South Africa's currency hitting historic lows

Rand's drop in value puts basic goods out of people's reach

January 16, 2002|By John Murphy | John Murphy,SUN FOREIGN STAFF

JOHANNESBURG, South Africa - Renowned for its safaris, bustling black townships and new democracy, South Africa is now earning a new, somewhat dubious distinction as one of the cheapest countries in the world.

Consider this: Big Macs cost less here than any other place on the planet - 82 cents. You can dine on a three-course steak dinner at one of Johannesburg's top restaurants for less than $10. A bottle of vintage wine (with a cork, not a twist top) will set you back as little as $3. A ticket to a movie is $2.50.

The prices are good news only to tourists. Among South Africans, you won't hear many celebrations because what's driving down prices is the weakening South African currency, the rand. The buying power of 43 million South Africans has diminished, pushing prices of even the most basic items out of reach of many.

Once one of the world's most-respected currencies, the rand is plummeting to its lowest levels in history against the dollar, the British pound and the euro. And no one can quite explain why.

In 1990, when Nelson Mandela was freed from prison, one dollar bought 2.5 rand. A dozen years later, a dollar buys nearly 12 rand. Since September, the rand has experienced one of its sharpest declines, losing 40 percent of its value against the dollar. In December, it hit a new low of 13.85 to one dollar, before recovering to its current level.

Based on The Economist magazine's annual Big Mac index, South Africa has one of the world's most undervalued currencies. The index compares the price of the McDonald's hamburger around the world as a measure of the buying power of domestic currencies. A Big Mac in South Africa costs 82 cents, nearly 70 percent less than in the United States, where the average price is $2.59.

"The falling rand, when looked at in the context of the Big Mac index, makes South Africa arguably one of the cheapest destinations in the world in pound and dollar terms," said Owen Leed, chief marketing director for South African Tourism, who is hoping the less-valuable rand will draw more visitors to South Africa this year.

There is more than cheap burgers to attract visitors. At Johannesburg's exclusive Butcher Shop & Grill, where diners must book a table one week in advance and no one under 14 is allowed, a three-course meal of snails, the most expensive steak on the menu and a Caesar salad is just $9.94. Wash it all down with a bottle of merlot for another $5.60.

Prices are so low that it is not uncommon to see tourists laugh when they receive a bill here. A Johannesburg newspaper recently featured a story about foreign tourists, shocked by the favorable exchange rate, leaving huge tips at bars and restaurants.

But for South Africans who are not waiters or bartenders, the sharp and steady decline of their money has been a disaster.

Imported fuel and agricultural products are driving up transportation and food costs. One of the hardest-hit items is maize meal, a cornmeal that is cooked into a thick paste called pap, a staple in most black households. The price of the meal has shot up more than 100 percent in the past year, partly due to the rand's slide. The price of bread has also increased.

"We used to buy bread for one rand a loaf. Now it's almost four rand. We can't afford it," says Cyprian Mathole, 47, a day worker living in Johannesburg. He said he has given up smoking to help save money.

Middle-class South Africans planning trips abroad are discovering that they cannot afford to buy dollars, pounds or euros.

Under pressure to save the ailing currency, President Thabo Mbeki is launching a commission this week to investigate what is causing the rand's slide.

Pressure for an investigation came from the business community, afraid the weak rand would lead to higher interest rates and inflation. In a letter to Mbeki this month, the head of the South African Chamber of Business alleged that people and organizations had used "dubious financial methods and instruments" to manipulate the rand for their own profit.

Economists, however, remain puzzled about what caused the currency to lose value. The last time the rand nose-dived so steeply was in 1986, when South Africa was wracked by anti-apartheid protests and nearly defaulted on its debt repayments. In contrast, South Africa has been calm and stable in recent years. By all measures, the country is financially sound, analysts say.

Some economists blame the problem on nervousness after the terrorist attacks of Sept. 11, the debt crisis in Argentina, currency speculators, and political and economic turmoil in neighboring Zimbabwe.

Many observers say they doubt the commission will root out a culprit because there might not be one. "If there is anything to be uncovered, they will uncover it. But it's a big if," said Merton Dagut, a professor of economics at the University of the Witwatersrand in Johannesburg.

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