan’s budget speech. The chances of it actually happening this time are probably much greater.</p>
<p>But an imminent vote isn’t possible because parliament starts its 2017 Easter <a href="https://www.parliament.gov.za/storage/app/media/Programmes/parliamentary-programme-framework-2017.pdf">recess</a> on the 31st of March, and only returns in early May. My reading of the Constitution and the Rules of the National Assembly suggests that recalling parliament before the recess ends will be difficult, if not impossible. That means that in the absence of some other process to block the president’s machinations, his cronies will have a minimum of four weeks to implement whatever nefarious plans they have devised for the finance ministry.</p>
<p>A lot of damage could be done in that time. </p>
<h2>Harm that can be done</h2>
<p>The consequences of Gordhan’s removal could be potentially dire on a number of fronts. They include, for example, the finance ministry withdrawing from its involvement in various court cases relating to the Gupta family. </p>
<p>Other possible consequences include the worsening of <a href="http://www.fin24.com/Economy/sars-at-risk-of-imploding-20170305-2">mismanagement</a> of the South African Revenue Services and untrammelled corruption at state-owned enterprises. </p>
<p>The approval of the expensive and unnecessary nuclear deal also becomes a real possibility. Eskom already holds hundreds of billions of rand in <a href="https://theconversation.com/why-south-africas-power-utility-isnt-in-great-financial-shape-68441">debt guarantees</a> from the National Treasury and the nuclear deal would likely be financed through the issuing of further such guarantees. </p>
<p>The combination of irresponsibly issued and utilised guarantees, along with an increase in borrowing costs, a ratings downgrade and falling revenue collection, would lead to a dramatic worsening in various public finance metrics, such as the debt-to-GDP ratio. </p>
<p>Corresponding harm could be done to critical institutions that fall under the Ministry of Finance. These include the <a href="http://www.gepf.gov.za/">Government Employees Pension Fund</a> and the <a href="http://www.pic.gov.za/">Public Investment Corporation</a> which are responsible for trillions of rand in public sector pensions. Institutions like the <a href="https://www.fic.gov.za/Pages/Home.aspx">Financial Intelligence Centre</a> and <a href="https://www.fsb.co.za/Pages/Home.aspx">Financial Services Board</a> could also be compromised. And there are significant funds that could be appropriated or misdirected from development finance institutions such as the <a href="http://www.landbank.co.za/">Land Bank</a> and <a href="http://www.dbsa.org/EN/Pages/default.aspx">Development Bank of Southern Africa</a>.</p>
<h2>Where to from here?</h2>
<p>As long as principled, competent public servants remain at the helm of the country’s National Treasury it might be harder for the new minister of finance to engage in corrupt, illegal or irrational actions. To do so he would have to suspend or dismiss numerous officials leaving himself open to legal action on various grounds, including labour law. The presence of good officials also means that there is greater scope for whistleblowing which could inform action by civil society, the judiciary and the legislature.</p>
<p>In principle, parliament should be able to exercise significant oversight over the National Treasury, including the budget. But Parliament’s primary source of technical support has shown itself to be <a href="https://theconversation.com/explainer-the-nitty-gritty-of-south-africas-annual-budget-72901">unable or unwilling</a> to tackle politically sensitive issues. On top of this the Financial and Fiscal Commission, which also advises parliament committees on such matters, currently has no permanent leadership. </p>
<p>It therefore remains to be seen whether there’s sufficient political will and technical competence in the legislature to significantly mitigate the harm that the recent reshuffle will cause. In that context, the best South Africans can hope for is that somehow the harm can be minimised for four weeks, and that the president and his new cabinet are removed shortly afterwards.</p><img src="https://counter.theconversation.com/content/75549/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Seán Mfundza Muller is affiliated with the Public and Environmental Economics Research Centre (PEERC) at the University of Johannesburg, and previously worked for the Parliamentary Budget Office.</span></em></p>The removal of South Africa’s finance minister, Pravin Gordhan, is the greatest threat to public finances experienced in the post 1994 era.Seán Mfundza Muller, Senior Lecturer in Economics, University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/732862017-02-21T08:40:21Z2017-02-21T08:40:21ZReplacing South Africa’s finance minister, or his deputy, would carry a heavy cost<figure><img src="https://images.theconversation.com/files/157660/original/image-20170221-18664-9zq029.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Finance minister Pravin Gordhan, his deputy Mcebisi Jonas, and Reserve Bank Governor Lesetja Kganyago. </span> <span class="attribution"><span class="source">GCIS</span></span></figcaption></figure><p>Many see <a href="http://mg.co.za/article/2017-02-17-brian-molefe-to-be-sworn-in-as-a-member-of-parliament">the decision</a> by South Africa’s governing African National Congress (ANC) to send the <a href="https://www.businesslive.co.za/fm/features/2016-11-03-state-of-capture-report-reduces-brian-molefe-to-tears/">disgraced</a> former CEO of the power utility Eskom to parliament as the precursor to another <a href="http://www.huffingtonpost.co.za/2017/02/17/brian-molefe-becomes-an-mp-next-stop-finance-minister/">attack</a> on the National Treasury and to remove finance minister Pravin Gordhan. </p>
