South Africa’s overnight miracle four years in the making

The National Treasury and the Reserve Bank began discussions regarding a shift to a lower 3% inflation target rate in 2021, with the official move occurring in November 2025 during the Medium-Term Budget Policy Statement (MTBPS). 

This move promises to have significant benefits for South Africa in the long run, including faster economic growth, a more stable currency, and lower debt-servicing costs for the state, households, and businesses. 

Coupled with the success of the National Treasury’s policy of fiscal consolidation, which also kicked off in earnest in 2021, South Africa’s financial future appears better than many expected just a few years ago. 

Reserve Bank Governor Lesetja Kganyago explained how the four-year process to lower the inflation target came about after the bank conducted a macroeconomic review. 

“Fortunately, one does not have to manoeuvre with the National Treasury. We have got structures between the Treasury and the Bank that advise the minister and me,” Kganyago explained to Newzroom Afrika. 

“One of the most important committees is the Macroeconomic Standing Committee, and that committee has been working on a lower target for three years.” 

The conversation between the Reserve Bank and the National Treasury about lowering the inflation target began in earnest in 2021 after the government commissioned a macroeconomic review. 

This review recommended a move towards a lower inflation target that is a specific point and not a band to bring South Africa in line with its peers and developed economies. 

South Africa first began inflation targeting in 2000, with a 3% to 6% band, which was initially set to drift lower and narrower. However, this did not play out. 

“The work came to fruition this year, and eventually the minister and I agreed on the lowering of the target, which was announced in the MTBPS,” Kganyago said. 

Kganyago explained some of the benefits a lower target will have for South Africa, as well as some of the potential short-term costs. 

“With the adoption of the target, we did the work. In the short term, there will be some costs to economic output, but that will be in the first year,” Kganyago said. 

“In the outer two years, we showed that economic output will accelerate, the rand will strengthen, inflation will decline, and a more stable macroeconomic environment.” 

Crucially for the government and households, as inflation comes down towards the new target, so will the cost of servicing debt as interest rates are cut further. 

“Lower inflation means that the South African Reserve Bank has more room to lower its policy rate, making the cost of borrowing lower. Lower inflation leads to lower interest rates,” Kganyago explained. 

This significantly loosens financial conditions in South Africa, making it cheaper to borrow money while also reducing current debt repayments. 

This frees up spending from businesses, households, and the government, significantly boosting economic growth in South Africa.

The National Treasury estimates that a 100 basis points reduction in interest rates saves the government R20 billion in reduced debt-servicing costs. 

Standard Bank has previously estimated that a 50-basis-point reduction in interest rates frees up around R8 billion in household spending, due to lower loan repayments.

Government playing its part

The government has played its part in shoring up South Africa’s finances, with the National Treasury’s policy of fiscal consolidation bearing fruit. 

Enoch Godongwana’s appointment to Finance Minister in 2021 coincided with moves to lower the inflation target and implement fiscal consolidation. 

In the second year of his second term as Finance Minister, Godongwana appears to be performing a similar role to Trevor Manuel in the 2000s. 

Godongwana has presided over the painful process of fiscal consolidation, which entails raising tax revenue and limiting government spending. spending to balance the budget and stabilise the debt load. 

The painful process is necessary after 15 years of mismanagement, which resulted in skyrocketing government spending, with very little to show for it. 

South Africa’s economy stagnated, averaging an annual growth rate of 0.8% for the past decade, pushing government debt as a share of GDP to over 77%. 

Government debt as a share of GDP has more than tripled since Manuel left office in 2009, when it was a mere 26% of GDP and declining.

The National Treasury, after four years of work, now has the government closer than ever to stabilising the debt load as a share of GDP and beginning to reduce it. 

South Africa is set to record a wider primary budget surplus of 0.9% of GDP in the current financial year, with this widening to over 2% in the next three years. 

This means the government is bringing in more revenue than it is spending, excluding debt-servicing costs. It is on track to do this for three years in a row. 

A primary budget surplus will result in the government’s debt pile stabilising at 77.9% of GDP in the current year before gradually declining. In effect, it halts growth in the debt pile. 

With faster economic growth forecasted, the picture should improve further as Godongwana’s department remains dedicated to driving reform through Operation Vulindlela. 

Coupled with a lower inflation target, the government’s debt-servicing burden should ease, freeing up more capital to spend on productive areas of the budget or paying down its debt.

“So, we have had a difficult year, full of uncertainty, but South Africa managed to come through well, and that we saw has also been recognised by ratings agencies,” Kganyago said. 

S&P Global upgraded South Africa’s credit rating, bringing it closer to investment grade, and maintaining its positive outlook, which indicates that further improvements are around the corner. 

Reaching investment grade is critical for an economy, as many global pension funds, which sit on trillions of dollars, are not allowed to invest in sub-investment-grade assets. 

The return of some of these assets to South Africa would substantially boost economic growth.