Governments in emerging markets, including SA, did not use the recent commodity boom to build financial buffers against external shocks such as soaring inflation and the Russia/Ukraine war, and there are now unrealistic expectations of what central banks can do to solve fiscal problems, Reserve Bank governor Lesetja Kganyago said.
Policy makers "are starting to look at the central banks and they’re starting to get crazy ideas, because they think that maybe these chaps [central banks] … have been so good they could tame inflation. They might just tame our financing problems too," he said.
But Kganyago, who was speaking on Saturday at a public lecture at the annual IMF and World Bank meetings in Morocco, said central banks were not designed to solve fiscal problems. Because they had been successful in taming inflation, societal expectations of what they can do had increased and that was a risk.
The IMF and World Bank have sounded the alarm about high levels of government debt in many countries, with emerging markets and developing economies particularly vulnerable now that the era of cheap money has come to an end and interest rates are expected to stay higher for longer.
Kganyago said emerging-market treasuries had become addicted to cheap money, but when economies reopened after the Covid-19 pandemic and borrowing costs rose, many governments had mistakenly turned to central banks to solve fiscal pressures.
In SA, the failure to build buffers against shocks resulted in the government postponing crucial structural reforms required to achieve fiscal sustainability and higher levels of growth, Kganyago said.
Economists have been sounding the alarm about SA’s deteriorating fiscal position, as commodity prices tumble and the revenue overruns on which government has relied for the past two years come to an end.
The director of the IMF’s Africa department, Abebe Selassie, on Friday urged SA to keep its macroeconomic policies as nimble as possible and continue to implement meaningful structural reforms in order to address emerging fiscal pressures.
The fund, which revised SA’s 2023 growth outlook higher — to 0.9% in October from 0.6% in April because of lower-than-expected power outages in the second quarter — says deep-rooted reforms are required, particularly in network industries, in order for the country to reach higher growth rates.
"The calibration of macroeconomic policies has been very good and well balanced and the surprises have come more on the structural side in SA. including the hugely disruptive things that are going on in Eskom," Selassie said.
He added that for an economy and country with tremendous potential and such strong institutions but hobbled by energy challenges and high unemployment, it is really
disappointing that SA is not tapping into its potential.
"Going forward it will be important that SA does deep-rooted reforms that will address the challenges of the network industries. We have seen them [network industries] stifling exports, so in some cases the country has lost out in the commodity price boom in the last couple of years," Selassie said.
"I think the Reserve Bank and Treasury have been doing what they can to address the implications of all of these shocks."
Selassie was speaking at a presentation of the IMF’s economic outlook for Sub-Saharan Africa, which shows that despite the upward revision of SA’s growth prospects for 2023, the country’s average growth remains low compared with other countries in Sub-Saharan Africa. The region is estimated to grow by an average of 4%, with developing economies growing at 4.1% in 2023.
"Looking ahead, the relative size of SA (19.5% of regional GDP) means that average regional growth in 2024 will largely reflect SA’s coming recovery, which in turn will be driven by that country’s efforts to address pressing issues in the power sector," the report reads.
The IMF expects that the region will be hit by the slowing economy in China, which is a major credit provider and a significant source of foreign direct investment.
To circumvent the impact of China’s slowdown, the IMF says countries in the region should foster greater regional trade, implement structural reforms and diversify their economies.
Kganyago also used his lecture to urge wealthy nations to fund just energy transitions in poorer countries with high debt levels, not only because it is just but because it makes economic sense.
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