<p>The decision to give Brian Molefe a seat in the country’s parliament has led to widespread <a href="https://www.dailymaverick.co.za/article/2017-02-20-life-of-brian-mexican-standoff-looms-for-zuma-of-guptas-new-cabinet-deployee/">speculation</a> that he is being positioned for a cabinet post – either as finance minister or as deputy finance minister. While some commentators believe that President Jacob Zuma has his sights set on appointing Molefe as finance <a href="http://www.timeslive.co.za/politics/2017/02/17/Molefe-as-MP-seen-as-a-bid-to-oust-finance-minister-Gordhan">minister</a>, others <a href="http://www.huffingtonpost.co.za/2017/02/17/whats-the-real-plan-for-brian-molefe/">argue</a> that the real target is Deputy Minister Mcebisi Jonas. The deputy minister <a href="http://www.fin24.com/Economy/mcebisi-jonas-takes-on-ajay-gupta-over-saxonwold-meeting-20170217">blew the whistle</a> on an alleged bribery attempt by a member of the Gupta family which is at the centre of a political storm amid allegations that it has attempted to exert undo influence on Zuma.</p>
<p>Either way, there is no doubt that Molefe’s appointment to either position would cause substantial turmoil in the country’s financial system and cost South Africa billions of rand. </p>
<h2>The cost of the rand taking a knock</h2>
<p>South Africa would take a massive economic blow because its currency would depreciate dramatically. The rand <a href="http://www.xe.com/currencycharts/?from=USD&to=ZAR">fell</a> through the floor the last time Zuma made a misbegotten attempt to <a href="https://theconversation.com/why-zumas-actions-point-to-shambolic-management-of-south-africas-economy-52174">install</a> one of his cronies at the helm of the National Treasury in December 2015.</p>
<p>This should worry South Africans. The country’s current account <a href="https://www.imf.org/external/pubs/ft/scr/2016/cr16218.pdf">deficit</a> in the third quarter of 2016 was 4.1%. This means that the sum of imports and external debt – borrowing from abroad – is larger than the sum of its exports and lending abroad. Mineral products, machinery and chemical products alone <a href="http://atlas.media.mit.edu/en/visualize/tree_map/hs92/import/zaf/all/show/2014/">constitute</a> more than 50% of South Africa’s imports. A weaker rand would make these more expensive since the country would have to pay more rand per dollar value. This means that prices for everything from consumer products to transportation would go up. South African firms, which often depend on intermediate inputs from abroad, would face a rise in the cost for their products and an erosion of their profits. As a consequence, fewer people would invest in the country.</p>
<p>A currency depreciation would affect investors in other ways too. A weaker rand would diminish their returns and they would therefore be more likely to look for investment opportunities elsewhere. Not only will they stop investing, they would also likely unwind their existing positions. This in turn would drain liquidity from the financial system, making banks less likely to provide new loans for businesses. The knock on effect would be lower growth and higher unemployment.</p>
<p>It is difficult to put a number on the impact of a sudden depreciation of the rand. But some simple back-of-the-envelope calculations can help. South Africa spends roughly US$10 billion more on imports than it gets from exports. This corresponds roughly to R130 billion per year. If the rand weakens from 13 to 14 Rand per US$1, the country would need another R10 billion to finance its trade imbalance. </p>
<p>South Africa has watched this movie before. Between November 2015 and January 2016 when Zuma installed the backbencher Des van Rooyen as finance minister the rand weakened from R14.4 to R16.9 per US$. This R2.5 increase per US$ corresponded to additional R25 billion cost to finance our trade deficit. On top of this <a href="http://www.biznews.com/undictated/2015/12/15/cost-to-sa-of-zuma-v-rooyen-gordhan-nene-r171bn/">private investors</a> are estimated to have lost R171 billion after finance minister Nhlanhla Nene <a href="http://ewn.co.za/2015/12/09/New-finance-minister-announced">was fired in 2015</a>.</p>
<h2>Secondary effects</h2>
<p>Removing either the finance minister or his deputy would also result in rating agencies downgrading the country’s investment rating to junk status. </p>
<p>Zuma has shown in the past that he has no clue about the impact of ratings on the country’s finances. Amidst threats of downgrade late last year Zuma was <a href="http://www.fin24.com/Economy/zuma-we-take-the-ratings-agencies-very-seriously-but-20161025">quoted</a> as saying:</p>
<blockquote>
<p>But although they’re important, their ratings don’t necessarily have an impact on the agreements and commissions South Africa have entered into with other countries.</p>
</blockquote>
<p>This simply is not true. A downgrade affects the interest rates on every new bond issuance. Every year some of our outstanding R2,000 billion <a href="https://commodity.com/debt-clock?off">domestic</a> and R141 billion foreign denominated debt has to be <a href="http://www.resbank.co.za/Lists/News%20and%20Publications/Attachments/7195/08Statistical%20tables%20%E2%80%93%20Public%20Finance.pdf">rolled over</a>. Debt services are already at roughly R150 billion per year – the second largest position in the country’s <a href="https://www.fanews.co.za/article/economy/43/budget-2016/1390/budget-2016-all-about-debt-stabilisation-and-a-social-compact/19856">budget</a>. A 5% increase in the country’s refinancing cost would already cost South Africa additional R7.5 billion every year. Money that is missing to finance social grants, healthcare, police or student bursaries.</p>
