Rand is killing manufacturers

Many South African manufacturers are struggling to maintain their operations because of the overvalued rand.

Most have fought valiantly to retain export markets built up over many years but can no longer compete. The rand has appreciated by 30% since April 2009. This is before factoring in SA's higher than average inflation rates. The US dollar and the British pound exchange rates with the rand approximate the levels of 10 years ago. Against forces like these, productivity drives can only do so much to reduce losses.

Local manufacturers who are up against importers have struggled for similar reasons. Many importers get substantial support from their governments. Also, some new importers dismissed Africa until their local markets collapsed and a faster growing African market became attractive. There are no South African materials, labour or ingenuity in their products.

Manufacturers have been patient in the hope that the overvalued rand would bounce back to competitive levels. However, there is no leeway left and jobs are being lost daily. A job lost is seldom regained and a factory closed means the jobs and local value add are almost certainly gone forever. The exchange rate has caused the industrial pump to run dry and it will need a lot of priming if it is to help reduce the unsustainably high levels of unemployment.

Administered prices have increased faster than general prices and have impacted proportionally more on more businesses. These include Eskom, Transnet - and most municipality increases which have been far in excess of inflation rates. These impact on the ability of business to be globally competitive.

According to the Department of Trade and Industry, SA has the second highest real interest rates in the world. The only higher country, Brazil, has a tax on short-term cash inflows and a government very supportive of business. It moves beyond plans, growth paths and policy statements into action and this is reflected in its faster growth rates. Brazil recently increased its tax on short-term flows.

The revenue from this new tax could be used to support job retention and job creation. The New Growth Path is going to need financing and this is a potential source.

If SA wants to retain a degree of industrialisation, then more urgent action needs to be taken to relax all remaining exchange controls and accumulate more reserves. This needs to be done openly rather than by subtle means if a strong message is to be sent to the markets. Markets will react to clear policy change but not to "more of the same" indications.

The current undeclared global currency wars have caught many smaller countries by surprise. Most major nations end up not practising what they preach. Though we cannot influence the major conflicts we also cannot merely complain about what developed nations do. We must take what action we can to minimise the damage locally. If everyone is playing by unconventional rules, then so must we.

But relaxation and reserves will not be enough. The Manufacturing Circle is calling for an effective devaluation of the rand through at least a 1.5% interest rate cut later this month. If it is clear that we will protect our currency through tempering inflation and also reduce our unemployment by returning to a competitive environment, then markets will react. If the rand still stays strong, then the Tobin tax would seem to be the last remaining viable option.

There will be additional benefits of an interest rate cut which will increase consumer demand among those who qualify under the National Credit Act. It also reduces the cost of working capital which is more important in labour intensive businesses. This could see a small uptick in inflation but that is worth the jobs that would be saved and created.

These are not silver bullets, but if something does not happen, we will regrettably have to deal with increased unemployment. This is likely to increase the demand for social grants while also reducing tax collections. Without a competitively based real exchange rate that is stable, South Africa will struggle to address unemployment, poverty and inequality. The call by the minister of finance for the SA Reserve Bank to address not only targeted inflation, but also growth and lower unemployment, is welcomed.

• Harris is public affairs director of Bell Equipment and a member of Manufacturing Circle