Let the markets dictate the exchange rate of the currency

In “No action can be better than the wrong action,” (Business Day, Feb. 28, 2011) professor Gavin Keeton from Rhodes University argues, “In recent times the [SA] government recognised the limitations of its abilities in one important policy area, namely trying to weaken an overvalued exchange rate”.

Indeed, no government official has sufficient knowledge or information to determine what an “appropriate” level for the exchange rate should be. And given that the exchange rate is simply the price of one currency in terms of another, professor Keeton’s hits on a wider issue. Governments the world over do not have sufficient information to determine prices in general. Artificially lowering a price below its market clearing level creates shortages and raising it above that level creates a surplus. Prof Keeton goes on to say, “The decision [not to intervene] was fortunate, as global mood that favoured large capital inflow into emerging bond markets seems to have changed. Foreigners have been net sellers of SA bonds since October last year and last month were also net sellers of equities”.

Author: Jasson Urbach is an economist with the Free Market Foundation. The views expressed in the article are the author’s.

FMF Policy Bulletin/ 1 March 2011