<p>The banking group Absa did some <a href="https://businesstech.co.za/news/finance/145453/fears-over-south-africa-junk-status-this-is-how-it-will-affect-you/">sample calculations</a> on how a ratings downgrade would affect the average South African. It concluded that every adult person would lose roughly R2,000 because a ratings downgrade would mean that the banks themselves would face higher refinancing costs. These would be passed on to their customers. </p>
<p>These numbers mirror a World Bank <a href="https://businesstech.co.za/news/finance/145453/fears-over-south-africa-junk-status-this-is-how-it-will-affect-you/">estimate</a> that a ratings downgrade in South Africa would result in a reduction of R1,000 per capita by the end of 2017.</p>
<p>The numbers paint a clear picture. Zuma’s last attack on the National Treasury cost South Africa <a href="http://www.biznews.com/undictated/2015/12/15/cost-to-sa-of-zuma-v-rooyen-gordhan-nene-r171bn/">billions</a>. Molefe’s appointment would be seen as another attack on the institution given that he was implicated by the former public protector Thuli Madonsela in her state capture <a href="http://mg.co.za/article/2016-11-02-breaking-read-the-full-state-capture-report/">report</a>. The effect of his appointment would be equally costly for the country. </p>
<p>South Africans should not allow this raid on the National Treasury to happen. The last time Zuma and his allies attempted to capture a well-functioning institution for their own personal gains the private sector gave them a hiding. The good news is that it is likely that markets will show a strong reaction this time, too. The question is whether ordinary South Africans realise the threat that a captured National Treasury would pose to their wallets and stand up before it is too late.</p><img src="https://counter.theconversation.com/content/73286/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Co-Pierre Georg is a Policy Associate at Economic Research Southern Africa. He writes in his private capacity.</span></em></p>The decision to give former Eskom CEO, Brian Molefe, a seat in the country’s parliament comes with the potential to cause great economic pain for South Africa.Co-Pierre Georg, Associate Professor, UCT School of Economics; South African Reserve Bank Research Chair in Financial Stability Studies, University of Cape TownLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/714132017-01-17T17:10:19Z2017-01-17T17:10:19ZWhy junk status still hangs over South Africa<figure><img src="https://images.theconversation.com/files/153041/original/image-20170117-2750-1oupxky.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Although South Africa <a href="http://mg.co.za/article/2016-12-02-reprieve-for-south-africa-as-sp-leaves-credit-rating-unchanged">avoided a downgrade</a> to non-investment grade, or junk status, in 2016, the country is not yet out of the woods and may be downgraded this year. The reasons for this are ongoing political risk as <a href="https://theconversation.com/ministers-call-for-zuma-to-resign-signals-internal-rebellion-in-south-africas-cabinet-69663">factional battles</a> in the governing African National Congress intensify, policy inconsistencies and low economic growth. </p>
<p>The effects of a sovereign credit rating downgrade would be significant for all South Africans. It would drive up borrowing costs, which in turn would have a negative impact on the government’s finances. It could also lead to foreigners leaving South Africa’s capital markets as well as driving the rand weaker. And it would in-turn push interest rates up, which would hurt ordinary South Africans.</p>
<p>But there are some possible steps the country can still take to avert a downgrade. These would include underscoring that Finance Minister Pravin Gordhan is secure in his job, and cutting wasteful expenditure.</p>
<h2>Impact on the markets</h2>
<p>South Africa’s public debt stands at 50.1% of the country’s GDP, <a href="http://www.tradingeconomics.com/south-africa/government-debt-to-gdp">nearly double what it was in 2006</a>. If the government’s borrowing position is not controlled it runs the risk of running up debts that it can’t service. An over-borrowed government is also perceived to be risky, which increases the cost of additional borrowing because lenders demand a premium. On top of this the country’s fiscus is under pressure from low revenue collection as a result of the slowing economy. </p>
<p>A downgrade to junk status is also likely to trigger significant capital flight. This is because sovereign downgrades typically have a direct impact on bonds and other fixed income securities making them less attractive to foreign bond investors. The likely outcome is that they will take their money to markets that offer better returns. This would be bad news for the country as <a href="https://www.wits.ac.za/news/latest-news/in-their-own-words/2016/2016-11/south-africa-needs-tougher-exchange-controls-before-junk-status-hits.html">foreign investors hold</a> about R62 billion (USD4.5 billion) in government securities. </p>
<p>A downgrade may not affect equity holders to the same extent as bondholders. Of the 472 companies listed on the Johannesburg Securities Exchange, <a href="http://www.fin24.com/Markets/Equities/dual-listed-shares-shine-on-the-jse-20160510">39 are dual listed</a>. These have primary or secondary listings in South Africa, London and New York. Companies listed abroad will be less vulnerable because most of their earnings are from abroad and in foreign currencies. But companies listed solely in South Africa would be affected by the country’s poor economic performance and a weaker currency. This is likely to drive them to internationalise which would mean a loss to South Africa. In addition, their valuations would be negatively affected by the higher cost of capital.</p>
