Without getting into the facts of the matter, currency manipulation has far-reaching effects on the major economic participants such as consumers, businesses, and the government. Some important aspects to note about this topic are stated below.
- About the “Rand Cartel” case
Simply put, the Rand Cartel case involves 28 local and international commercial banks that have allegedly contravened section 4(1)(b) of the Competition Act “the Act”. In terms of the Act thereof, it is prohibited for companies to (i) directly or indirectly fix a purchase price or selling price or any other trading condition, and to (ii) divide markets by allocating customers, suppliers or territories. The allegations reveal that by rigging the value of the Rand against the US dollar, commercial banks made nearly R1 trillion a day between, 2007 and 2013. Such anti-competitive conduct has a knock-on effect on several parts of the economy including the prices of imports and exports, financial assets, and to some extent, government debt and foreign direct investment.
- How does currency manipulation take place?
Currency manipulation occurs when market participants, in this case, “commercial banks”, fix prices and divide markets by allocating customers. At the trading level, this includes fixing bids, offers, bid-offer spreads and consequently the spot exchange rate.
- What are the economic implications of currency manipulation?
- High Cost of living
A manipulation of the domestic currency affects the prices of imports and exports which can ultimately result in a cost-of-living crisis. To put this into context, the manipulation of the Rand can either result in a weaker or stronger Rand value. A weaker Rand stimulates exports and makes imports more expensive; conversely, a stronger Rand hampers exports and makes imports cheaper. When imports become expensive as a result of a weaker Rand, this increases the prices of domestic goods and consequently, the cost of living. When exports become expensive as a result of a stronger Rand, small and medium businesses that export goods abroad become less competitive globally. This implies that whether the Rand manipulation resulted in a weaker or stronger Rand, this had adverse effects on both consumers and businesses.
- Foreign direct investment
Every country needs a relatively stable domestic currency to attract capital from foreign investors. As previously stated, the manipulation of the Rand can either result in a weaker or stronger Rand value. When the value of the Rand appreciates, the expected values of investment projects are reduced, and foreign investment is reduced accordingly. When the value of the Rand depreciates, South Africa’s wages and production costs relative to those of its foreign counterparts are reduced, which gives South Africa a “locational advantage” for receiving productive capacity investments to the benefit of South African citizens.
- Government debt
The South African government borrows money in foreign currency to meet its foreign currency commitments. As such, a proportion of the South African government debt is foreign currency dominated. A stronger Rand value reduces the foreign-currency-dominated value of the government debt while a weaker Rand value increases the foreign-currency-dominated value of the government debt. This will ultimately affect the government’s financial position, including that of the domestic companies that engage in foreign exchange transactions, either in a good or bad way.
- Interest rates
The value of the domestic currency in the foreign exchange market is a key consideration for central banks when they set monetary policy. Directly or indirectly, exchange rate levels may play a role in the interest rate you pay on your mortgage, the returns on your investment portfolio, the price of groceries at your local supermarket, and even your job prospects.
Below is an overview of the USD/ZAR exchange rate between 2007 and 2013. It is sufficient to note that the global economy was largely volatile between 2007 and 2010 amid the global financial crisis. As such, variations in the domestic currency during this period can be explained by several macroeconomic factors. Assuming that a larger proportion of the variations in the Rand were influenced by the conduct of commercial banks, it is evident that the manipulation of the Rand resulted in a relatively weaker Rand for most parts of the period under consideration. Holding other things constant, this contributed positively to the prices of exports and inflows of foreign direct investment. On the downside, this raised the prices of imports and consequently the cost of living for ordinary South African citizens.
Figure 1: USD/ZAR exchange rate
Image Source: South African Reserve Bank
If/ when the Competition Commission fine these commercial banks, will it have any positive impact on the local economy? ie: the cost of living at large
The Commission investigates/prosecutes companies that engage in anti-competitive conduct. The Tribunal is the one that decides on the fine. However the funds go into the National Revenue Fund.