Rand, rates 'good for deficit'
Pretoria - The fall in the value of South Africa's rand coupled with higher interest rates should help narrow the country's large current account deficit, but it remains at risk should commodity prices fall, the International Monetary Fund said on Monday.
"The adjustment of the rand should have an impact on the current account, together with the increase in interest rates in such a way that it will narrow the current account deficit over the next year," Saul Lizondo, the senior IMF adviser for Africa, told Reuters.
South Africa's rand has depreciated by about 14% against the US dollar so far this year, knocked by weaker emerging market sentiment and a current account shortfall of more than 6% of gross domestic product (GDP).
South Africa's central bank has hiked interest rates by 150 basis points to 9% since June to curb rising inflation in sub-Saharan Africa's biggest economy, and most analysts expect the upward cycle to continue into 2007.
IMF First Deputy Managing Director John Lipsky said high commodity prices had helped South Africa offset rising oil prices, keeping growth high. But its current account deficit put it at risk should commodity prices fall, he said.
"For South Africa, too steep a drop in its terms of trade is one of the potential risks going forward, particularly in light of the recent widening of the current account deficit," Lipsky told a conference on sub-Saharan Africa's regional economic outlook.
He also said strong capital inflows had helped finance the deficit but this could also change and was a risk.
News source: www.news24.co.za
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