Lesetja Kganyago: ‘South Africa’s growth problem is structural, not cyclical’

The Governor of South Africa’s central bank, Lesetja Kganyago explains his views on structural reform, monetary policy and protecting the bank’s independence to David Thomas.

As Jacob Zuma’s long and ruinous presidency gradually gave way to the scourge of ‘state capture’, the last decade saw a raft of once-credible South African institutions fall into decay and disrepair.

From the revenue service to the prosecuting authority and the national power utility, crucial organisations were hollowed out by mismanagement, political interference and corruption as the economy stalled.

Yet even as politicians jealously eyed its independence, the South African Reserve Bank (SARB, the central bank) retained a reputation for autonomy, prudence and sound macroeconomic management under Governor Lesetja Kganyago.

With the state continuing its attempted recovery under the presidency of Cyril Ramaphosa, Kganyago, Governor since 2015, was reappointed for a second five-year term in July.

Encouraging growth

Yet with South Africa stuck in a sustained period of economic underperformance and challenges to the central bank’s traditional role mounting, the plain-speaking 53-year governor tells African Banker that much more can and must be done to encourage growth.

“We have been saying the same thing for five years, and we had a sense that it’s not that government does not know what structural reforms to do – and many of those structural reforms were captured in the National Development Plan – but nothing was forthcoming.

“I would like to reiterate the statement that says that the growth problem in South Africa is a structural one, not a cyclical growth problem. You can see that we have been trapped in this low growth situation now for a good five years.”

Despite the promises of the new administration, reform has been slow. Credit ratings agency Moody’s – the last to rate the country’s debt at investment grade – says that quicker structural reforms are urgently needed, particularly to underperforming state-owned enterprises, if the country is to avoid another downgrade.

Blueprint for reform 

The SARB predicts growth of 0.6% in 2019, rising to 2% in 2021. In a bid to speed things along, the National Treasury released a 77-page discussion document offering mostly familiar measures to boost growth to 4% and create 1m new jobs.

That controversial blueprint, released in August 2019, has been dismissed by some – including the ruling ANC’s alliance partners in the trade union movement, but Kganyago, who is careful not to insert himself into political discussions, welcomes the fact that it has concentrated minds on the reform process.

“It’s a document, it’s out there, and it’s gotten South Africans talking. The Minister of Finance [Tito Mboweni] himself has not actually pronounced anything, he’s released the document and said ‘let’s talk’ and the President came out and supported him. That conversation must continue, but it was the correct thing for the Treasury to do.

“Without a doubt, there are things that can be done in the short run, and the people tasked with responsibility, which is basically the Cabinet, must make those choices about what can be done immediately in the short term, once we’ve focused on the long term and the outcome of the reform programme,” he says.

And yet in an era where ‘tough reforms’ are often a byword for mass job retrenchments – with layoffs mooted at Eskom and other failing state-owned companies – Kganyago says that any reform programme must be undertaken with safeguards to protect the losers.

“Many reforms fail because during the process, the losers are not taken care of. So you need mitigating factors so that you can accommodate the losers in some way or another so that they can make a transition. What you can’t do in a structural reform programme is try and protect jobs, but you can protect people.”

Achieving price stability

Alongside his advocacy of structural reform, Kganyago has not been shy in explaining the limits of monetary policy as a fix-all to South Africa’s entrenched economic challenges.

In the Monetary Policy Committee’s most recent statement in July, the governor insisted that economic underperformance “cannot be solved by monetary policy alone”, pointing to the need for “prudent macroeconomic policies” and structural reforms to “raise potential growth and lower the cost structure of the economy”.

Indeed, the SARB sees its primary purpose as achieving and maintaining price stability, and projects inflation of 4.4% this year. The constitution defines its primary objective as “to protect the value of the currency in the interest of balanced and sustainable economic growth.” These principles have guided the bank through the economic upheavals of recent years.

“We have reacted the best we could. Our plan and mandate is price stability.  Not price stability for price stability’s sake, but because it’s necessary for balanced and sustainable growth.

“We believe that our policy settings since the global financial crisis – and I’m the third Governor since then – were absolutely the right ones to put in place. You could always quibble and say that well, in this six months you shouldn’t have done this, but we struck the right balance of staying true to the mandate while being cognisant of balanced and sustainable growth.”

For many investors, those principles, underpinned by the bank’s continuing independence, are a crucial bulwark against populist economics and unfettered quantitative easing. But the limited mandate angers some politicians, particularly on the left of the ANC, who believe the SARB should be forced to do more to encourage growth and tackle unemployment. Kganyago sees that criticism as part of a global debate on the expanded role of central banks since the financial crisis.

“In a democracy there will always be a contestation around institutions – when all the other institutions that were supposed to do certain things for the economy didn’t play their role, central banks said, we’re the only game in town. My fear is that then the people who were supposed to take the hard decisions postponed taking them because central banks were lifting more than what they were supposed to lift.”

SARB’s independence must be protected

Nevertheless, the clamour for change continues. In its December 2017 party conference, the ANC resolved to move the bank, which remains under an unusual private ownership model, into state hands. In June, the party’s powerful National Executive Committee agreed to expand the central bank’s mandate to include employment and growth.

Those decisions sparked investor fears of undue political influence on the SARB, but President Ramaphosa insists any process to move the bank into state ownership will simply follow international practice and will not impact the bank’s independence. An exasperated Kganyago says that provided that can be assured, he is comfortable with a change in ownership.

“On nationalisation, it’s a discussion that we said we’ve had enough of now, as we’ve said everything. The people who have to make that decision must make it and live with the consequences. We’ve made all the points we had to make – we said as long as our mandate and independence are protected, be my guests.”

Despite his evident frustration with the continual re-emergence of the topic, Kganyago says that the role allotted to the bank under the constitution helps to provide certainty and confidence in an era of partisan political rancour.

“I always remind South Africans that the constitution is a covenant us South Africans enter into, and so I operate clearly with the knowledge that the constitution protects us from these things. I’m reading the memoirs of Paul Volcker, who was chairman of the Fed, who said that as a central banker you must hear the political noises and you will hear the political noises – just don’t listen to them.”