The Reserve Bank of South Africa’s instinct in the past has been to raise interest rates to reduce inflation and ensure that the government’s foreign funding needs continue to flow, reaping benefits higher than in rich country markets. The higher interest rates also signal the SARB’s intention to protect the currency – and therefore foreigners’ investments – in rand-denominated government bonds.
Sometimes the SARB overshoots – in the late 1990s under Chris Stals and early 2000s under Tito Mboweni (for different reasons) defense against expected inflation and currency protection went too far . The result of the appreciation of the currency and rising interest rates was that fledgling export-oriented or import-competing firms in the manufacturing sector had to deal with contracts they had to run at an unaffordable cost. In contrast, foreign firms competing with South African firms in tradable sectors found that they had a price advantage due to their weaker currencies against the rand.
As a result, when the economy boomed in the late 2000s (about 5% growth on average between 2004 and 2008), domestic companies were reluctant to invest in production capacity because they feared being caught up again. by the appreciation of the rand.
Since the global financial crisis, due to domestic conditions and international liquidity, the rand has remained relatively weak and not very volatile. Localization policies and the damage caused to global value chains by Covid have also led to favorable conditions for investment in domestic production in the type of goods generally available in international markets – “tradable goods”.
Climate change concerns and rising wages abroad have also helped encourage local manufacturers, although the trend towards digitalization, automation and robotization in developed countries is a compensating factor.
Thus, the SARB faces a difficult choice.
It can raise interest rates relatively quickly to protect the currency and international borrowing, or it can react more modestly to changing global conditions, raising interest rates as little as possible. It can focus on developing domestic production and services in tradable sectors, rather than worrying about access to speculative money.
This will make it more difficult for the government to borrow money over the medium term, and perhaps even longer term. It could also penalize short-term growth. But, if accompanied by a clear commitment by government to prioritize domestic job creation – and by companies to invest in tradable goods and services sectors – it could lead to a longer trajectory. term of sustainable growth and job creation, instead of resorting to foreign borrowing to finance domestic consumption.
This would enable faster growth in labour-intensive sectors and could support emerging green growth sectors where South Africa could be an African leader.
This is a difficult choice to make for two reasons: first, it would seem risky to change course from past monetary policy practices and rely on private sector investment in the tradable sector to it is worth it. Second, looser monetary policy will lead to tighter fiscal policy—the government will need to be very careful to ensure an efficient allocation of resources.
Government consumer spending will not be able to increase much, especially if more public finance is directed to the type of investments that will encourage private sector investment – investment in people, education, skills, health and security, and in infrastructure.
To underpin such change, there would need to be a high level of understanding, agreement and coordination between government across all three spheres – the private sector, trade unions and civil society.
In a democratic country like ours, where the right of veto is dispersed among a wide range of forces, it would not be possible to achieve this shift towards job creation in tradable sectors – away from government-financed consumption. foreign – without much serious negotiation under conditions of growing trust.
Trust and good faith negotiations are rare in our current political climate, which is one reason why macro authorities would be reluctant to switch to such a strategy. But if they could achieve such a change, we could be on the way to creating sustainable jobs. BM/DM