Should South Africa embark on a proposed currency depreciation of about R15 to R20 to the dollar to gain demand for the country’s exports, it would simply result in greater social unrest and political instability, Investec chief economist Annabel Bishop has asserted.

In an opinion piece released on Friday, she cautioned that rand depreciation would be a short-term solution that was outweighed by longer-term damage, which included higher inflation and the erosion of living standards.

Bishop said that, in attempting to increase a country’s share of world markets, the temptation often arose to use price competitiveness through either currency devaluation or keeping wages too low. 

“The unavoidable truth is that, under marked currency devaluation, the citizens of the country take a communal pay cut through the decreasing cost of local goods sold in world markets, and by paying substantially more for imports.

“Workers earn lower salaries as a result of these depreciations, without the ability to tap into economies of scale, as the cost of mechanisation of the production process is beyond the country’s reach owing to currency weakness,” she commented. 

As a result, Bishop warned that strike incidents increased.

She noted that, while a substantially depreciated currency was easy to achieve, the reversal of the unintended or destructive consequences of such depreciation were difficult to reverse.

In addition, the weakening of the currency for the immediate gratification of a more competitive rand, such as one that temporarily increased the country’s level of exports, would actually result in a substantial lowering of living standards for those already employed.

“A country’s standard of living is shaped by its output; the more it produces through the use of its resources – whether these are human, natural or capital – and the more efficient the production, the more there is to go around, as long as gains are not eroded by inflation,” she said.

Moreover, in a high-output economy, high levels of quality healthcare, education and public services would became easily affordable and per capita incomes would rise significantly in an environment of high growth and low inflation.

She added that the manufacture of high-quality, innovative products, which did not require currency depreciation to boost demand, allowed an economy to support high wages, a strong currency and attractive returns to capital, resulting in a sustainable, high standard of living.

“The current account deficit is large, at -6.4% of gross domestic product (GDP) at the last reading, not as a result of the trade deficit of -2.6% of GDP for the same period, but because the bulk of the current account deficit consists of dividend and coupon payments to foreigners holding South African equities and bonds,” said Bishop.

Foreign sell-offs of these equities and bonds would automatically collapse the current account deficit, as the foreign holders would no longer receive dividend and coupon payments on South African assets.

Moreover, a sharp currency depreciation would cause the trade deficit to balloon as the cost of oil imports and capital equipment climbed and the demand for exports dropped off as the input costs of labour, electricity and transport rose sharply.