South Africa is a country found on the southernmost point of the African continent. It borders the Atlantic Ocean to the south and western coasts, and the Indian Ocean to the east. South Africa is a multi-ethnic country with about 56 million people. The official currency is the ZAR (ISO code), the South African Rand. The South African Rand is used in neighboring countries such as Lesotho, Namibia, and Swaziland, although they have their respective currencies.
History of the Rand
The rand was first used in 1961 during which period the Union of South Africa was formed. The new currency was used to replace the South African pound, and served to eliminate the denominations of shillings, pounds, and pence. It was used as the legal tender whereby 1 pound was equivalent to 2 rands, and 10 shillings was exchanged for a single rand. To create awareness about the new money form and currency, the government introduced a mascot called Decimal Dan, coupled with intensive radio and media campaigns to inform the masses. The rand experienced a stable exchange rate since its inception until the beginning of the 1980s. Since 1961 until 1971, the rand was equivalent to USD 1.40, which was relatively high in value. The political pressures of the 1980s alongside sanctions placed against South Africa because of the apartheid led to a high depreciation of the rand. The high inflation rates also contributed majorly to the downslide of the currency.
As of March 1982, the currency traded above R 2 per dollar. In the early 1990s, the political uncertainties further weakened the currency and fastened the depreciation level of the rand. During the 1994 general election, the rand experienced one of its weakest points coupled with a series of national reforms which included the election of a new governor to the Reserve Bank. In 2001, the currency slid to its weakest level in history following a series of local events and international events.
Factors Causing Depreciation
There were several factors contributing to the downslide of the currency over time. Firstly, South Africa’s account deficit was worsening at a high rate and widened to a record 7.3% of GDP which represents a 37-year high. Secondly, a five-year inflation rate stood close to 9%. Most global investors were concerned about the thriving subprime crisis and chose other markets or favorable environments.
The energy crisis also contributed to the weakening of the rand, since the country’s Eskom electricity could not meet the high energy demands. The rand continues to be affected by major global changes such as the UK leaving the European union. This is because of South Africa’s high trade deficit compared to other countries.