<p>As the bond market reacts to the sovereign downgrade, the ripple effect would extend to the rand, causing it to weaken against other major currencies. The rand averaged R14/USD at the end of 2016 but a downgrade this year would be likely to push it beyond its lowpoint of about <a href="https://businesstech.co.za/news/finance/116372/rand-vs-the-dollar-1978-2016/">R16.80/USD</a>, possibly beyond the R20/USD level in the medium term). It plunged to this level in December 2015 after President Jacob Zuma announced he was removing then Finance Minister <a href="https://theconversation.com/the-removal-of-south-africas-finance-minister-is-bad-news-for-the-country-52170">Nhlanhla Nene</a>. </p>
<h2>Ordinary people</h2>
<p>According to the World Bank <a href="http://siteresources.worldbank.org/EXTAFRSUMAFTPS/Resources/chapter2.pdf">South Africans are the biggest borrowers in the world</a>. The country’s National Credit Regulator Statistics has reported that approximately <a href="http://www.ncr.org.za/documents/pages/Annual%20Reports/NCR%20Annual%20Report%202015-16.pdf">20% of consumers are three months in arrears</a>. </p>
<p>A Adowngrade would drive up debt servicing costs. In addition, the fiscus would be under pressure due to higher interest costs on debt repayments coupled with lower economic growth. The government’s response would then be to raise taxes. The choices would between the politically unpalatable option of raising the value added tax rate, which would hit the rural poor and the lower-middle class urban consumers, or increasing personal taxes on the already <a href="http://www.fin24.com/Economy/sa-is-an-overtaxed-nation-says-outa-20160403">over-taxed working middle class</a>. As the <a href="https://www.washingtonpost.com/news/monkey-cage/wp/2016/08/12/here-are-4-reasons-that-south-africas-african-national-congress-lost-ground-in-this-months-election/?utm_term=.70e8eaf46612">recent local government elections have shown</a> this could also have political ramifications for the governing party.</p>
<p>With budget deficits for the past 20 years <a href="http://www.tradingeconomics.com/south-africa/government-budget">averaging -3.24%</a>, a rating downgrade would force the government to either embark on injecting new money into the economy or <a href="http://www.capetalk.co.za/articles/1576/south-africa-s-government-is-running-out-of-money-sairr">borrowing</a> more. Injecting new money into the economy would fuel inflation and exert pressure on the exchange rate. The central bank would then have to respond by raising interest rates, again hitting consumers.</p>
<p>Further borrowing is also risky as it could lead to a possible debt trap where the government is no longer able to service its debts. </p>
<h2>Momentous year</h2>
<p>This is a momentous year for the country, with the <a href="https://theconversation.com/zuma-lives-to-fight-another-day-but-fallout-from-latest-revolt-will-live-on-69587">factional battles</a> and ANC contestation gathering momentum, and for the world with the inauguration of President Donald Trump and uncertainties around <a href="https://theconversation.com/brexit-shows-economic-costs-of-pursuing-populist-policies-like-trumps-62407">post-Brexit</a> trade policies. In such an uncertain environment, South Africa must rectify the four mistakes that have led it to drift to the point of a downgrade. </p>
<p>First, government policy needs to be clear, consistent and growth-oriented. Second, rather than considering further borrowing or increasing taxes, the government must cut non-productive spending and restructure the non-viable state-owned entities (especially those that rely on bailouts or have become too large to manage). Third, the authorities need to ensure that <a href="https://www.businesslive.co.za/bd/national/2017-01-06-sarss-luther-lubelo-should-not-have-attacked-rating-agencies-says-gordhan/">business confidence</a> doesn’t deteriorate further. It can do this by desisting from issuing <a href="https://www.dailymaverick.co.za/article/2016-12-22-we-want-the-rand-to-fall-so-that-when-it-rises-we-will-control-the-economy-maine/#.WHYPZVN97IU">conflicting political statements</a> which cause investors to panic. And lastly, the presidency must quell the uncertainty around the finance minister’s position. </p>
<p>If South Africa continues to get <a href="http://blackopinion.co.za/2016/12/05/south-africa-ruled-rating-agencies/">these wrong</a>, it’s likely that it will be downgraded this year. Since it takes <a href="http://www.cnbcafrica.com/news/southern-africa/2016/06/03/south-africa-to-regain-investment-rating/">an average of seven years for a country to regain its investment grade</a>, South Africa would be stuck in a <a href="https://theconversation.com/south-africa-can-expect-zero-growth-its-problems-are-largely-homemade-62943">middle-income trap</a> until at least 2024. Under this scenario it would be unable to move out of low-level manufacturing, unemployment levels would remain high and the economy would remain stagnant.