Urgent action is needed on SA’s debt strategy – Kganyago

SOUTH Africa needs to recalibrate its debt management strategy as the finance costs on the government’s more than R400 billion debt are steadily gathering momentum, SA Reserve Bank Governor Lesetja Kganyago said yesterday.

At a discussion on South Africa’s inflation targeting strategy, Kganyago said the State had this far only been able to adequately manage its debt servicing strategy due to low inflation costs, but the horse was fast bolting, with inflation ticking up.

“Over the past 12 months or so, we have noticed that National Treasury borrowed over the short end of the yield cap, and because South Africa has such a steep yield cap, we have benefited from borrowing over the short end of the yield cap, but that must be telling us something – the providers of funds are concerned over the trajectory of our fiscal matrix,” he said.

Kganyago said lower inflation has benefited the economy generally, and households of all income levels in particular.

“As lenders require less compensation for inflation, interest rates have come down. Furthermore, with expectations anchored inside the inflation target range, businesses no longer raise prices as soon as the exchange rate weakens,” he said.

“This credibility has helped us cut interest rates to record lows during the Covid-19 crisis – and we have been able to keep rates low during the recovery.

“This stands in stark contrast to some of our peers, where higher inflation has forced rate hikes, even though the pandemic is ongoing,” he said.

Kganyago said with the stimulus of low interest rates, and the security of well-anchored inflation expectations, monetary policy stands out today as South Africa’s main source of macroeconomic resilience.

“This is an area where we as a country have made careful policy choices, and then stuck with them, to our long-term benefit.

“As we confront our other economic challenges – such as our mass unemployment, electricity shortages, record debt levels and, most recently, the wreckage of riots – we should reflect on our inflation-targeting record and take inspiration from that,” he said.

Kganyago said South Africa has lost about 1.5 million jobs from the Covid-19 pandemic, and even though inflation was now back in the middle of the target range, interest rates were still at record lows.

“So never let anyone tell you that the SARB only cares about inflation and ignores jobs. Rather, bear in mind that we have this power only because we put price stability first. We have anchored inflation expectations,” he said. Kganyago said by adopting inflation-targeting, the SARB has made a clean break from the era of opaque policy and confusion.

South Africa’s targeted inflation has averaged 5.8 percent since 2000, which is within the 3 to 6 percent target range. It has averaged 4.5 percent over the past five years.