IMF says rand 'overvalued'
Oct 22 2008 16:48
Washington - The International Monetary Fund has said on Wednesday that the rand may be overvalued.
The IMF said South Africa's floating exchange-rate policy was helping shelter it from external shocks but noted there were questions about the value of its currency.
"While acknowledging the considerable uncertainty surrounding estimates of the equilibrium value of the currency, directors took note of the staff's tentative assessment that the currency may be moderately overvalued," the IMF said in a review of SA's prospects.
The IMF's report was completed on August 15 2008.
By 18:10 the rand was bid at R11.2763/$ from a previous close of R10.6550. It was bid at R14.4810/€ from a previous R13.8936 and at R18.2403/£ from R17.7622 before.
South Africa faced intensifying inflation pressures that were making its economy more vulnerable to a downturn, the IMF added.
"In particular, global food and fuel price shocks have boosted inflation and the external current account deficit, while economic growth has slowed in the context of still-high levels of unemployment and inequality," the IMF said.
It also warned that a deteriorating economic outlook has heightened the risk that capital inflows to the country will slow down.
The IMF praised South Africa's government for practising what it described as sound macroeconomic policies and an open policy framework. "South Africa's economic fundamentals remain strong, the external debt is low, and the financial system is resilient," it said.
The IMF said that given the importance of sustaining investor confidence and the limited scope for raising private saving, the government needed to increase public saving "to bring the structural public sector borrowing requirement to zero over the next few years."
It suggested that the way to achieve that goal was to restrain current spending and to increase spending efficiency, including by seeking more public-private partnerships to work on needed infrastructure projects.
The IMF said it supported South African authorities' policy of gradually building up currency reserves.
