Policy response, structural reforms are CMA’s best responses to global challenges
CMA Central Bank Governors Symposium
The South African Reserve Bank Deputy Governor Fundi Tshazibana says the best response for the Common Monetary Area (CMA) to global challenges and regional vulnerabilities includes policy response, structural reforms, controlling inflation, and close supervision of banks and non-banks.
Tshazibana was speaking during the CMA Governor’s symposium under the theme ‘Global Spillover Effects into the CMA region’ held at the Happy Valley Hotel on November 17.
The deputy governor said the policymakers in the region, including central bankers, still had a lot of work to do.
She said a credible fiscal path was not only necessary for fiscal sustainability but to bolster confidence and ensure financial stability to give some breathing room to monetary authorities high and volatile inflation discourages external capital inflows.
Discourages
She stated that it also discourages domestic fixed investment, erodes the purchasing power of the more vulnerable in society, and generally leads to a sub-optimal allocation of resources.
She said it made it essential for central banks to ensure that inflation returns swiftly to target, even when the causes of deviation are due to external factors, domestic supply shocks, or necessary exchange rate adjustments.
She explained that market-determined exchange rates supported foreign investment and enhanced the allocation of resources in the long run.
“Within the CMA, the rand is able to play its role of ‘shock absorber’ in episodes of capital outflows, and this helps reduce the length and size of such episodes,” she said.
Tshazibana stated that in the near term, currency realignment was typically associated with an inflationary shock, and it was a central bank’s task to ensure that the shock did not become permanent.
Monetary policy
She explained that credible monetary policy frameworks were required to help facilitate the eventual return to lower inflation rates.
“Arguably, both the spillovers from global shocks and the policy response required to deal with the inflationary consequences can increase the vulnerability of a country’s financial institutions,” she said.
She added that to avoid conflict between price and financial stability goals, central banks should act pre-emptively by monitoring the evolution of financial institutions’ balance sheets and take appropriate action in the case of excess risk concentration or growing forex or duration mismatches.
She also stated that in the context of escalating public debt levels, heightened exposures of both banks and non-bank financial intermediaries to the sovereign required close supervision.
Furthermore, the deputy governor said the fiscal policy could play a crucial role in limiting both price and financial stability risks, especially in those Sub-Saharan Area (SSA) countries that, like South Africa, had seen elevated deficits and rising debt ratios in recent years.
Fiscal consolidation
She said a credible fiscal consolidation path could boost investor confidence, stabilize the currency, and reduce the risk premia on government debt.
“Reforms that help in broadening the tax base, prioritizing productive public investment, and reducing wasteful expenditure, can all assist in fiscal consolidation, without causing significant real income losses,” said Thsazibana.
She explained that generally, structural reforms that helped foster stronger and more inclusive growth would facilitate the task of both monetary and fiscal policymakers.
She also added that these could include the deepening of domestic capital markets to reduce reliance on external funding at a time when the cost and availability thereof have become more challenging.
“They can also entail steps that facilitate the diversification of African economies, the broadening of their export base, and their stronger integration into global supply chains,” she explained. Tshazibana also explained that reforming network industries, fostering skills development and training, and reducing barriers to entrepreneurship would all assist in that diversification.