Boldness needed to boost economy
The IMF’s economists have given SA’s monetary policy the thumbs up but fiscal policy the thumbs down. Remember the days when every time the rand crashed, inflation rocketed, forcing the Reserve Bank to respond with steep interest rate hikes? These days, a weaker rand doesn’t have nearly the same effect on prices — indeed, as an IMF working paper published last week notes, what economists call the “pass-through” effect of exchange rate movements to inflation fell from 70% to just 20% between 1994 and 2014, and it was in the 15 years after inflation targeting was introduced in 2000 that the real decline came.
The economists sought to establish empirically whether there was a link and it turned out that the key reason for the reduced pass-through was the credibility of monetary policy.
In other words, when economic actors such as businesses and trade unions believe the central bank will act to curb inflation, they don’t respond to a weaker rand and higher import prices by driving up prices across the board.
The research, say the IMF’s economists, “confirms the remarkable achievement that, despite the many shocks that the economy has witnessed, the declining pass-through is indeed explained by improved monetary policy credibility”.
The lesson is, then, that if we want to avoid the very sharp interest rate hikes SA used to see when its currency crashed, the central bank needs to continue to act independently and firmly to keep inflation well within the target range, and we need to trust that it will do so.
Also this week, the IMF published its latest “Article IV” report on SA, which includes an in-depth piece on what led to the doubling of public debt in the past decade.
It asks: “Was debt good for growth?” The answer is no. National government debt has roughly doubled since the 2008/2009 global financial crisis to reach 53% of GDP.
The IMF’s researchers find this has been driven almost entirely by increased government spending, with the public sector wage bill making up almost two-thirds of that, followed by interest costs and social grants.
The spending stimulus helped smooth the impact of the financial crisis initially, but the IMF’s point, which others have also made, is it was the kind of current spending (on wages, grants and so on) that did nothing to boost SA’s growth rate permanently.
Had the spending gone to investment in productive capacity and infrastructure, it would have enhanced SA’s growth potential. If education and health spending had been more efficient, enhancing productivity and reducing inequality, it would have lifted the sustainable growth rate.
Instead, we have debt we can’t afford with nothing to show for it.
Says the IMF politely: “The significant debt accumulation observed in the last 10 years could have been used more productively.”
Evidently SA cannot rely on monetary or fiscal policy to get out of its low growth trap.
The IMF is optimistic that the recent political transition offers “a new opportunity to ignite growth”.
We don’t know how it would view the vague and unimaginative list of items that made up the “stimulus package to ignite growth” that President Cyril Ramaphosa announced this week. But these don’t look like the “bold reforms” the IMF has called for.