Aron, J., I. Elbadawi, and B. Kahn, 1997, “Determinants of the Real Exchange Rate in South Africa,” Centre for Study of African Economies Working Paper, WPS/97-16, University of Oxford.
Turner, A.G., and S.S. Golub, 1997, “Towards a System of Multilateral Unit Labor Cost-Based Competitiveness Indicators for Advanced, Developing and Transition Economies, IMF Working Paper, WP/97/151.
APPENDIX: Pass-through from Exchange Rates to Domestic Prices
Earlier analysis by the staff drew attention to the relatively limited response of import and consumer prices to the large depreciation of the rand in 1996. Extending the analysis over a longer time period, from 1992 to 1997, and taking into account the trade liberalization that has occurred during this period, the following conclusions emerge:
Between 1992 and 1997, the pass through from foreign prices to imported prices was between 77 percent and 85 percent (see figure below), depending on how foreign prices are measured.
When a lower bound estimate for tariff reductions during this period is incorporated, the pass-through was larger, between 84 percent and 92 percent. Tariff reductions are captured through changes in the ratio of duties collected to imports. This lower bound impact of trade liberalization between 1992 and 1997 is equivalent to a decline of about 3.5 percentage points in import prices; it is a lower bound because insofar as liberalization has entailed the replacement of quantitative restrictions (QRs) by equivalent tariffs, measured duty collections will be higher, biasing downwards the impact of tariff reduction. If it is assumed that the elimination of QRs has contributed as much as tariff cuts, the pass-through will be between 90 percent and 100 percent.
However, the wedge between changes in foreign prices and in the imported component of producer prices remains high, with only about 56 percent of the foreign price increase being reflected in imported producer prices.
Thus, over the period 1992-1997, exchange rate changes are almost fully reflected in domestic prices, once a sufficiently long period is considered to allow for lagged impacts, and the impact of trade liberalization on prices is taken into account. This is consistent with the conclusion in last year’s staff report that over time fuller pass-through (than was evident in 1996) would make itself manifest. However, it is puzzling why producer price increases are so much lower than increases in other prices.
Growth, Employment and Redistribution: A Macroeconomic Strategy, 1996, page 3.
Issues associated with the practical specification of real exchange rate measures are discussed in detail in Turner and Golub (1997).
Implied partner country import growth is calculated from the actual growth in imports of goods (excluding oil) in countries which together account for more than 95 percent of trade with South Africa. Weights are based on each country’s share in South Africa’s exports.
Calculated as the nominal effective exchange rate deflated by relative producer prices.
Changes in taste and/or technology may also have triggered faster growth in demand for South Africa’s exports.
Over the period 1994-96, specific trading partners can be identified for only around 76 percent of South Africa’s total merchandise trade. For simplicity, that part of merchandise exports and imports for which a partner could not be identified has been pro-rated across all partners in accordance with their share in identified trade.
Australia, Belgium, Brazil, Canada, France, Germany, Hong Kong, Italy, Japan, the Netherlands, Spain, Switzerland, Sweden, Taiwan, United Kingdom, and the United States.
It remains to be seen whether the large nominal depreciation of the rand since the latter part of 1997 will translate into a sustainable real depreciation.
For a detailed discussion of the relative merits of different approaches to estimating the real exchange rate, see Turner and Golub (1997) and Zanello and Desruelle (1997).
Data on unit labor costs are only available for 16 countries. Weights are calculated by dividing each country’s DOT weight by the sum of the DOT weights of the 16 countries.
In addition to the lifting of sanctions in 1994, major easings in exchange controls on capital transactions occurred since 1995, import duties were reduced significantly with the abolition of the import surcharge in 1995, most remaining quantitative restrictions on imports were replaced by tariffs by 1996, and the price of gold fell sharply in 1997.
Exports to Asia appear to have been boosted in part by the start-up of the so-called “mega projects,” and by some diversion of nonferrous metal exports from traditional European markets to Asia.
Progress on free trade agreements with the EU, and within SADC, would likely provide a fillip to South Africa’s exports in the medium term but at this stage the final form of these agreements remain unknown.