Another major inflation headache for South Africa

 ·11 May 2023

The weakening rand has been a sore point for South Africa’s economy, says Lesetja Kganyago, the governor of the South African Reserve Bank (SARB).

Exchange rate weakness in South Africa has substantially contributed to inflation, he said.

Speaking at a public lecture at the University of Johannesburg (10 May), the governor said the rand had been one of the worst-performing emerging market currencies this year.

On 10 May, the rand reached its lowest point in three years, dropping to R18.83 to the dollar. Since April 2023, the rand has remained stuck above R18 against the greenback

The Reserve Bank said that it remains committed to maintaining the value of the currency in the interest of balanced and sustainable growth; however, it now faces the challenge of doing so in a context where many of the drivers of both inflation and growth are outside of its control.

Kganyago said that over the last 12 months, idiosyncratic factors such as persistent load shedding and the recent greylisting of the county by the Financial Action Task Force have kept investors wary of South Africa.

Broadly speaking, a weak currency can contribute to higher domestic inflation by increasing the cost of imported goods and raw materials – leading to knock-on effects on everyday consumers.

As the currency loses value, it takes more to buy the same amount of goods, ramping up inflation.

Speaking on the Money Show, Kganyago said that the currency remains volatile – noting that it can be the best- or worst-performing currency on any given day.

According to the governor, the SARB has the responsibility to protect the currency’s value in terms of what it can purchase domestically, “not what it can buy in New York or Hong Kong or London or Frankfurt.”

Regarding investors keeping their distance from the country, the rand depreciation has negated the impact of lower global energy and food costs on domestic inflation, said Kganyago.

“Parallel to the somewhat easing global price pressures, domestic headline inflation has gradually slowed and came in at 7.1% in March 2023.”

“However, despite this moderation ‒ primarily driven by a decline in fuel prices from the peaks observed in mid-2022 ‒ inflation remains well above the SARB’s preferred midpoint of the 3-6% target range,” Kganyago said.

The rand’s weak position is likely to persist. ETM Analytics said that until there is a concrete plan to bring an end to the nationwide energy crisis, the underperformance will persist.

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