Business Day (Johannesburg)
Linda Ensor
19 November 2008
Cape Town — Finance Minister Trevor Manuel yesterday added his voice to warnings that the ruling African National Congress's (ANC's) leftist allies risked damaging the national economy by pressing for policies that would dampen growth and drive away desperately needed foreign investment.
These policy proposals relate to the reintroduction of foreign exchange controls, harsh measures against foreigners, the abolition of inflation targeting and others that would increase the cost of doing business.
Treasury director-general Lesetja Kganyago also stressed the need for prudence in the context of a global economic slowdown when he told Parliament's finance committee that "it will not serve anyone any purpose to be adventurous with macroeconomic policy".
Their comments endorsed the view of several economists that the left-wing fiscal and economic views expressed by ANC politicians and trade unionists were causing uncertainty among foreign investors, and would harm SA's growth.
Uncertainty over future policies has resulted in the recent downgrading of SA's credit rating by two rating agencies, though the treasury has rejected their reasons.
Foreign inflows are critical to finance the deficit on the current account of the balance of payments, which will be under increasing pressure as commodity prices and exports slump on sluggish world demand.
"About $20bn per year is needed to finance the current account deficit. Continuing to attract foreign investment implies the need to maintain confidence in our macroeconomic policies and raise the growth rate of the economy," Manuel said in a speech on the global crisis.
Earlier, he warned committee members that if "people make calls for foreign exchange controls, and if we impose harsh measures on foreigners, we won't get the money we need for economic growth".
Calls for inflation targeting to be abandoned to make cheap credit available would result in the same crisis as in the US, which had its origin in copious amounts of cheap credit being made available relative to savings, Manuel said.
"The economic and social costs of a prolonged period of high inflation or deflation caused by wayward or ill-
conceived monetary policies cannot and should not be tolerated by a democratic society," he said.
Manuel warned the economy would suffer from the global crisis along with the rest of the world. "It is becoming clear that, at least in the medium term, our aspirations for more rapid economic growth and our capacity do not match.
"We need to be able to achieve much higher economic growth rates with a sustainable current account," Manuel said. "Raising the cost of economic activity and restricting our ability to trade is not the right path for SA."
Manuel also urged the removal of the microeconomic and regulatory constraints to propel investment. Productivity would have to rise, exports increase and saving and investment rates move to higher levels. "There is room for policy adjustment in a range of sectors to facilitate investment in new businesses and growth in employment, particularly in network industries.
"Government's contribution to reducing the costs of economic activity and expanding infrastructure needs to be matched by investment and productivity growth in the private sector."
Manuel criticised "indiscriminate dispensing of cash to firms that lobby for help". This would not raise incomes and create jobs. He was confident the government would keep up healthy growth in spending, keep public borrowing modest and sustain low, long-term interest rates. "As growth slows, however, it is likely to become more difficult to maintain a positive government saving rate."
Kganyago said the CPIX inflation rate had peaked, and would continue to fall as it absorbed the decline in the producer price index and lower oil and food prices.
The treasury still projected gross domestic product growth of 3,7%-3,8% this year.
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