IMF throws its support behind the Reserve Bank

The International Monetary Fund says that South Africa would gain significant economic benefits by adopting a lower inflation target, but the process must be carefully managed.

“Shifting from the current target band to a lower point target at an appropriate time could help lower expectations and inflation,” the IMF said Tuesday in its regular update on the country’s economic health.

“Careful design and gradual implementation will be key to minimize potential near-term output costs.”

The South African Reserve Bank (SARB)Governor Lesetja Kganyago said last week that a review of its 3% to 6% inflation target band was getting close to the end.

The current system target range was introduced in 2000 and has not been updated since. It is believed that a lower inflation target will improve South Africa’s competitiveness.

That said, there has been no timeline for the talks between the National Treasury and the SARB, with the former setting the target.

The SARB currently aims to anchor inflation expectations at the midpoint of its band (4.5%) and Kganyago has previously advocated for lowering the target.

“A well-calibrated tolerance band can help provide flexibility given the volatile and shock-prone global environment,” said the IMF.

“Close coordination between the Treasury and the SARB and clear communication of policy plans will be critical to support credibility and anchor expectations.”

Other signs of life

The IMF also noted that the Government of National Unity (GNU) represents an opportunity for South Africa’s economy on a path toward higher and more inclusive growth.

“The GNU faces massive long-standing challenges: eroding standards of living, unacceptably high levels of unemployment, poverty, and inequality, lower life expectancy relative to peers, and rising public debt and debt servicing costs, which crowd out critical spending needs,” said the IMF.

“At the same time, South Africa’s diversified economy, abundant mineral wealth, flexible exchange rate, credible inflation-targeting framework, deep financial markets, and ability to issue domestic-currency debt are sources of strength.”

“The fresh mandate of the GNU offers a historic opportunity to build on these strengths and pursue ambitious reforms to safeguard macroeconomic stability and address impediments to growth to achieve higher standards of living for all.”

It added that the outlook for South Africa is improving, with activity recovering following a challenging 2023 characterised by load shedding and logistics woes.

Real GDP growth is projected to accelerate to 1.1% in 2024 and 1.5% in 2025 on the back of domestic demand supported by renewed post-election confidence, improved power generation (with no load shedding since end-March), and declining interest rates.

“The medium-term outlook critically depends on the GNU’s ability to fully implement structural reforms addressing impediments to growth.”

“Under the IMF baseline, growth is projected to reach 1.8% by the end of the decade, as investment recovers gradually on the back of ongoing electricity and logistics reform efforts.”

It also welcomed the GNU’s commitment to reducing fiscal deficits and stabilizing public debt.

That said, the IMF’s baseline shows that public spending is projected to decline more gradually given the support to State-Owned Enterprises (SOEs) and insufficiently specified consolidation measures in the MTBPS.

Without additional reforms, public debt is expected to continue to rise over the medium run.

With reporting from Bloomberg

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