</p><img src="https://counter.theconversation.com/content/71413/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Sean Gossel receives funding from the University of Cape Town. </span></em></p><p class="fine-print"><em><span>Misheck Mutize does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The effects of a sovereign credit rating downgrade would be painful for all South Africans.Misheck Mutize, Lecturer of Finance and Doctor of Philosophy Candidate, specializing in Finance, University of Cape TownSean Gossel, Senior Lecturer, UCT Graduate School of Business, University of Cape TownLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/680782016-11-02T12:35:42Z2016-11-02T12:35:42ZSouth Africans learn that the law can be a double-edged sword<figure><img src="https://images.theconversation.com/files/144188/original/image-20161102-27231-y7cqgn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Head of South Africa's National Prosecuting Authority, Shaun Abrahams, dropped a fraud charge against the finance minister Pravin Gordhan.</span> <span class="attribution"><span class="source">Siphiwe Sibeko/Reuters</span></span></figcaption></figure><p><em>South Africa’s National Prosecuting Authority charged the country’s finance minister Pravin Gordhan and two of his former colleagues at the tax authority, Ivan Pillay and Oupa Magashule, with <a href="https://www.enca.com/south-africa/npa-charges-gordhan-pillay-and-magashula-with-fraud">fraud</a> last month. The charge was widely criticised as <a href="https://theconversation.com/charges-against-finance-minister-show-misuse-of-south-african-law-67177">baseless</a> and <a href="http://www.sowetanlive.co.za/news/2016/10/23/helen-suzman-foundation-and-freedom-under-law-launch-bid-to-set-aside-gordhan-s-charges">politically motivated</a>, amid allegations of <a href="http://www.biznews.com/leadership/2016/10/25/south-africans-mobilise-to-save-sa-from-state-capture-can-they-eject-zuma/">state capture</a>. It sent the currency into a <a href="http://www.timeslive.co.za/sundaytimes/businesstimes/2016/10/11/Rand-and-banking-shares-plummet-on-Gordhan-NPA-summons">nosedive and wiped billions</a> off the stock market. This week, the NPA <a href="http://www.iol.co.za/news/crime-courts/npa-drops-charges-against-gordhan-2085233">withdrew</a> the charges on the eve of the trio’s court appearance. Politics and society editor, Thabo Leshilo, asked law professor Penelope Andrews for her view.</em></p>
<p><strong>What’s the significance of the charges being withdrawn against Gordhan?</strong></p>
<p>The significance lies in three things: first, it was the extraordinary level of public attention that the case generated. The airwaves, the media and social media were alight with commentary on the case. </p>
<p>Second was the educational function that the charges provided. Ordinary citizens got another peek at the <a href="https://www.npa.gov.za/">National Prosecuting Authority</a> and its operations and there is now greater awareness of the meaning of fraud since this was the charge laid.</p>
<p>The third was that as events unfolded they showed that public campaigning and public pressure may actually yield results.</p>
<p><strong>What does all this say about the NPA and its independence?</strong></p>
<p>At the moment there is a lot of <a href="http://www.destinyconnect.com/2016/10/23/shaun-abrahams-met-zuma-behind-closed-doors-charging-gordhan-report/">speculation</a>, some of it quite persuasive. But something as serious as this – a minister being charged and the flagrant disregard for its consequences – requires a concerted probe into the reasons for the actions of the National Prosecuting Authority. We have to move from widespread speculation to confirmed facts.</p>
<p><strong>What’s to be read into the lateness of the decision not to prosecute, coming as it did on the even of their court appearance?</strong> </p>
<p>My sense is that the National Prosecuting Authority was taken by surprise at the level of <a href="http://www.timeslive.co.za/politics/2016/11/02/The-leading-figures-supporting-the-Save-South-Africa-protest">public disapproval</a> of its actions and the <a href="http://www.moneyweb.co.za/news/south-africa/da-eff-and-save-south-africa-march-against-state-capture/">overwhelming support</a> for Gordhan. In particular, they must have been alarmed by the level of <a href="http://constitutionallyspeaking.co.za/gordhan-is-there-any-case-to-answer/">legal opinion</a> about the spurious nature of the charges and opposition to the case itself.</p>
<p>The lateness of the decision to prosecute may have been hubris on the part of the head of the National Prosecuting Authority, <a href="https://www.npa.gov.za/content/adv-shaun-kevin-abrahams">Shaun Abrahams</a>. Or it may have been a decision of his to persevere and let the chips fall as they did. The decision not to prosecute may also have been a last ditch attempt on his part to save his reputation, such as it was, and to prevent a drubbing by the court.</p>
<p><strong>There has always been suspicion there was no case against the the trio and that the charges were politically motivated. This appears to be vindicated by the withdrawal. What does it say about the rule of law in South Africa?</strong></p>
<p>It actually says contradictory things about the rule of law. It can be used as a shield that protects those who might be falsely accused. This was clearly the case here. But the rule of law could also be a sword –- to attack those who obstruct the nefarious plans of powerful people.</p>
<p><strong>How does all this reflect on the head of the prosecuting authority? Are there grounds for him to resign?</strong> </p>
<p>I take no position on whether Abrahams should resign. Many prosecutors make decisions to withdraw charges for a host of reasons, some of them quite legitimate. The better route would be an inquiry into what went into the decision to charge the minister and the two others in the first place. Was it malice? Incompetence? A conspiracy? An inquiry would highlight whether Abrahams and his team are fit to run the nation’s prosecuting authority. </p>
