South Africans are paying the price of high inflation and interest rates for the government’s failure to build adequate financial buffers against external shocks such as global inflation and the Russia-Ukraine war.
This is feedback from the South African Reserve Bank Governor, Lesetja Kganyago, who spoke at a public lecture this weekend during the annual IMF and World Bank meetings.
Kganyago said emerging economies, including South Africa, failed to capitalise on the recent commodity boom to build financial buffers against external shocks.
In particular, the South African government failed to use the additional tax collected during the commodity boom from mining companies to pay off some of its debt or grow the economy.
Instead, the government chose to continue paying the Social Relief of Distress Grant.
The IMF and World Bank warned that high levels of government debt in emerging economies pose a significant risk to the global economy.
This is especially true now that the era of cheap money has come to an end, and interest rates are expected to remain high for longer, said Kganyago.
When their economies reopened and borrowing costs rose, many governments mistakenly turned to central banks to solve their fiscal problems.
Policymakers “are starting to look at the central banks, and they’re starting to get crazy ideas because they think that maybe these chaps have been so good they could tame inflation. They might just tame our financing problems, too,” he said.
In South Africa, the government’s failure to build buffers against shocks has postponed crucial structural reforms needed to achieve fiscal sustainability and higher levels of growth.
Kganyago said that it is unrealistic to expect the Reserve Bank to be able to address fiscal crises as it is not designed to do that.
On the sidelines of the annual meetings, Kganyago repeated his call for the government to address its poor fiscal policy and rebuild its financial buffers.
Kganyago said that governments across the world need to help central banks unwind the fiscal stimulus they implemented during the Covid pandemic.
The governor said the current spike in inflation was caused by the unusually large supply-demand imbalances caused by sudden restrictions and relaxations on economic activity.
“Fiscal authorities have got to be rebuilding their fiscal buffers so that the process of disinflation is assisted.”
“Failure to disinflate economies would result in higher financing costs for the fiscal authorities and, by extension, all of us. This also applies to South Africa.”
Kganyago said he was unsure whether more interest rate hikes were on the horizon but was clear that “the disinflation job is not yet done”.
Risks to the Reserve Bank’s outlook included high oil prices, global financial conditions, the strong dollar, and food prices reversing their downward trend.