NEW GROWTH PATH: Macro-eco­nomic poli­cies

Finweek English Edition - - COLUMN - GRETA STEYN

The first point that needs to

be made is that noth­ing has come of the “greater re­straint” in fis­cal pol­icy

THE NEW GROWTH PATH set out a very spe­cific and some­what con­tro­ver­sial macroe­co­nomic pol­icy frame­work. Two ques­tions arise: Is this frame­work be­ing im­ple­mented and was it fea­si­ble in the first place? Ac­cord­ing to the NGP, South Africa’s macroe­co­nomic stance would be guided by “looser mon­e­tary pol­icy and a more re­stric­tive fis­cal pol­icy, backed by mi­croe­co­nomic mea­sures to con­tain in­fla­tion­ary pres­sures and en­hance com­pet­i­tive­ness”.

The NGP called for lower real in­ter­est rates to sup­port a more com­pet­i­tive ex­change rate and re­duced in­vest­ment costs. It also called for larger buy­ing of for­eign cur­rency flow­ing into SA to counter the rand’s ap­pre­ci­a­tion. Re­serves would be used to build a de­vel­op­ment fund to in­vest in in­fra­struc­ture in Africa.

“A fur­ther set of tools to ad­dress the com­pet­i­tive­ness of the ex­change rate is be­ing ex­plored, in­clud­ing mea­sures to ad­dress the neg­a­tive ef­fects of short-term cap­i­tal in­flows,” the NGP stated. It added there would be “greater re­straint” in fis­cal pol­icy to slow in­fla­tion, de­spite eas­ier mon­e­tary pol­icy. A counter-cycli­cal fis­cal stance through the busi­ness cy­cle would man­age de­mand in sup­port of a more com­pet­i­tive cur­rency while achiev­ing crit­i­cal pub­lic spend­ing goals.

The new fis­cal pol­icy would re­quire vig­or­ous pri­ori­ti­sa­tion and im­proved value for money, in­clud­ing mod­er­a­tion of re­mu­ner­a­tion growth.

The first point to be made is that noth­ing has come of the “greater re­straint” in fis­cal pol­icy. In fact, fis­cal pol­icy is looser than it was en­vis­aged in the Medium Term Bud­get Pol­icy State­ment in Oc­to­ber last year. Then the fis­cal deficit was pro­jected to fall to 4,6% of gross do­mes­tic prod­uct over the 2011/2012 fis­cal year from 5,3% over the past fis­cal year. How­ever, lat­est pro­jec­tions in the Bud­get put the deficit at 5,3% of GDP again in the cur­rent fis­cal year. For 2012/2013 it would be 4,8% (in­stead of 3,9%) and in 2013/2014 it would be 3,8% (in­stead of 3,2%).

If fis­cal pol­icy is to be used as an in­stru­ment to fight in­fla­tion, a deficit of 5,3% of GDP is too high. Those deficits are in any case not what the Har­vard Panel on eco­nomic growth in SA had in mind when it pro­posed tighter fis­cal pol­icy and looser mon­e­tary pol­icy. The panel had fis­cal sur­pluses in mind.

The eas­i­ness of fis­cal pol­icy is clear from the cur­rent bal­ance, which shows the dif­fer­ence be­tween cur­rent rev­enue and cur­rent ex­pen­di­ture. It shows Gov­ern­ment is cur­rently bor­row­ing to fi­nance short-term con­sump­tion. SA’s sav­ings are be­ing used to fi­nance higher cur­rent ex­pen­di­ture on wages, in­ter­est and goods and ser­vices.

The sec­ond point is that mon­e­tary pol­icy could hardly be looser. With a repo rate of 5,5% and an ex­pected in­fla­tion rate of 5,5%, it means the real rate is zero. Yet one senses from the NGP doc­u­ment its writers en­vis­aged some­thing even looser.

The third point is that both the Re­serve Bank and Gov­ern­ment have, as en­vis­aged by the NGP, stepped up buy­ing for­eign ex­change to try to curb the rand’s strength. But the pol­icy doesn’t seem to be work­ing, al­though some would say the rand would have been even stronger with­out the buy­ing. But no sign yet of re­serves be­ing used to in­vest in Africa.

No word ei­ther about the “fur­ther set of tools to ad­dress the com­pet­i­tive­ness of the ex­change rate” – that is, con­trols on cap­i­tal in­flows. Such tools have been used in Brazil and some Asian mar­kets. With for­eign cap­i­tal in­flows dry­ing up in last quar­ter 2010 and first quar­ter of this year it’s clear those tools aren’t nec­es­sary and would have dis­as­trous con­se­quences if the cur­rent ac­count deficit were to widen.

The NGP sug­gested var­i­ous mi­croe­co­nomic mea­sures to curb in­fla­tion, in­clud­ing a more vig­or­ous competition pol­icy. How­ever, the NGP’s chief ar­chi­tect – Eco­nomic De­vel­op­ment Min­is­ter Ebrahim Pa­tel – is try­ing to stop Wal­mart from im­port­ing cheap goods on a large scale if it takes over Mass­mart. That flies in the face of the fight against in­fla­tion.


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