<p><strong>What needs to happen to prevent a replay of similar situations in future, and rebuild confidence in the NPA?</strong> </p>
<p>An inquiry, not necessarily judicial, but led by credible individuals trained in the law, needs to be held into the <a href="http://www.dailymaverick.co.za/article/2016-10-27-game-over-for-abrahams-moyane-and-co-documents-prove-gordhan-prosecution-political/#.WBnHAfp97IU">fiasco</a>. It should be underpinned by a transparent process with unlimited access to a wide range of sources. Only such a concerted effort to clarify what has transpired will ensure that it is not repeated.</p><img src="https://counter.theconversation.com/content/68078/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Penelope Andrews does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>South Africa’s National Prosecuting Authority charged the country’s finance minister Pravin Gordhan and two of his former colleagues at the tax authority, Ivan Pillay and Oupa Magashule, with fraud last…Penelope Andrews, Dean of Law and Professor, University of Cape TownLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/638602016-08-12T08:12:53Z2016-08-12T08:12:53ZSouth Africa is Africa’s largest economy (again). But what does it mean?<figure><img src="https://images.theconversation.com/files/133911/original/image-20160812-16360-1kaq7mv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p><em>South Africa has toppled Nigeria and reclaimed its status as <a href="http://www.bbc.com/news/world-africa-37045276">the largest economy in Africa</a>. This comes two years after Nigeria rebased its GDP calculation and advanced to the top spot. South Africa was also temporarily relegated to the third position early this year after <a href="http://www.moneyweb.co.za/news/economy/imf-egypt-overtakes-sa-africas-second-largest-economy/">Egypt climbed to claim the second spot</a>. The Conversation Africa’s business and economy editor Sibonelo Radebe asked the University of the Witwatersrand’s Professor Jannie Rossouw to explain what it all means.</em></p>
<p><strong>How is this ranking calculated?</strong></p>
<p>The ranking is made on the basis of the size of the gross domestic product (GDP) of the three countries in question, namely South Africa, Egypt and Nigeria. The GDP is a measure of total economic activity in a country in a specific period (for example a year). GDP is measured in the domestic currency of the country, which is the rand in the case of South Africa, the naira in Nigeria and the Egyptian pound in Egypt’s case.</p>
<p>For purposes of international comparison, the GDP values are converted at the prevailing exchange rate to a common international currency such as the US dollar. Owing to the increase in the exchange rate value of <a href="http://www.bdlive.co.za/economy/2016/07/01/we-will-watch-rands-rally-for-signs-of-a-longer-term-trend-daniel-mminele-says">the rand</a>, the US dollar value of the South African GDP increased. Given the change in the value of the country’s currency, its GDP exceeded the value of Nigeria’s GDP. The same applies to Egypt: owing to the increase in the exchange rate of the rand, South Africa’s GDP is now larger than the GDP of Egypt when converted to US dollars.</p>
<p>It’s important to remember that South Africa’s <em>actual</em> GDP in rand value stayed the same.</p>
<p>However, the difference between South Africa and Nigeria is not large. At the time the <a href="http://www.bdlive.co.za/economy/2016/08/10/africas-largest-economy-in-dollar-terms-is-sa-following-the-rands-improvement">calculation</a> was made, the US dollar value of the South African GDP was some $301bn, while Nigeria’s was $296bn. At current exchange rates the Egyptian GDP is about US$270 bn.</p>
<p>One must caution that the relative ranking could have changed since the calculation, depending on exchange rate movements.</p>
<p><strong>What do these ranking mean? Are they useful in any way?</strong></p>
<p>These rankings do not mean much and are not really useful to the people making economic policy and investment decisions. What really matters to economic actors, broader stakeholders and observers are the economic prospects of these countries. What people want to know is: will there be economic growth in years to come, and will the GDP per capita increase?</p>
<p>GDP per capita is measured as the income per person (on average) in a country and provides an indication of standard of living. On this basis a country with a small GDP, but also a small population, can have a better standard of living than a large country. In Africa, Botswana comes to mind.</p>
<p>GDP growth is important because it provides returns for investors in an economy. It also provides an increase in job opportunities for unemployed people and new entrants to the labour market. In the long run GDP growth contributes to increased GDP per capita and increased standards of living in a country.</p>
<p>International investors pay less attention to relative size of economies than they do to growth prospects. These are much more important when making investment decisions.</p>
<p>Currently the economic prospects of South Africa, Nigeria and Egypt are poor. South Africa has not fully recovered from the aftershocks of the financial crisis of 2008. No economic growth is expected for 2016, while economic growth at a rate lower than the population growth rate is expected for 2017 and 2018. On a per capita basis South Africa will <a href="http://www.resbank.co.za/Lists/News%20and%20Publications/Attachments/7396/MPC%20Statement%20July%202016.pdf">get poorer over the next two years</a>.</p>
