Strong or Weak Currency for South Africa?
Topic 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
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
References: Blonigen, B.A.1997.Frim-Specific assets and the link between exchange rates and foreign direct investment. The American Economic Review, 87(3):447-465. Hagedorn, S.2010.Peg the rand to give SA a fighting chance.[Online].Available: http://www.businessday.co.za/articles/Content.aspx?id=108808 [ 20 September 2011]. Hart & Cravern.2011.Strong Rand-Blessing or Curse. [Online].Available: http://www.dalmax.co.za/news/strong-rand-blessing-or-curse/ [10 September 2011]. Kiat, J.2008.The Effect of Exchange rate and inflation on foreign direct investment and its relationship with economic growth in South Africa. Pretoria: Gordon Institute of Business Science. Madura, J.2008. International Financial Management.9th Edition: Cengage Learning. Masia, A.2005.Economics Society of South Africa.Bi-Annual Conference, Kwazulu-Natal: Elangeni Holiday Inn. Masia, A.2005.Currency Value Effects on the South African Economy and Estimation of its Underlying Equilibrium Level.Kwazulu-Natal.[Online].Available: http://www.essa.org.za/download/2005Conference/Masia.pdf [16 September 2011].