The finance minister and the Reserve Bank governor agree on discipline, so prepare to tighten your belts. Reg Rumney reports.
Finance Minister Chris Liebenberg said this week that both fiscal and monetary policy were still not strict enough for sustainable growth.
Later, Reserve Bank Governor Chris Stals, also speaking at the eighteenth Frankel Pollak Vinderine Investment Conference in Johannesburg, gave what amounted to a warning of an interest rate rise soon.
Stals, delivering his consistent message about the need for monetary discipline, said after pointing to what he termed monetary policy “inertia” in the light of most interest rates rising last year, said the Reserve Bank could “lean against the wind”, but not keep interest rates low against market pressures, particularly if it was committed to keeping the rate of increase in the money supply under control at the same time.
“It will be irresponsible for the Bank to lean against the wind if interest rates want to rise in a situation where the rates of increase in bank credit extension and in the money supply already exceed 15 percent per annum, as we now have in South Africa.”
Liebenberg said Stals would probably be criticised for his stance, but he had only given the impression of having a strict monetary policy, Liebenberg jokingly said, “Dr Stals has achieved what politicians always aspire to: to do one thing and say another.”
Monetary policy, he said, was actually very accommodating, with M3 growth of 16 percent while the upper growth target was nine percent.
On the budget, Liebenberg confirmed the government would “get within spitting distance” of the targets it had set itself, and that this was all due to fiscal discipline.
He mentioned the budget deficit before borrowing, the amount by which government spending exceeds revenue. This is normally measured as a percentage of gross domestic product (GDP), the main measure of national economic activity. “With a deficit of 6,5 percent of GDP, can you really talk about fiscal discipline?”
There were signs of monetary and fiscal discipline becoming entrenched. Liebenberg identified two obstacles to sustainable growth in South Africa: a lack of competitiveness and a lack of savings.
Liebenberg said surveys done in South Africa on competitiveness put South Africa at the bottom in terms of skills and expertise.
The one exception was in financial services. The only answer he could find to the question why South Africa could compete internationally in financial services was that it is the only profession that does not have import tariffs or export promotions incentives.
Hence the government of national unity might be moving in the right direction in cancelling tariffs.
The balance of payments as an inhibitor of growth, he said, was a function of the lack of competitiveness.
The usual reasons given were that the minimum wage was too high and productivity too poor. Uncompetiveness was a much wider issue.
“If you focus only on labour you won’t find a solution easily.”
Lateral thinking was needed, and he had asked the newly formed National Economic, Development and Labour Council to look at the creation of a national export strategy.
Aside from the lack of competitiveness, there was a need for investment for sustained growth, and savings were needed to fund that. Because of the lack of domestic savings South Africa was reliant on foreign capital. But South Africa should not be too dependent on foreign capital, he said. The country needed a balance between domestic and foreign investment, and between loans and equity investment.
New capital should not all be in the form of the recent successful bond issue. Capital was also needed to build factories.
South Africa’s domestic savings rate as a percentage of GDP stood at 17,5 percent. This compared poorly with other developing countries. Even Mexico had a rate of 22,1 percent. He pointed out it had been said the biggest lesson to be learnt from the Mexican crisis was that the country was too reliant on foreign capital.
“If we want two percent economic growth, without relying on foreign capital, we need a domestic savings rate of 19 percent.”
The country needed a growth rate of 3,6 percent to make inroads on joblessness.
This implied a domestic savings rate of 22 percent.
One way to increase the savings rate was to increase growth with less spending.
Tax incentives, he said, had been found not to increase the pool of savings but shift existing savings to the most tax-efficient investment.
He gave as an example the difference between “discretionary” savings, ie money held in bank, with “contractual” savings, ie money funneled into the financial products of the giant assurance institutions.
“Private household discretionary savings in South Africa are particularly low. Private contractual savings are among the highest in the world. Perhaps the one is a function of the other.”
The secondary tax on companies (STC) introduced by the previous finance minister and designed to encourage companies to retain dividends in a company for investment in projects rather than attracting tax by paying dividends out was another example.
All that happened was that savings were retained in the corporations rather than by individuals. The savings pool was not increased.
Liebenberg dismissed the idea lotteries were a way of increasing savings. “I would be surprised if they had a material impact on increasing the savings pool.”
The number one factor discouraging savings was inflation, said Liebenberg. “High inflation encourages people to spend rather than save.”
The other factor decreasing savings was financial deregulation. “I am worried that it encourages consumption at the cost of savings.”
Liebenberg said the savings rate of 17,5 percent could be 22 percent were it not for the government dissaving — government borrowing to spend on consumption — of minus 4,4 percent.
This brought the matter back to fiscal and monetary policy, and the commitment government had made to stop dissaving. This should also stop inflation.
The belief was that strict monetary policy, enforced by an independent Reserve Bank, was only necessary when fiscal policy was lax.
Liebenberg said that strict monetary policy may be needed as well as strict fiscal policy.
Capital inflows would be reflected in the exchange rate and inflation.
Then strict monetary policy, ie higher interest rates, would be needed to mop up liquidity and not give a false sense of security.
This, argued Liebenberg, was an investor friendly policy because it sent the signal that South Africa was committed to a strategic process of investor friendliness.