The International Monetary Fund’s (IMF) first deputy managing director, John Lipsky, said on Monday that he saw tremendous potential in South Africa, but emphasised the need to maintain transparent economic policies, as well as the need to take action to benefit from foreign direct foreign investment. He was speaking during a presentation on the regional outlook for sub-Saharan Africa.
Head of the IMF’s African department, Abdoulaye Bio-Tchané, highlighted that according to IMF research, inflation in sub-Saharan Africa remained under control despite high oil prices, with growth set to reach 6% in 2007 and inflation set to fall slightly in 2006, despite the pass-through effects of higher oil prices to consumers.
Lipsky said while the increase in South Africa’s current account deficit was a surprise, the country essentially had a sound economy and some adjustment in the current account could be expected in the future.
Bio-Tchané said South Africa’s external debt in foreign currency was very low. He added that the flexible exchange rate system permitted an adjustment — “it’s harder where you have fixed exchange rates”, he said.
However, he did highlight that a deterioration in South Africa’s terms of trade would be a problem.
“The challenge is to add to the importance of the effectiveness of policy going forward. Your policy is a floating exchange rate with an inflation target. It is essential that it is maintained. Productivity and investment growth form part of that policy. The interpretation of growth and sustainability is critical on maintaining the macro balance and productivity growth,” said Lipsky.
“We all know there is tremendous potential here. If it were easy it would have already happened. It is important for you to keep an eye on the programmes implemented and the environment created that are going to create improvement in growth plus macro stability, which will make concerns of the deficit of secondary consideration,” he stated.
Lipsky said the world had experienced the fastest years of global growth in decades with core inflation remaining exceptionally low.
“It’s a favourable and unusual environment, which has also had low volatility of output. It has been called ‘the great moderation’ and has underpinned an unexpectedly strong performance of emerging markers and has effectively changed the outlook for investors to look at opportunities elsewhere. It has led to an increase of foreign direct investment,” he said.
“It’s almost revolutionary that most investment is also in underlying currencies. So long as the global environment remains as favourable and as the market anticipates things, then opportunities for emerging markets are unusually favourable. Now is the time to be aggressive about reforms and structural improvement as you will be rewarded now, rather than if you wait for difficulties that could come in the future,” stated Lipsky.
“It is an unprecedented and favourable environment, but actions taken now would bring pay-offs — and not just FDI,” he added.
As to inflation, Lipsky said growth in South Africa was close to or even above potential.
“The central bank has responded to that. You could debate it — but I feel strongly there is ample room for growth over time. Losing credibility of the inflation target would be a big risk over the medium term for this economy,” he said.
“You mustn’t cloud and confuse focus of monetary policy,” asserted Lipsky.
Bio-Tchané added that South Africa was benefiting from the effects of good economic policies.
“Oil importers have managed to keep growth on an upward trend of over 4% as the negative impact of high oil prices was offset by the parallel rise in other metals. There is a risk non-oil commodity prices might decline further than oil and could lead to some deterioration,” he added.
Lipsky said that the IMF projected the oil price would remain high.
He said rising oil prices had big implications. “Shielding the poor should have the highest priority,” he said.
This is Lipsky’s first visit to South Africa and he is due to meet representatives of the government and the private sector.
Bio-Tchané said the IMF would now be doing a report on the regional outlook for sub-Saharan Africa every six months. – I-Net Bridge