South Africa\u2019s central bank governor Lesetja Kganyago called for sweeping reforms to macroeconomic policies to boost economic growth, and lessen exchange rate volatility and sovereign risk.<\/p>\n
Proposed changes include structural reforms, deregulation of the nation\u2019s transport and electricity sectors, lowering the inflation target and a shift back to predictable, transparent fiscal policy rules.<\/p>\n
\u201cWith the rise in debt created by our efforts to confront weakening growth and failures of state enterprises, there is little chance of improving credit quality without new rules and more strategic use of macroeconomic policy,\u201d Kganyago said in a speech at the Peterson Institute for International Economics in Washington Tuesday.<\/p>\n
Lowering the inflation target to 3%, the bottom of the current range, will be a \u201cmajor benefit to fiscal policy\u201d and economic growth, the governor said. It will also reduce the potential for an upward drift in the real exchange rate and cut loan-service costs for the country\u2019s over-indebted public sector, he said.<\/p>\n
Public finances in Africa\u2019s most industrialized economy were hard hit by a decade of graft, known locally as state capture. A full house of junk credit ratings and rising government debt following a R254 billion relief package for power utility Eskom Holdings SOC Ltd. are adding to the strain.<\/p>\n
Meanwhile, severe power rationing because of Eskom\u2019s inability to meet demand and logistics-network constraints are eroding the nation\u2019s economic growth prospects, disrupting local supply chains and stoking inflation.<\/p>\n
That\u2019s spurring investors to place a premium on the local currency. The rand has weakened more than 7% against the dollar the year, making it the second worst performer in a basket of 16 major currencies tracked by Bloomberg.<\/p>\n
Few Friends<\/strong><\/p>\n The South African Reserve Bank\u2019s approach to pursuing better inflation outcomes that included highlighting constraints that lie outside the scope of monetary policy hasn\u2019t won it many friends \u201cbut has helped to foster a better public discussion about the challenges holding back our economy,\u201d Kganyago said.<\/p>\n His renewed call to lower the inflation target will probably be met with criticism by detractors of the central bank, including some politicians and labour groups, who have said it should do more to support South Africans and the domestic economy.<\/p>\n In January, Gwede Mantashe, the governing African National Congress\u2019s chairman, said the party agreed to change the central bank\u2019s mandate to include job creation, a prospect that rattled investors worried that modifications would weaken the Reserve Bank\u2019s independence and commitment to its inflation target.<\/p>\n President Cyril Ramaphosa later downplayed suggestions that the change was imminent, while Finance Minister Enoch Godongwana said an explicit mention of jobs in the central bank\u2019s remit won\u2019t affect its operations.<\/p>\n The central bank has lifted the key interest rate by 425 basis points since November 2021 in an attempt to tackle the worst global inflation shock in a generation.<\/p>\n At 7%, it remains above the 4.5% midpoint of the target range at which policymakers prefer to anchor inflation expectations. However, it\u2019s \u201coff the highs of a few months ago and compares favourably\u201d to the country\u2019s emerging-market peers, Kganyago said.<\/p>\n Still, average price-growth expectations for 2023 increased to 6.3% in the first quarter from 6.1% previously, according to a survey of business people, labour unions and households conducted by the Bureau for Economic Research.<\/p>\n That prompted the central bank to lift borrowing costs by a bigger-than-expected 50 basis points on March 30, when it raised its inflation forecast to 6% from 5.4%.<\/p>\n Forward-rate agreements used to speculate on borrowing costs show traders are pricing in a quarter-point hike in May, which would take the key rate to 8%.<\/p>\n
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