Persistent challenges in economic growth and adherence to spending targets could hinder South Africa's move to a lower inflation environment, underscoring the necessity for fiscal policy consistency, according to the central bank's chief economist.
Officials aim to stabilise inflation expectations around the 4.5% midpoint of the target range, a level last seen in 2021 and anticipated to be reached again next year, as per projections from the Reserve Bank, Bloomberg reported.
“Staying at this level will require long-term inflation expectations once again returning to the 4.5% level,” Chris Loewald, head of economic research at the South African Reserve Bank, wrote in a chapter of a newly published book titled Monetary Policy Responses to the Post-Pandemic Inflation.
Loewald stressed the growing importance of macroeconomic policy consistency amidst ongoing fiscal challenges and the risk of subdued economic growth hampering desired disinflation.
His remarks underscored South Africa's fragile public finances and sluggish expansion, with the nation consistently missing debt targets and averaging less than 1% annual growth over the past decade.
Finance minister Enoch Godongwana's forthcoming national budget presentation on 21 February offers an opportunity to demonstrate the country's commitment to fiscal responsibility amid increasing demands on public finances ahead of this year's elections, expected to be the most closely contested since 1994, potentially marking a shift in power.
The Reserve Bank has repeatedly flagged fiscal risks as a threat to its mandate of controlling inflation, cautioning that they could prolong elevated borrowing costs.
During its recent meeting, the monetary policy committee opted to maintain the benchmark interest rate at 8.25%, the highest since 2009. Governor Lesetja Kganyago highlighted the absence of clear evidence indicating a cooling of inflation towards the midpoint of the 3% to 6% target band.
Loewald reiterated the immediate priority of returning inflation to target levels, advocating for the removal of long-standing structural barriers such as product and labour market rigidities, inadequate education outcomes, inefficient infrastructure, weak governance, and policy uncertainty to stimulate job creation, investment, and economic growth, aligning it with emerging market norms.
South Africa's economy has long been hindered by rolling power outages, congested ports, inefficient railways reflecting insufficient investment, and ineffective management.
Loewald stressed that implementing reforms successfully demands a gradual yet consistent approach, contingent upon robust and independent institutions.
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