/ 1 November 2022

Beware empty promises of expansionary policies, says Kganyago

South African Reserve Bank Governor Lesetja Kganyago Interview
Reserve Bank governor Lesetja Kganyago. (Waldo Swiegers/Bloomberg via Getty Images)

South Africa needs to maintain prudent monetary and fiscal policies to avoid the economy being punished, says Reserve Bank governor Lesetja Kganyago.

Kganyago, who was delivering a public lecture at the Wits School of Governance on Tuesday, underlined the dangers of expansionary policies, which are used to stimulate the economy and employment.

Expansionary policies include tax cuts, increased government spending on infrastructure and lowering interest rates.

South Africa faces a dire growth outlook, with the GDP expected to expand by a meagre average of 1.6% over the next three years. Meanwhile, the country has one of the highest levels of joblessness in the world, with the real unemployment rate hitting 44.1%,

But, according to Kganyago, “the claim that more expansionary policies will solve the unemployment problem is simply an empty promise, backed up by little more than ideology and wishful thinking”.

There are times, Kganyago said, when expansionary monetary and fiscal policies are necessary. “And there are times when they become dangerous.”

Expansionary policies, he said, are necessary in the wake of sudden shocks. They are also best used when there is fiscal or monetary space to do so.

“Stimulus has got to be temporary. You cannot be in a stimulus permanently … When the pandemic hit us, there was dololo fiscal space, so the treasury couldn’t respond in the aggressive manner that it did in 2008/2009,” Kganyago said.

“The burden fell on monetary policy. Why? Because monetary policy had the space. Inflation was low. And because inflation was low, we were able to bring the interest rate down very quickly.” 

Kganyago delivered the lecture a week after Finance Minister Enoch Godongwana tabled his medium-term budget policy statement, which heralded the success of the government’s policy of fiscal consolidation

Consolidation, which requires the government to cut spending to narrow the budget deficit and stabilise debt, stands in contrast to expansionary policies. Lower public spending risks compromising economic growth and job creation as service delivery and infrastructure deteriorates.

Kganyago said the budget policy statement signals the importance of rebuilding fiscal defences so that the economy can weather global shocks.

The document notes the government’s commitment to stabilising public finances will allow it to avoid “the pitfalls of risky fiscal action that has led to currency depreciation and economic instability in a number of countries”.

Kganyago’s lecture comes two weeks after Liz Truss was forced to cut her stint as the United Kingdom’s prime minister short after her administration’s decision to cut taxes for the country’s top earners backfired. Truss’s plans to stimulate the UK economy amid the cost-of-living crisis caused the pound to plummet, raising the risk of even higher inflation. 

“Countries with less prudent policy frameworks get punished,” the governor said.

“The experience of the last few weeks shows that that punishment is not confined to emerging market economies. If an advanced economy adopts reckless policy, it gets punished almost instantly. Irrespective of whether it has a reserve currency, it gets punished,” Kganyago added.

“So it is important that we stay the course and make sure that our macroeconomic policy framework is prudent. Because we know that prudent macroeconomic policy served South Africa well going into the global financial crisis.”