The instinct of the South African Reserve Bank has, in the past, been to raise interest rates to lower inflation and ensure that the foreign financing needs of government continue to roll in, reaping higher rewards than in rich country markets. The higher interest rates also signal the intention of the SARB to protect the currency — and hence the investments of foreigners — in rand-denominated government bonds.
Sometimes the SARB overshoots the target — in the late 1990s under Chris Stals and in the early 2000s under Tito Mboweni (for different reasons), the defence against expected inflation and the protection of the currency went too far. The result of the appreciation of the currency and the higher interest rates was that budding export-oriented or import-competing firms in the manufacturing sector were faced with contracts they had to fulfil at an unaffordable cost. In contrast, foreign firms competing with South African firms in tradeable sectors found they had a price advantage due to their weaker currencies relative to the rand.
As a result, when the economy boomed in the later 2000s (about 5% growth on average between 2004-2008), domestic firms were reluctant to invest in productive capacity as they feared they would be caught again by an appreciating rand.
Since the global financial crisis, because of domestic conditions and international liquidity, the rand has been relatively soft and not very volatile. Localisation policies and the damage to global value chains caused by Covid have also led to conditions favourable for investment in domestic production in the kind of goods usually available from international markets — “tradable goods”.
Climate change concerns and rising wages abroad have also helped to encourage local manufacturers, though the trend to digitisation, automation and robotisation in developed countries is a countervailing factor.
So, the SARB faces a difficult choice.
It can raise interest rates relatively rapidly to protect the currency and international borrowings, or it can respond to the changing global conditions more modestly, raising interest rates as little as possible. It can shift its focus to nurturing domestic production and services in tradable sectors, rather than being preoccupied with access to hot money.
This will make it more difficult for the government to borrow money over the medium term, and maybe even the longer term. It could also penalise short-term growth. But, if it is accompanied by a clear commitment by the government to prioritise domestic employment creation — and by business to invest in the tradable goods and services sectors — it could lead to a longer-term trajectory of sustainable growth and employment creation, instead of relying on foreign borrowing to fund domestic consumption.
It would make faster growth in labour-intensive sectors possible, and it could underwrite emerging green growth sectors where South Africa could be an African leader.
This is a difficult choice to make for a couple of reasons — first, it would seem risky to change course from the monetary policy practices of the past and rely on private sector investment in the tradable sector to make it worthwhile. Second, a looser monetary policy will entail a tighter fiscal policy — the government will have to be very careful in ensuring the efficient allocation of resources.
Government consumption expenditure won’t be able to grow much, especially if more public finance is directed towards the kind of investments that will encourage private sector investment — investments in people, education, skills, health and safety, and in infrastructure.
Underpinning such a shift, there would have to be a high level of understanding, agreement and coordination between government in all three spheres — the private sector, the unions and civil society.
In a democratic country such as ours, where veto power is scattered across a wide range of forces, it would not be possible to achieve this shift towards job creation in the tradable sectors — away from foreign-financed consumption — without a lot of serious negotiation under conditions of increasing trust.
Trust and good-faith negotiations are in short supply in our current political climate, which is one reason why the macroeconomic authorities would be reluctant to shift to such a strategy. But if they could deliver on such a shift, we could be on the path to sustainable job creation. BM/DM