South African Reserve Bank governor Lesetja Kganyago said while monetary policy seeks to preserve South Africans’ buying power by ensuring price stability, it should not be seen as a panacea for the country’s structural economic woes.
Delivering a lecture at the University of the Free State on Thursday evening, he said the aftermath of the Covid pandemic is likely to have further increased inequality and most countries’ income levels remain below their pre-Covid trend.
“The pandemic and its aftermath widened inequality between countries, after several critical decades of income convergence.
“Within-country inequality, which had worsened as the return to skills and strong growth favoured the upper segments of income distribution in most regions, saw less of a worsening in inequality during the pandemic, largely due to robust policy responses.”
Kganyago’s lecture came as the Bank kept the repo rate on hold at 8.25% in July, despite global expectations that inflation would start receding. South Africans have been anxious for a rate cut as the country has not seen a cut since November 2021.
According to the World Bank report titled “Poverty and Shared Prosperity”, the richest countries were able to deploy the largest emergency support, broadly pre-empting any rise in poverty.
Upper middle-income economies spent less — offsetting only half of the poverty impact while lower middle-income economies only offset a quarter — and could provide larger buffers when hit by large economic shocks.
However, most economies faced the pandemic with little policy space and their extended use — ultra-low interest rates and a massive increase in borrowing — also set off inflation and a persistent deterioration in incomes.
Kganyago said temporary fiscal and monetary measures were extended around the world to sustain recovery. Inflation was the unintended consequence and, in distributional terms, became the channel through which macroeconomic stimulus would be partly paid for.
“Turning to our experience here in South Africa, it is clear the country entered the pandemic in poor shape, with a decade of stagnant economic growth, declining real income per capita, and limited fiscal space.”
He said distributional patterns were also clearly unbalanced, with about two-thirds of the total income earned accruing to just 10% of the people. While the middle 40% earn just under 30% of the income generated, the bottom 50% of the population earn just 5% of the total income.
“As the pandemic spread in early 2020, the monetary policy committee lowered the policy rate to 3.5% — a multi-decade low. The cuts to achieve this were rapid and large.”
He said major supply-side constraints, such as insufficient electricity and logistical constraints, have limited how much economic activity South Africa could muster.
“Monetary policy cannot do much in such conditions. In fact, the more we try to loosen policy and use money illusion to reduce real wages and stimulate employment growth, the more we run into an inflation problem. This pushes up interest rates and squeezes sectors, firms, and jobs created in the loosening period. Ironically, it is when inflation rates are low that we see much-accelerated productivity and jobs growth, as was the case in the early 2000s.”
This past week, Stats SA’s quarterly labour force survey announced that the number of job seekers who could not find work in the country reached a new high of 8.38-million, with unemployment inching up to 33.5% in the second quarter of 2024.
Kganyago said over the past decade both inflation rates and interest rates were low in many major economies and many people, including central bankers, stopped worrying much about inflation.
“The post-pandemic surge in inflation came as a big surprise. But what we have learnt should be no surprise. People strongly dislike high inflation, and much prefer price stability.”
Kganyago said many emerging markets managed the post-pandemic inflation surge more effectively than others. In South Africa, improved policy credibility and communication allowed for effective inflation management with smaller policy rate increases compared to what was required in other countries.
“Central banks cannot be the only game in town. There is only so much that can be achieved with monetary policy. We cannot deliver all the social progress we all desire. We can create a base for it; we can help navigate the economy through crises; but not more.”
He said the central bank was often encouraged to do more, but said this fundamentally spoke to the limitations of South Africa’s state capacity. South Africa’s inequality problem is really about chronic skill and geographical mismatches, product market structures and a labour market designed to protect insiders.
“What really matters for inequality is economic growth, job creation and productivity growth. These outcomes occur when markets function effectively, when the costs of economic activity are clear and stable, and when essential public services and network industries work to reduce the cost of economic activity.”
He said in the wake of the pandemic, South Africa’s home-grown supply constraints continue to drive up inflation and the Bank’s flexible inflation-targeting framework helps us to see through the temporary inflation effects, but not the permanent ones.
“The upshot is that if we want better growth and less inequality, significant improvements in our supply environment are necessary. This will create the space for monetary policy to play a more supportive, enabling and appropriate role in achieving economic progress.
“Fortunately, as demonstrated by our country’s ability to tackle load-shedding, we can resolve complex problems with the right focus. I look forward to the same energy and intelligence being applied to our other major challenges.”
