SA’s commodity boom, which is giving rise to demand for more spending, will burst like others before and the government should resist temptation to use it as a reason to delay fiscal consolidation, Reserve Bank governor Lesetja Kganyago said.
“Don't adjust your spending thinking you are wealthier than you are,” Kganyago said on Friday during a virtual panel discussion that also involved Mexico’s former central bank governor Agustín Carstens and head of the US Federal Reserve Jay Powell. “The boom is not a permanent one.”
SA’s economy, which slumped 6.4% and lost more than 1-million jobs in the wake of the Covid-19 outbreak, has got a breather from a surge in commodity prices, with finance minister Enoch Godongwana now widely expected to present a more rosy outlook for the government finances on November 4 than his predecessor Tito Mboweni did in February.
That has led to growing calls for the government, which in February was forecasting a budget deficit of 14% for 2021 and a debt-to-GDP ratio approaching 90% by 2025/2026, to institute a basic-income grant.
Kganyago said this would be a mistake and governments should avoid complacency and instead pursue the reforms that were needed even before the outbreak of Covid-19, and have since been delayed. With the cost of borrowing set to rise as policy normalises globally, it is crucial for governments to get their fiscal positions under control.
“The era of cheap money has made other policymakers complacent,” he said, speaking at the end of a conference organised together with the Bank of International Settlements to mark the 100th anniversary of SA’s central bank.
Carstens, who currently serves as the the general manager of the BIS, which acts as a bank for central banks, praised SA’s central bank for its success in containing inflation.
Powell said the US central bank will be patient in assessing when to increase interest rates even as it judges that the economy has been recovering well enough for it to start its policy of tapering bond purchases. It will act if it sees risks of inflation moving consistently to a higher level, he said.
The potential of higher rates in the US has been cited as one of the biggest risks for emerging markets such as SA as it could draw capital away from their riskier assets, weakening currencies and increasing chances of an acceleration in inflation.
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