<p>The economic prospects for the Nigerian economy will remain poor as long as the oil price remains under pressure, owing to Nigiria’s over-dependence on oil. The Egyptian economy is hampered by a large government budget deficit.</p>
<p><strong>The last time Nigeria overtook South Africa Lagos rebased the way it calculates its GDP. What’s different between then and now?</strong></p>
<p>Naturally not only exchange rates play a role, but also the size of the GDP of a country calculated in terms of its own currency. The size of the domestic GDP in local currency value can increase as a result of economic growth (and also decrease with negative economic growth).</p>
<p>From time to time countries’ GDPs are also rebased to ensure that economic activity is accurately reflected. A recent rebasing of the Nigerian GDP contributed to that country claiming first place in terms of economic output in Africa.</p>
<p>Rebasing is a fairly common practice in all countries. This can be done, for example, to take full account of new activities such as cell phones or renewable energy investments. But rebasing is done on a scientific basis and countries cannot simply rebase their GDPs in a quest to increase the relative size of their economy. There must be scientific grounds for rebasing.</p>
<p><strong>How should we measure or rank economies? Are there alternative reliable tools that can be used?</strong></p>
<p>The alternative way to rank economies is the use of purchasing power parity (PPP) exchange rates. On this basis rapid and immediate swings in exchange rates are not taken into consideration in the measurement of relative economic size. PPP is calculated on the basis of the goods/services a unit of currency can buy in different countries, to reflect “affordability”, rather than only price. </p>
<p>A common example is a comparison of the price of hamburgers in two different countries. The prices of <a href="http://www.economist.com/content/big-mac-index">McDonalds hamburgers are compared</a> in different countries and a PPP exchange rate is calculated to show whether exchange rates (on this basis) are over- or undervalued.</p><img src="https://counter.theconversation.com/content/63860/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jannie Rossouw is received financial assistance for research from the NRF and from ERSA. </span></em></p>South Africa has claimed back its status of the largest economy in Africa, toppling Nigeria, due to the appreciation of the rand. What’s prompted the movement?Jannie Rossouw, Head of School of Economic & Business Sciences, University of the WitwatersrandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/615882016-06-30T14:19:47Z2016-06-30T14:19:47ZExplainer: Nigeria’s move from a fixed to a floating exchange-rate policy<figure><img src="https://images.theconversation.com/files/128545/original/image-20160628-7815-1e666pd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Africa’s largest economy has finally floated its fixed currency exchange rate for the first time in history. The freeing of the Nigerian naira after months of policy debates saw the currency immediately <a href="http://abcnews.go.com/International/wireStory/naira-gains-nigeria-floats-currency-1st-time-39985159">plummet by 40%</a>.</p>
<p>One would have to go back two decades to find parallels. South Africa – then Africa’s largest economy – also went through an agonising shift from a fixed exchange rate to a free-floating exchange rate after many permutations.</p>
<p>There are important lessons to be learnt from these two major African economies.</p>
<p>The management of exchange rates is one of the instruments used by a state in pursuit of economic development. How it manages its finances – fiscal policy – as well as trade policies are also key.</p>
<p>But in a globalised world the management of exchange rates has taken on added importance. This is because most countries have opened their economies by adopting export led development, which is underpinned by a low cost of production and an undervalued exchange rate. The exchange rate value of their currencies therefore plays a vital role.</p>
<p>An exchange rate is a nominal value of one currency against another of a trading partner. For example the South African rand or Nigerian naira against the US dollar, pound or the euro. And citizens of a country buy, sell and get paid a wage by a currency.</p>
<p>But how do countries manage their exchange rates? In particular, how do they go about making sure the value of their currencies is working for rather than against them?</p>
<h2>Options for managing currencies</h2>
<p>Historically, most currencies were backed by gold as the standard for trade. This ended in the 1970s when the <a href="https://global.britannica.com/topic/gold-standard">gold standard collapsed</a> due to debt default and high oil prices.</p>
<p>Currencies backed by gold were accompanied by economic policies that put the state at the centre of economic policy. Known as <a href="http://www.imf.org/external/pubs/ft/fandd/2014/09/basics.htm">Keynesianism</a>, the logic was that increased government spending would lead to higher output and, ultimately, full employment. The collapse of the gold standard therefore also had an impact on how economies were managed. Countries were encouraged to put the market mechanism at the centre and privatise state assets. This was the foundation of what is now called neoliberal economic policies, characterised by a small government, privatisation of key institutions including health and education, and free-floating exchange rates. </p>
