Strong or Weak Currency for South Africa?

2655 Words Oct 28th, 2011 11 Pages
Topic 1. A weak currency or a strong currency for the South African economy? What are the pros and cons of a weak or a strong currency in South Africa? Discuss.

Table of Contents Page Number
1) Introduction……………………………………………………………………….….3

2) Benefits of a weak Rend in South Africa………………………………………....3

3) Shortcomings of a weak rand in South Africa……………………………….…...4

4) The Pros of a strong rand in South Africa……………………………………..…5

5) Cons of a strong currency………………………………………………………….7

6) Recommendation for South Africa economy……………………………………8

7) Conclusion……………………………………………………………………….…..9

8) References…………………………………………………………………………..10

1. Introduction
A strong currency
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SA cannot simultaneously lower the cost of its labor in a global context and raise the real disposable income of local workers. The reason companies benefit from a weaker exchange rate is that it improves their competitiveness. Unfortunately, if wages rise by as much as the currency has weakened the benefits of the weaker rand are quickly lost. Therefore, unless unions agree to contain wage increases to below the inflation rate, and take a real cut in wages when the rand depreciates, any plans to forcibly weaken the exchange rate are pointless. Madura (2009:172) indicates that the negative side of a weaker currency may include an upward inflationary pressure and increased prime lending rates by financial institutions. Thus, in the long run foreign companies will be driven out of the market as local goods seem to be cheap for local consumers; however, faced with little competition than before, local producers will increase prices culminating in an inflation stricken economy. Also a rand that is extremely weak would imply that most importers will seek domestic supply of goods. Domestic suppliers then have more power and are able to increase the selling price of goods. Moreover, less home grown business investments will flourish partly owing to deterring interest rates that shuns more investments.

4. The Pros of strong rand in S.A
Currencies rise and fall based upon the performance of the local economy and the sentiment of investors. If a

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