Lesetja Kganyago: Introductory remarks - Witwatersrand dialogue
Introductory remarks by Mr Lesetja Kganyago, Governor of the South African Reserve
Bank, at the Witwatersrand dialogue, Johannesburg, 16 March 2023.
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It is a real pleasure to be at Wits again and in a discussion with Adam Tooze
The major disruptions since the onset of the pandemic in early 2020 challenged the
belief of many that the world had entered a long phase of low and stable inflation.
Supply chains, stretched by the staggered reopening of economies, only proved as
resilient as their weakest link, resulting in major delivery lags and higher costs in key
industries. Labour supply did not adjust automatically when firms began to hire again,
resulting in tight labour markets.
There was no precedent in recent history that we can learn from relating to the policy
responses required to the pandemic shock. Even after economies had re-opened, fears
of long-term scarring, including bankruptcies and permanent job losses prompted
coordinated responses from governments and central banks to uphold highly
stimulative policies. In retrospect, we now know that such stimulus provided excess
support to demand at a time when supply was struggling to adjust, compounding
inflation.
The war in Ukraine, which exacerbated the shock to prices of oil, gas and some inputs
into food production like fertilizers, added to the global inflation problem. Even a country
like South Africa, where supply constraints did not originate, faced price pressures from
more expensive imports, shortages of key inputs, elevated shipping costs and the
depreciation of the rand as financial markets repriced the outlook for global interest
rates.
Worldwide inflation pressures have forced monetary policy normalisation. Policy rates
increased quickly as central banks realised that what was thought to be the transitory
inflationary shocks are not so transitory and there are strong second round effects.
Despite the increases, policy rates in many countries, including South Africa, remain
below neutral interest rates and in some cases, they are negative.
The Covid-19 crisis and the recovery period reminded us of lessons that we often forget
such as:
1. Working together to address global problems leads to effective solutions.
The hoarding of vaccines during the crisis meant there were numerous mutations of
the Covid-19 virus. It is only once vaccination rates increased across countries that
the Covid-19 pandemic was contained. Coordinated global responses accelerated
the global recovery.
2. We need to have policy buffers. Having policy buffers to tackle Covid-19 type
pandemics is difficult as they are rare events. The problem is that many countries
had no monetary or fiscal space to tackle even small crisis. In South Africa, we had
the space to provide a sizable monetary policy stimulus unlike central banks in
advanced economies which were stuck at the zero lower bound. But we had limited
fiscal space due to the fiscal decisions in the post Global Financial Crisis period.
3. Inflation is bad. Many governments, including ours, faced mass protests against
high inflation (and not high interest rates) in the post crisis period.
4. Borrowing in foreign currency during good times should trigger
consideration regarding the ability to pay during bad times. In addition, the
cyclicality of commodity revenues makes them an inappropriate source of
continuous funding to meet short-term obligations (interest payments on
debt).
There are many other repeated lessons.
The post crisis period poses many challenges for central banks from dealing with fiscal
dominance effects to tackling climate change related risks.
Increasingly central banks are being asked to address problems that fall directly under
the domain of government, without consideration under what conditions and how
central banks are effective in achieving their goals.
Credibility and independence are critical in achieving our objectives. Other critical
elements include well defined and limited number of goals, effective tools to achieve
these goals and finally, measurable success indicators and accountability. Central bank
credibility is directly linked to achieving the goals and being accountable.
If you want for the South African Reserve Bank to address the unemployment crisis,
then you need to give us the tools to address things such as high firing and hiring costs
or the large number of unskilled workers. You would need to take them from other
government departments. For us to be successful, we need to act independently
without considering political issues. How many politicians would be happy with that?
How would you hold us accountable if you give us multiple goals?
Another example is climate change. The three main drivers of the transition are relative
price changes, technology developments and adoption, and infrastructure investment.
The most effective tools to accelerate these drivers sit with government departments.
People downplay the importance of financial and price stability for the effectiveness of
structural policies. How much green investment do you think we will attract if our
financial system is unstable, and we cannot guarantee real returns!?
The focus of central banks should be to deliver on their core mandates and create the
space for government policies to drive structural changes.