Figure 1: Selected emerging economy exchange rates, percentage change against the US dollar: January 2021 compared to January 2023

Extract A: Can South Africa's central bank curb further rand depreciation?

At an annual rate of 7.8%, South Africa's inflation is concerning, driven heavily by global supply shocks. This represents a critical challenge for the struggling economy, whose currency (the South African rand) lost nearly 28% of its value against the US dollar over the two-year period ending January 2023. The South African Reserve Bank (SARB) faces intense pressure; while it may want to pause tightening monetary policy to support a weak domestic labor market, the risk of a currency spiral remains high. South Africa's public and private sectors hold significant debt denominated in foreign currencies, particularly US dollars. Consequently, the government and the SARB are highly sensitive to sharp depreciations that threaten financial stability and raise the cost of servicing foreign debts, while also trying to restore international investor confidence.

Consumer price increases have placed enormous strain on households, though some analysts hope price pressures will moderate if the rand stabilizes. Indeed, the rand experienced a brief recovery after the SARB raised its benchmark repo rate. However, some policymakers prefer lower borrowing costs to cushion the nation's high unemployment rate and stimulate credit-led domestic demand. Some economists argue that further aggressive rate hikes would be counterproductive, given that South Africa's real GDP growth is already projected to slow into near-stagnation.

Over the longer term, South Africa's structural challenges—such as energy shortages and logistics bottle-necks—weigh on its growth potential compared to other emerging markets. Between 2023 and 2050, South Africa's economy is projected to grow by an annual average of just 1.5%, compared to 2.2% for Brazil and 5.4% for India. GDP per capita growth is expected to be even lower, underperforming peer emerging nations and limiting progress in reducing poverty and inequality.