Publication: Business Report Issued: Date: 2004-07-22 Reporter: Lynda Loxton

Cost of the Arms Deal is as Volatile as the Rand, but Fears Remain

 

Publication 

Business Report

Date 2004-07-22

Reporter

Lynda Loxton

Web Link

www.busrep.co.za

 

Cape Town - Given the volatility of the rand against at least four key currencies and the sheer complexity of the deals within deals in the R30 billion arms procurement package signed by the government in 1998, no economist worth their salt was prepared to guess yesterday how much the strength of the rand against the dollar could save South Africa on the total package.

But an overall consensus was: "Not much ... it could end up costing about R40 billion."

The facts speak for themselves. In 1998, the rand averaged R5.57 against the dollar but by 2001/02 it was hitting R11 and R12 to the dollar before beginning its revival to its current level just above the 1998 levels.

But the package was not just denominated in dollars. Also included, in widely differing percentages, were the British pound, the Swedish kronor, the euro and the rand itself, which complicates any calculation enormously.

According to Jane's Defence Weekly, the original value of the deal to contractors has fluctuated from R25.3 billion in 1999 to R36.9 billion in 2002 and R31.1 billion in 2003. This year, it could come out at about R29 billion. These prices are before VAT, excise duties and interest payments.

The economists polled said all these factors explained why the public was continuously fed vastly different figures about how much the deal would cost taxpayers, ranging from R29 billion to about R60 billion.

They also did not take into account the offset deals involved, some of which had a high import content - such as the building of the new harbour at Coega - which would have benefited from the stronger rand.

Some equipment was delivered when the rand was at its worst, while other goods were due for delivery with the rand slightly better, with payment made at the ruling exchange rate at the time of delivery.

This clause raised eyebrows when the deal was signed and many expected the rand to continue weakening, thus pushing up total costs. This year they have been proved wrong but some economists are uneasy about how long the rand boom will continue and fear how far it could then fall.

With acknowledgements to Lynda Loxton and the Business Report.