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4 Jan 1995
Dear Sir
THE CONSTITUTION-MAKING PROCESS.,FINANCIAL
INSTITUTIONS AND PUBLIC ENTERPRISES
1. May the suggestion
be respectfully submitted to your Committee that the feasibility or otherwise be
considered of provisions in
the Constitution requiring the Reserve Bank., the
Finance and Fiscal Commission and the budget to avoid deficits In South Afrioaga
external balance of payments on current account and to that end, to ensure that
total annual savings should not fall short of total
annual investment and that
Interest rates policy should be In accord therewith.
2, In support of the
above, the following points are made
21,1 Any deficit in SA's external
balance of payments on current account is necessarily equal to the deficit
between total internal
sav:Lnge and total internal Investment.
2.2 A deficit
in savings in relation to investment can be dealt with by Increases in the
structure of interest rates thus when (as
now) there
is a deficit as between
e and Imports of goods and services (i.e. a current account deficit). an
:increase in interest rates will
remedy the saving-interest deficit and at the
time the export-:import deficit,
2.3 Among some users of capital there is
antipathy towards rises in interest rates,, while among many generators of
capital (:including
the elderly) interest rate Increases are welcome, But It is
a responsible view that the interest rate structure should at all times
be such
as to savings-investment deficits and thus, automatically,, import-export
deficits. It is a source of concern that real
SA bank prim overdraft interest
rates may (as at present) be little or no higher then many overseas rates The
need to avoid these
deficits lies in the fact that (,at My rate In the absence
of large net capital Inflow from abroad) such deficits lead inevitably
to
-
(a) depreciation of the rand against other currencies, which in turn causes
further hesitation among potential investors overseas
i and
(b) inflation in
SA because more is spent m capital goods than is produced by savings @
a.
2.5 Avoidance of the deficits will encourage foreign investment In the SA
economy ; and In due course It will thus also encourage
a return to a single
currency and a single exchange rate system.
3. While in no way
dogmatically claiming the foregoing to be unchangeable, the undersigned
earnestly feels that there is much merit
In considering whether policies of
avoiding deficits in the savings-investment balance, &M thus avoiding
current account balance
of payments deficits should be suitably entrenched in
the Cmotitution.
Yours faithfully
Herbert S. Mabin
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