Strong or Weak Currency for South Africa?

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1. A weak currency or a strong currency for the South African economy? What are the pros and cons of a weak or a strong currency in South Africa? Discuss.

Table of Contents Page Number 1) Introduction……………………………………………………………………….….3

2) Benefits of a weak Rend in South Africa………………………………………....3

3) Shortcomings of a weak rand in South Africa……………………………….…...4

4) The Pros of a strong rand in South Africa……………………………………..…5

5) Cons of a strong currency………………………………………………………….7

6) Recommendation for South Africa economy……………………………………8

7) Conclusion……………………………………………………………………….…..9

8) References…………………………………………………………………………..10

1. Introduction
A strong currency is a currency whose value compared to other currencies is improving, as indicated by a decrease in the exchange rate, whereas, in contrast a weak currency can be indicated by a significant depreciation in value over time against other currency. South Africa`s economy with the currency at an almost three year high against the United States dollar, also characterised with a relatively weak economy and a strengthening currency finds itself in a unique position. For South Africa the debate seesaws between those who seek action to tame the rand and those who see the strong currency as a blessing. A strong currency yields higher economic growth and lower inflation as well as attract skills (Hart, 2011). On the other hand labour unions fear a too powerful South African Rand could deter efforts to drive down the country`s 25 % unemployment rate. In line with the government`s policy of employment creation a weak rand can be the answer to the economy of South Africa through the reduction of the value of the rand (Cravern, 2011).The need for a weak rand has also been noted by the Minister of Finance Mr Pravin Gordan in his budget speech where he highlighted the need to put in place policies aimed to build the foreign exchange reserves and lowering debt to slow the strengthening currency. 2.Benefits of a weak Rand in South Africa

A weak rand may grow South Africa`s exports as local products gain a competitive edge on the international market, hence, creating many jobs. This would have a positive effect on Gross Domestic Product (Madura, 2009:172).Furthermore, he points out that another potential benefit is the reduction of imports into South Africa. This is due to a reduction in inflated costs that are incurred as a result of an unfavorable exchange rate. Moreover, a weak rand may stimulate and revamp the South African tourism industry as it becomes more attractive for most tourists from other countries to buy rands at fairly affordable exchange rates. This will translate into more employment prospects in South Africa, since; more people have to be hired temporarily or employed permanently to accommodate an influx in tourist’s attendant upon a weak South African Rand. Also it will promote foreign investments as it becomes cheap for foreign companies to start and establish their businesses in South Africa, as demand will be both high internally and on the international markets.

3.Shortcomings of a weak rand in South Africa
If the benefits of the weaker rand could be sustained and the improved competitiveness created jobs, the cost could be worthwhile. However, it’s unfortunate that a weak rand can haunt South Africa economically, socially or even politically in the long-run as it only breeds short-lived benefits. A weaker rand pushes up food and petrol prices, and a range of industries in other sectors take advantage of the weaker rand to expand their margins by pushing up prices by more than the currency has depreciated. An opinion piece in the Business Day (2010), noted that “A one-off, sharp weakening of the rand wouldn’t be inflationary.” In fact, the data shows the pass-through from a gradual currency weakening is far lower than a one-off plunge and then, workers...
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