Rand under new pressure

Governing South Africa: Six weeks of currency speculation pose problems for the ANC and its alliance partners
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IN TODAY'S South Africa even the "tannies" are taking to the streets. The tannie, or auntie, was the backbone of loyalty to the old South Africa and the National Party. At party gatherings tannies could be counted on to serve the food, embroider the party flag and send home-baked cakes to the boys patrolling apartheid's borders and harassing people in its townships.

But last week the tannies were on the march, dancing and chanting the slogans of South Africa's revolution. On the country's television sets, under a poster reading, "Loyalty doesn't buy bread," were hundreds of civil servants demanding that the government honour its 1996 pledge to increase public service salaries.

But the novelty of watching National Party die-hards protesting against an ever-tightening fiscal policy was lost on the country as it battled its way through a sixth successive week of speculative assaults on the currency.

Last week the rand fell 5.5 per cent to its lowest levels ever against the dollar and pound. Although the rand has fallen only 11 per cent against the dollar this year, the latest crisis has shaken the government and central bank far more than its previous dive in early 1996 when it fell 26 per cent in a few weeks.

When the government presented its growth, employment and redistribution strategy, it openly called it Thatcherite and told its election partners, the country's largest trade union federation and the Communist Party, that the policy was non-negotiable. The programme's targets promised to take the sting out of slashed government spending by generating thousands of jobs a year by the end of the century, lowering inflation and putting the economy on track for a 6-per-cent growth rate.

The ploy worked. The rand stabilised, inflation was reined in to about 5 percent, its lowest level since the 1970's, and the government's economic growth target of 6 per cent by the end of the century seemed achievable. But that mad scramble to save the rand in the autumn of 1996 prepared the ground for the assault on the rand that followed two years later.

The African National Congress (ANC) government's non-negotiable stance on an economic policy that was soon perceived as a self-imposed structural adjustment programme meant that it failed to win the support of its alliance partners.

Thabo Mbeki, the deputy president and heir to Nelson Mandela, last month defended the slow pace of privatisation, saying he had been advised by Margaret Thatcher, not to move too fast. The body-blow to Mr Mbeki's deliberate pace came at the end of May with the first attack on the rand that threatened to drive it below R5 to the dollar.

The government and central bank fell back on the tactics that saved the rand in 1996, but this time their confidence dwindled in the few days it took for them almost to exhaust the country's foreign reserves.

In less than a month the central bank threw about half its total foreign reserves, more than R26bn (pounds 2.8bn), into the breach to little avail. Punitive central bank interest rates soared as high as 30 per cent as the bank tried to mop up liquidity in the domestic money market and prevent speculators from borrowing rands to fund their attacks on the currency.

Econometrix, an economics consultancy, said last week that the currency crisis was likely to push inflation back up, in spite of interest rates that are 15 per cent ahead of inflation. The higher interest rates have forced them to cut their economic growth projections for this year by two-thirds to 1 percent. Growth is expected to limp up to 2 per cent next year, a third of the government's planned 6 percent.

Chris Stals, the governor of the central bank, last week threw up his hands in an admission of the bank's impotence in the face of currency speculators. "The present financial crisis is of course not a South African crisis but a global one," Mr Stals told the Johannesburg business community. "Had the roots of the problem been in the South African economy, it would have been easier to prescribe remedial action and apply appropriate policies that could guide the situation back to stability."

That explanation is unlikely to sit well with the marching tannies of Cape Town or the ANC's partners less than a year before the country's second democratic elections.

Jonathan Rosenthal is Industrial Editor of the South African newspaper Business Report, part of the Independent Newspapers group.