Inflation target open to debate
Gordhan to invite allies to bridge differences on the issue
May 13, 2009
By REUTERS AND Ethel Hazelhurst
South Africa was managing its debt to ensure it did not overborrow in its efforts to boost growth, new Finance Minister Pravin Gordhan said yesterday.
Gordhan, who was sworn in as finance minister on Monday, said in a series of radio and television interviews that the government would be discussing policy issues, including inflation targeting - one of the investor friendly policies that labour and the ANC's communist allies wants to change.
In response to a question on SABC radio, Gordhan said that Treasury Director-General Lesetja Kganyago "is overseas to raise money to the tune of $1 billion (R8.4bn)", referring to the Treasury's roadshow for a foreign bond it planned to issue shortly.
The Treasury said in its Budget Review that it would float an international bond to raise the equivalent of $1bn.
This would help finance the country's budget deficit, equal to 3.8 percent of gross domestic product (GDP) in the 2009/10 financial year.
The government and its utilities plan to spend R787bn over the next three years to upgrade and build new infrastructure.
Asked on SABC television how the government would address labour demands to drop inflation targeting, Gordhan said: "By talking. All the issues have more than one solution. I don't think any one of us has the monopoly on wisdom."
He said there would be a lot of talk on economic policy, including inflation targets, "so we can emerge with consensus on how we manage these issues".
The Reserve Bank is currently mandated to set interest rates, with the goal of keeping inflation between 3 percent and 6 percent.
Jean-Francois Mercier, an economist at Citi, Citigroup's research arm, said Gordhan's observation that South Africa was managing its debt to ensure it did not overborrow was a sign that pragmatism and prudence would prevail, and that the medium-term spending targets were not likely to be revised upwards without considering whether there would be the revenue to fund the expenditure.
"We are not going to see much more in spending than we have seen over the past few years," said Mercier.
Discussing Gordhan's undertaking to debate inflation targeting with the ANC allies, Mercier said the Left had felt marginalised in the past and the presidency of Jacob Zuma was always going to be more consultative.
Mercier added: "That an issue is going to be debated doesn't mean anything will be changed. Anyway, now (that) interest rates are falling, it will be much easier to reconcile (with the) critics to inflation targeting. And, of course, it has never been a very rigid form of inflation targeting.
"If you don't have inflation targets, you still need monetary policy to counter inflation. And I don't believe inflation targeting has cost the country growth. So I don't see any convincing argument for an alternative."
Gordhan said on Monday that the first priority was to ensure continuity in policies set up by former finance minister Trevor Manuel, while taking into account the need to deal with the global downturn.
He would not be drawn on whether South Africa was in its first recession in 17 years.
"We will wait for the next GDP figures (this month). We will make a pronouncement then," said Gordhan.
He said employers and employees needed to make sacrifices together because the local and global economy faced challenges and companies were struggling with cash flow.
Asked if the government would bail out struggling firms, particularly in the automotive sector, he said: "The outgoing administration made it clear there's not going to be bailouts as we have seen in the US.
"There are institutions such as the Industrial Development Corporation, which could assist (on) the terms of the criteria that have been set out."
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