Pretoria - South Africa's biggest internal challenge is unemployment, currently in excess of 25 percent. There is no doubt that addressing this must be the national policy priority, says Reserve Bank Governor Gill Marcus.
The governor said that unemployment in the country was of a structural nature and was not something that could be solved by interest rates or the exchange rate alone.
"It incorrect to look at the interest rate or the exchange rate as the silver bullet that will solve the country's growth problems," she said on Tuesday.
Marcus warned that excessive focus on the exchange rate could result in the neglect of other factors that would constrain growth even with a properly valued exchange rate.
Structural reforms are required in skills development and education while skilled artisans are also needed.
She said that the response to the financial crisis when about a million jobs were lost shows that the country has a fair amount of labour market flexibility.
"However, if we are looking at job creation as a priority to address unemployment, then current labour legislation, which extends wage determination to all firms in a particular sector, needs to be examined regarding its effects on small and medium enterprises which should be a focus of growth and employment creation," said Marcus.
The governor said that the central bank is aware of a stronger currency and that the bank is ready to do what it can to alleviate the impact of a stronger currency, adding that "we need to recognise the limits to what can be done".
"The various forms of direct intervention on their own will not suffice, as international experience has suggested. Consideration should be given to combining intervention policies with direct special targeted support measures for those sectors of industry that are hardest hit by the exchange rate developments," Marcus said.
The governor said there was no doubt that the rand is overvalued relative to its fundamentals.
"While we clearly recognise the problem, the solution is not clear cut. The costs of intervention are not insignificant and involve serious policy choices.
"Nevertheless the Bank is engaging with the National Treasury and we are examining the effectiveness and appropriateness of what other countries are doing," Marcus said.
