Lessons from crash of the rand

RAND NEW
Joram Nyathi Spectrum

THE South African currency, the rand, hit a fresh low on the so-called black Monday when it lost 3,3 percent to trade at 13,41 to the US dollar. This was recorded as the its lowest exchange rate since September 2011. Given that South Africa is Zimbabwe’s biggest trading partner on the continent, this should ring alarm bells for our ever moaning business. It spells even greater challenges for the struggling export sector. Bloomberg ascribed the fall of the rand to a “plunge in commodity prices”, which hit a 16-year low this week.

Let me quote the Bloomberg statement in detail, because it has a lot of relevance to what President Mugabe has been calling for in Zimbabwe, and re-emphasised in the region during his tenure as Sadc chairman, the urgent need for mineral beneficiation. More than that, African economies will need to diversify. “The currency (rand) led declines in emerging-markets exchange rates, hurt by lower prices for resources that account for more than half of its exports. Losses have been exacerbated by concern over growth in China, the top destination for South Africa’s raw materials, and the prospect of higher US interest rates,” said Bloomberg.

It also observed that the rand was one of many “commodity-linked, high-yielding currencies where a lot of foreign funds were parked,” adding, “Lower Chinese growth means weaker demand for commodities as they (Chinese) are the world’s largest consumer of raw materials by far.”

China-Africa trade has risen sharply in the past decade, from as low as $11 billion to $166 billion in 2012, according to a 2013 report by The Economist. Peter Fabricius, Foreign Editor of Independent Newspapers of South Africa, is of the neoliberal school where government should have no business in economic issues. The government should focus only on “improving concrete governance” and never “try to dictate to business how to do its job”.

“South Africa has already witnessed the friction between government and mining houses caused by government’s attempts to compel them to beneficiate minerals locally, even if exporting them is more profitable,” says Fabricius.

But evidence on the ground shows that, because of the profit motive, business will pretend not to know “how to do its job”. That is why most mining companies are reluctant to invest in local refining. That is why they would rather engage in cosmetic “social responsibility” programmes than support meaningful black economic empowerment, thus forcing government to intervene through legislation to demand value addition and local beneficiation before exporting. What Fabricius’s short-termist analysis ignores is an inconvenient fact of the boom-bust nature of commodity prices, and in the case of minerals, that they are a finite resource from which the owner must extract maximum value while they last. Many African countries have always struggled to raise national reserves because they have barely enough from mining royalties and tax for infrastructure development, let alone provision of adequate social services.

It’s a hand to mouth struggle for the majority regardless of the amount of FDI, because the investors always want to determine how much profit they get as a condition for investing. They should also be able to fire workers on notice as soon as there are signs that profits might decline, which is why the catastrophic July 17 Supreme Court ruling was such a boon for most businesses. All this falls under the rubric of a hypothetical, self-serving, often manipulated nomenclature called “easy of doing business”. And those who should stand for our cause against market injustices often play the role of fifth columnists, constantly reminding us, “Capital is a sensitive mistress, she runs where there is security.”

But Africa must fight for better rules of engagement if we are to minimise the catastrophes of commodity price volatility which has hit the South African rand. Value addition by private business won’t come without pressure. It’s no different from the fight for independence. By way of illustration, only a few years back, talk of UN Security Council reforms elicited snide looks but due to persistence by third world nations, there is growing convergence of opinion even among major think-tanks that the UN is undemocratic, that veto power is abused and that there should be more permanent members representative of all continents. The investor mistress needs to have a human face, she must bring some charm, and be seen to care to avoid job disruptions and a replay of Marikana. Without that Africa will have nothing to show for its abundant natural resources but gaping holes left by mining conglomerates, as President Mugabe pointed out recently. Where governments leave business “to do its job”, it is not uncommon that economists will reel out impressive GDP figures but not bother to reveal how the per capita GDP is spread across the population.

Nigeria and Angola are illustrative of the shortsighted fallacy about the profitability of exporting raw materials and a virtual mono-economy. Reports show that Nigeria’s crude oil exports to the US fell from $40 billion in 2008 to $2.7 billion last year, a drop of more than 90 percent.

Angola, another African country heavily dependent on huge crude oil exports to the US, has also experienced a dramatic fall in revenues, from $19 billion in 2008 to $5.2 billion last year. The effect on both economies has been to create huge funding gaps in their budgets, creating major shifts in resource allocations. The Economist raises pertinent scepticism and timely caution about the efficacy of undirected FDI as a likely driver of Africa’s economic development and growth.

l From Page 5

It observes of new investment, “Inevitably, Africa’s rise is being hyped. Boosters proclaim an ‘African century’ and talk of ‘the China of tomorrow’ or ‘a new India’. Sceptics retort that Africa has seen false dawns before. They fear that foreign investors will exploit locals and that the continent will be ‘not lifted but looted’. (My emphasis.) They also worry that many officials are corrupt, and that those who are straight often lack expertise, putting them at a disadvantage in negotiations with investors.” These are the pitfalls which afflict the continent even at policy level. That is why there is so much opposition to policies such as the land reform in Zimbabwe. That is why there is so much opposition to value addition and local beneficiation of minerals. Instead, daily we are exhorted to think only about easy of doing business, GDP growth and FDI figures in neighbouring countries, never mind whether those fortunate countries are being “lifted or looted”, whether our “straight” officials are being tricked, taken advantage of in negotiations with investors or the long-term interests of the country, indeed those of the continent, prevail.

Government has made it clear that Zimbabwe is ready for business. But we are not a whore. The policy is that Zimbabweans own their land and what’s underneath a 100 percent. That is where the 51/49 investment control and ownership ratio applies, with Zimbabwe’s contribution coming from resource-ownership. But the investor is still allowed to recoup his costs and make a fair profit for the sacrifice and risk. There are young entrepreneurs today who don’t want to be tied to farming, land ownership or mining. They want to venture into the service sector and ICT. That is why today’s millionaires are getting younger. And Government has been fairly clear on this, that is why the business ownership ratio is flexible and negotiated between locals and potential investors in all other sectors. In the case of special economic zones, it’s laissez faire. But then, like somebody once observed, we learn facts but not how to think. Where we attempt to do so, it is invariably in support of those who come to loot our resources. Add to this the rampant, almost 50/50 ratio of official aid to Africa against illicit financial outflows, the result is one of stagnation if not regression, in some cases, even as one read sunshine figures of huge FDI in neighbouring countries.

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