<p>Countries responded differently to the 1970s crisis, devising new ways to manage their currencies. Some adopted fixed currencies pegged against the currency of their major trading partner. A fixed exchange rate is sometimes called a crawling peg because of the movement of the currency within a band. Others allowed their currencies to float. Variations in between have also been tried. For example, within the floating model approach where the market is left to decide the value of the currency, countries have chosen to “manage” the rate by intervening in the market. And then there is the hybrid model under which the currency is allowed to float, but within a specified band. </p>
<p>The job of managing exchange rates falls under a country’s central bank, which controls monetary policy. Which regime it chooses has a direct impact on every aspect of an economy. </p>
<p>There are those very much in favour of fixed exchange rates, and just as many vehemently opposed to them. Some view a fixed exchange rate regime as too inflexible. Others point out that it reduces uncertainty in the face of international capital flows.</p>
<p>In the 1970s, after the collapse of the gold standard, South Africa fixed its exchange rate against the US dollar within a band. Similarly, between February 2015 and June 2016 Nigeria pegged the naira against the US dollar. It did this because of concerns about the currency depreciating against the dollar, making imports expensive. </p>
<p>The biggest weakness of a fixed exchange rate is that interest rate hikes in the pegged country currency may also strengthen the domestic currency. This inevitably leads to an excess demand of foreign goods and unsustainable external borrowing by government.</p>
<p>For example if the US increased interest rates and the dollar strengthened, the naira would also strengthen. Nigerians, experiencing a wealth effect, would respond by importing more. This phenomenon would not have been caused by factors in Nigeria, such as higher economic growth or higher oil prices, but because of actions by the US Federal Reserve. It is this artificial wealth effect that is of concern. </p>
<p>Both South Africa and Nigeria have abandoned this approach – South Africa in 2000 and Nigeria in 2016 – and replaced it with floating exchange rates. In the case of South Africa, various frameworks were adopted between 1960 and 1998, including exchange-rate targeting and an eclectic approach within a crawling peg. </p>
<p>Their decisions follow a global pattern where the policy choice in exchange rate management has shifted in favour of floating exchange rates. </p>
<h2>Why South Africa changed course</h2>
<p>In the 1990s the South African Reserve Bank paid a heavy price when trying to control the value of the country’s currency. In an effort to counter speculative activity in 1996 the bank sold about US$14 billion into the market. In taking such action, it temporarily put a bit of a brake on the depreciation of the currency. But in the end the intervention only contained the depreciation from R3.50 to the dollar to R4.50 to the dollar.</p>
<p>In 1997 the bank intervened again, this time in two ways. First, it sold slightly more rand than it had bought, to the tune of about an extra $1 billion. Second, it raised interest rates to 7% in real terms. Higher interest rates attract capital inflow thereby strengthening a country’s currency. The South African Reserve Bank relied heavily on this knowledge. </p>
<p>Once again these actions resulted in only marginally containing the depreciation of the currency.</p>
<p>Subsequent to this episode, there was a shift in the South African Reserve Bank’s policy. The bank adopted an eclectic approach that meant that not only the exchange rate mattered in monetary policy but also money supply.</p>
<h2>Why Nigeria changed course</h2>
<p>At the height of the oil price boom, Nigeria’s economy grew rapidly and overtook South Africa’s as the continent’s biggest economy. Inward investment in Nigeria grew and the country looked at investment opportunities elsewhere. Companies such as Oando listed on the Johannesburg Stock Exchange in South Africa. The Nigerian government also raised capital in international markets.</p>
<p>But when oil prices plummeted the country’s economic weaknesses were exposed. As the Nigerian dollar receipts dropped due to lower oil prices, the naira also weakened, prompting government to fix the currency in February 2015. </p>
<p>However, dollar receipts from the sale of oil continued to fall, making it difficult for importers. It also led to a scarcity of dollars. That in turn led to the development of a parallel dollar market that worsened the shortage in the formal sector. When there is scarcity of dollars, the dollar exchange rate market is illiquid making it difficult to pay dollar commitments. </p>
<p>The illiquidity and the difficulty to service foreign debt prompted the state to respond by floating the currency’s exchange rate. The aim was to discourage imports emanating from the parallel market and devaluing the naira.</p>
<p>It is not surprising that the naira responded by depreciating against the dollar to find its true value.</p>
<p>But Nigeria’s decision is no panacea for country’s ailing economy. This is true too of South Africa. Nigeria has to diversify its export basket away from oil. And South Africa has a host of structural problems it needs to address, such as high levels of unemployment, poverty and inequality.</p><img src="https://counter.theconversation.com/content/61588/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Lumkile Mondi does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>How countries manage their currencies is now more critical than ever. Nigeria has followed in the footsteps of South Africa by opting for a free-floating exchange rate regime.Lumkile Mondi, Senior Lecturer in Economics, University of the WitwatersrandLicensed as Creative Commons – attribution, no derivatives.