Forex SA

In my article on 26 September, I discussed the possibility that South Africa may assist the International Monetary Fund in providing a rescue package to the economically distressed Eurozone countries such as Ireland, Portugal and Greece (the co-called Piigs countries – the others are Italy and Spain). This possibility was raised by South African Finance Minister Pravin Gordhan, although he did not specify a figure of money, merely mentioning “a couple of hundred million US dollars”.

South African Reserve Bank governor Gill Marcus, however, has contradicted the Minister, saying that South Africa is not in a position to provide that kind of assistance to the IMF.

“My own approach would be that it needs the Group of 20 as a whole to look at what needs to be done, because it is not for us to plug gaps,” she said. “There has to be a coherent strategy, a co-ordinated approach and they have got to take the decisions. We can’t solve Spain or Italy. It is their job.

“Our reserves are nothing like China’s. China’s are in the trillions, we have US50 billion.”

This kind of conflicting position is not desirable, because the government of South Africa has traditionally followed an inflation-targeting macro-economic policy, which requires that the Finance ministry works closely with the Reserve Bank on issues like the prime lending rate and the size of currency and gold reserves. The Minister and the governor need to iron out their difference publicly.

Finance Minister Pravin Gordhan

At the same time, even if South Africa provides a “couple of hundred million dollars”, that is not going to make a sizeable impact on the crisis in Europe. Divided between the five Piigs nations, it pans out to an average of USD40 million each, which is chickenfeed in terms of solving the debt isses of a developed nation. The Minister therefore needs to be more specific as to how the money is going to be used in Europe. It is unlikely to be used for humanitarian aid in the Euro context, but should it really be used to prop up collapsing commercial banks who have over-extended their lending policies?

However, one issue that could be central to the Minister’s stance is political. As the Finance Minister of South Africa, Minister Gordhan has a certain responsibility to assist in maintaining sound economic relationships with other countries. Europe has traditionally been a major trading partner of South Africa, and so even if the South African contribution to the IMF’s rescue package is not enormous, its size is probably based on the ability of South Africa to make any such contribution and as an exercise in diplomacy it may well be necessary. The governor of the Reserve Bank, on the other hand, does not have nearly the same political aspect to her position. The Minister’s spokesperson has also said that the contribution, if made, won’t be drawn from South Africa’s reserves.

Another objection to the contribution is that South Africa has a heavy domestic burden in terms of assisting other southern African countries. However, this objection may be slightly exaggerated because the only two neighbouring countries requiring substantial assistance are Swaziland, who have already been given a ZAR2.4bn facility, and Zimbabwe. According to estimates, about 50% of the population of Zimbabwe twenty years ago already live in South Africa anyway, so in that sense the South African government is indeed contributing to the welfare of the region.

Sources: Cape Times, Zimbabwe Telegraph