Question

Question 2

Discuss the measures that can be put in place to ensure that the weakening rand does not affect growth negatively. In your discussion, highlight the importance the following-the balance of payments, policy around competition, South Africa’s economic strategy in relation to exports and imports and a possible diversification strategy.      [20 Marks]

Answer 1

How do we as a country know whether or

not we have enough foreign currency to

pay for our imports .Well just as your

bank can always tell you your balance

and keeps a record of all your

transactions, the South African Reserve

Bank keeps a record of South Africa's

imports and exports of goods and

services . This record is called the

current account in the balance of

payments.

In this account the Reserve Bank records

all of our merchandise exports are gold

exports service receipts that's foreign

currency earned exporting services

overseas and income receipts from

investments overseas as positive items

or deposits are merchandise imports

service imports and income payments are

regarded as negative items or

withdrawals from the current account .The

Reserve Bank also keeps a record of

South Africa's international financial

transactions as assets or liabilities in

the financial account of the balance of

payments in this account .They record net

direct investment financial investment

and other types of investment.Tthe South

African balance of payments or Bo P for

short is a summary of all the

transactions between South Africa and

the rest of the world but for now we're

only looking at the current account the   

goods and services that South Africa

buys and sells on the international

market we have to distinguish between

what's called the trade balance and the

balance on the current account .Let's

first deal with the trade balance.Tthe

trade balance is only concerned with

physical exports and import. In other

words goods or merchandise the trade

balance is the difference between

merchandise exports including gold and

merchandise imports. If we exports more

than we import we have what's called a

trade surplus but if our merchandise

exports including gold are less than our

merchandise imports we have a trade

deficit

The balance on the current account is

the net total of the various items this

now includes the trade of services as

well as income receipts. On top of

merchandise a current account surplus

occurs when a country earns more on

export of goods and services and income

receipts than it spends on these imports

A current account deficit exists when a

country spends more on imports than it

earns on exports and this would be

reflected as a negative balance on the

current account but how can we trade or

at least import anything if we have a

negative balance. Wouldn't that mean

we've run out of forex? This can be

explained by looking at the financial

account side of the balance of payments

People or corporations in other

countries can buy shares in South

African companies or a factory or other

capital intensive businesses. In the

country these are both examples of how

money or more accurately financial

investment capital can flow into South

Africa for example say someone has a

car factory in East London in the

Eastern Cape, the only one outside of

Germany. Now this is a flow of foreign

investment into South Africa. On the

other hand South Africans might buy

shares in or start businesses in other

countries. South African Breweries for

instance has beer factories in China.

These types of transaction are recorded

in the financial account which has three

main components.

Direct investment which

is investment in local enterprises

Portfolio investment which is the

acquisition of local shares or bonds for

financial gain and other investment

things like loans or credit agreements

which are an interest these three items

are all shown on a net basis in the

financial account. In other words the

outflows deducted from the inflows if

the inflow of all financial capital is

less than the outflow we have a

financial account deficit and obviously

if the inflow of financial capital

exceeds the outflow the nation has a

surplus on the financial account

so getting back to the question of how

can we afford to carry on importing

goods and services if we have a current

account deficit. If there's a surplus on

the other account on the financial

account the nation can borrow from this

account and carry on importing more than

it exports for a while anyway of course

we can only borrow from the one account

if it has a positive balance. A problem

will arise if there's a net outflow of

funds, this can happen if overseas

investors sell their South African

shares or shut down their local

businesses so it's risky to have a very

large trade deficit we never know when

there'll be an unexpected

Thanks.