Finance minister Enoch Godongwana has asked the National Treasury and the Reserve Bank to determine the full impact of a transition to a lower inflation target on consumers and the economy.
In an interview with Business Times on Wednesday, Godongwana said a macro standing committee — a joint platform between Treasury and the central bank — has recommended lowering the target, but because the process towards a lower target would be a painful one for South Africans, its impact must be measured before the target can be moved.
“It may well be that it makes sense in economic terms to have a lower inflation target,” he said. “It leads to the benefit of the economy as a whole.“But you don’t get there in a manner which is painless. To get there is tough. The question then is: what needs to be done?”
South Africa has set an inflation target band of between 3% and 6%. However, Reserve Bank governor Lesetja Kganyago has been arguing the merits of a lower target.
“South Africa’s inflation target is out of sync,” he told Bloomberg Television last week at the annual International Monetary Fund (IMF) and World Bank meetings in Washington.“What is clear is that if we revise the target, the target can only be revised lower.”
The current target was set in 2000. Of late, the Bank has been working to get inflation within the midpoint of the target, and it slowed down to 3.8% in September, raising hopes of another interest rate cut.
Godongwana said until an impact assessment has been undertaken, the inflation target would remain as is. “If you want ... a lower target, to transition to that is not going to be a painless exercise. What is the pain that we are going to suffer and how are we going to cushion the blow?”
Following the presentation of the medium-term budget policy statement (MTBPS) on Wednesday, the Treasury’s head of economic policy, Boipuso Modise, updated investors on the work they and the central bank have been doing on an inflation target adjustment. She said the outcome would be communicated to the market once the work is done.
“The mandate has not changed. Currently, the two teams between the Reserve Bank and the Treasury, through several forums, including the macro standing committee, are ... continuing to monitor the situation through empirical analysis to satisfy ourselves collectively on what the right policy decision is and how we go about doing that in a way that supports our growth aspirations,” Modise said.
The head of the budget office, Edgar Sishi, said the fiscal anchor was focused on a primary surplus and options to secure the benefits of debt sustainability. He said informal engagements with experts were ongoing to produce a formal discussion paper.
On Wednesday, the Treasury revised growth downwards to 1.1% from the 1.3% forecast in August. GDP growth is expected to average 1.8% over the next three years. There was also a R22.3bn tax revenue shortfall due to lower fuel levy collections and a drop in VAT collected on imports.
If you want ... a lower target, to transition to that is not going to be a painless exercise. What is the pain that we are going to suffer and how are we going to cushion the blow?
Treasury director-general Duncan Pieterse told reporters on Wednesday that the problem was having to revise optimistic revenue collection targets each cycle when expected economic growth turned out to be lower than forecast.
“The problems with forecasts that are too optimistic is that they then lead to tax bases that are too optimistic, revenue numbers that are too optimistic, and a situation where you are then making allocation decisions against revenue that does not materialise,” Pieterse said.
“You are putting yourself in a difficult position if you overestimate growth and then make the wrong allocation decisions against that.”
The government will over the next three years hold firm on fiscal consolidation, including stabilising debt at 75.5% of GDP by 2025/26; narrowing the budget deficit (the gap between revenue and spending) from 4.7% in 2024/25 to 3.4% in 2027/28; reducing the public sector wage bill; and limiting financial support to state-owned companies.
It also aims to arrest growth in debt service costs, which now account for 22c of every rand spent.
The Treasury has also set aside R11bn for the next two fiscal years to encourage older public servants in non-critical-skills jobs to take early retirement in a bid to curtail the government’s high wage bill.
Asked if South Africa would take advice from the IMF and set a debt ceiling, Godongwana acknowledged that allowing debt to surpass the 75% threshold would make it difficult for the country to continue meeting its debt obligations.
“What guides us is not necessarily what the IMF says. What guides us is our capacity to service our own debt. Because of the growth levels we have, higher than 75% debt is going to be difficult for us to service,” he said.
The MTBPS noted an improvement in economic conditions in the second half of the year, including the suspension of load-shedding; structural reforms to Operation Vulindlela — a partnership between the Treasury and the Presidency to unlock red tape — taking hold; global inflation receding; and the rand strengthening.
The document said: “The economy has since strengthened in response to the suspension of power cuts since March 2024, improved confidence following the formation of the government of national unity in June, better-than-expected inflation outcomes in recent months and reduced borrowing costs. All these factors are expected to continue supporting the economy over the period ahead.”
