Economic implications of a manipulated rand


. . . spotlight on SA commercial banks’ forex rates scam


MASERU – Commercial banks in South Africa have come under the spotlight after they have been accused of profiting immensely from the illegal manipulation of foreign exchange rates for many years. Lesotho, like other smaller economies (Botswana, eSwatini and Namibia) near South Africa whose currencies are pegged against the Rand, is practically a sattelite economy of the regional powerhouse so much that if South Africa sneezes, Lesotho catches a cold. Manipulation involves artificially altering the value of the currency, either by lowering or enhancing it.

While central banks can legally engage in such practices, commercial banks in South Africa have been illegally flooding the market with more rands, thereby weakening the currency’s value, solely for their own benefit. Lehlohonolo Mantsi, an economist and  a doctoral student in Economics at the University of Sussex in the UK, explains that currency manipulation occurs when central banks artificially adjust the value of a currency, either by lowering it (devaluation) or increasing it. “This is done for countries to gain competitive advantage in trade since international trade happens through the exchange of money or these manipulations can be done to reach inflation targeting. All these are lawful when done by the Central Banks or the Reserve Bank in the case of South Africa,” he says.

However, he adds that in the current case some commercial banks in South Africa have agreed to have unlawfully engaged in this phenomenon of currency manipulation; basically by supplying more Rands onto the market which effectively weakened the value of that rand. This means if one buys something from abroad it becomes more expensive since one has to exchange the weak rands to a more valuable currency and vice versa. “So the clear implication of this is once the currency manipulation is done unlawfully it has implications on the purchasing power of the society (which is eroded) and it is a serious crime,” Mantsi says. According to South African media, implicated banks in the alleged rand manipulation generated about a trillion rand a day between 2007 and 2013, the Divisional Manager for Cartels at the Competition Commission Makgale Mohlala said this week.

It further states that five of the 28 banks in South Africa have admitted to taking part in the alleged foreign exchange manipulation 16 years ago. The other banks have gone to the courts to appeal whether South Africa’s competition authorities have the jurisdiction to prosecute or have the material facts to prosecute. “Either way it has an effect because at any given time in the trading market, there are buyers and sellers. South African firms that want to buy internationally will need to acquire the dollars in order for them to buy in the international market. If they buy in dollars that are expensive because of the manipulation it means they will be losing money.  “South Africans that want to sell in the international market have to sell using dollars, so if they have to sell using a dollar that has been weakened by manipulation it means they will be losing money,” says Divisional Manager for Cartels for Competition Commission, Makgale Mohlala.

It is believed that the 2013 cartel made a trillion rand a day due to price-fixing and market allocation by the 28 local and international banks. This week, the Competition Commission signed a settlement agreement with one of the banks implicated in the foreign exchange case. Standard Chartered Bank agreed to pay an administrative penalty of R42.7 million. However, trade union Giwusa says this is a slap on the wrist considering the huge amounts of money these banks made a day. “We do mean that the penalty . .  does not match the crime. But more than that, I submit it amounts to a travesty of justice. To many working-class and middle-class people who bear the brunt of this criminality and that is not only in terms of the swindle . . but also its consequences in the form of an increased . . cost of imports and which have created a cost of living crisis for the majority of people in this country,” says Giwusa President Mmametle Sebei.

The South African Federation of Trade Unions (SAFTU), on the other hand, have welcomed the penalty enforced by the commission. However, the union calls for more banks to be fined for their illicit actions. SAFTU national spokesperson Trevor Shaku said: “It is especially outrageous for these banks to evade the law in our country when they have already accepted guilt and paid funds in the United States of America currency . . . for many years the banks have argued that the competition tribunal has no jurisdiction using this to delay being held accountable for their actions in the currency manipulation, probably with the hope that it would help them evade the rule of law. These nefarious hopes were dealt a blow when, in March of this year, the competition tribunal ruled that it has the jurisdiction to preside over the matter.”

The Competition Commission says the banks need to answer for their actions in the courts. This is after the commission granted three banks leniency and settled with just two banks. The penalty fees for the two banks amount to over a hundred million rand. Competition Commission SA spokesperson Siyabulela Makhunga explains: “The appeal seeks to set aside the order of the Competition Tribunal, which ordered that all of these banks must begin to take a decision . . corporate citizenship that they must come before the tribunal and answer to the allegations in the period covering 2007 up to September 2013.

“They have been accused of contravening section 41b of the Competition Act in that they’ve manipulated the US dollar, and South African rand currency pair, and that they’ve divided markets and allocated customers.  “So, it is in the interest of millions of Africans that we begin to provide answers whether or not there was a single orchestrated conduct by these banks and whether or not the matter was in the first place, appealable, and this is what we’re going to leave to the collective wisdom of the three justices that have been presiding over the matter in the next few days.”

Looking at the Lesotho’s situation regarding the currency manipulation in South Africa Mantsi says that Lesotho’s case is a bit different since it has given away the monetary policy tools through running one-on-one peg with Rand. “It is almost impossible for Lesotho to engage in currency manipulation because we have given away the Monetary Policy tools by running that one to one peg with SA Rands. The fact is the rand is well recognized in the world markets but that’s not the case for the Loti,” he says, explaining that it is highly unlikely that Basotho can engage in currency manipulation.

He further emphasises that unlawful manipulation comes in different ways but the most prevalent is when the supply of currency is enhanced outside the laws of Central Banks. “So let’s take two scenarios and say there was that unlawful supply of the currency and then it becomes weak against other currencies; then it means buying products from other countries becomes very expensive. Conversely, if there is that reduction on supply then it means it becomes very hard to access that currency and the commodities quoted in that currency become very expensive thereby losing the competitiveness in the markets,” says Mantsi. “Currency manipulation has far reaching consequences if not done within the confinements of the law and not carefully done.”

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