Johannesburg – The role of institutions has become central to discussions on economic development, and National Treasury and the South African Reserve Bank are two of the country’s institutions with a strong influence on the success of transformation programmes, said Mcebisi Jonas.
The former deputy finance minister was speaking at the annual Mapungubwe Institute for Strategic Reflection (Mistra) lecture at the University of Johannesburg on Tuesday night.
He shared his views on the role of fiscal and monetary authorities in helping or hindering radical economic transformation.
“National Treasury and the South African Reserve Bank remain centres of excellence in a sea of institutional decay and mediocrity,” said Jonas.
He went on to highlight how Treasury and the central bank can enable economic transformation.
Treasury is mandated by the Constitution to manage public finances, among other things. “To perform the constitutional mandate, political support for Treasury is needed,” said Jonas.
“To make fiscal authorities support radical economic transformation, they must be given support to perform their constitutional responsibility. That is the challenge we have,” he added.
Jonas explained that taxation is a “critical element” to help promote inclusive growth, if revenues are deployed well. South Africa’s progressive tax system, which taxes people proportionally to their wealth, can help reduce inequality, he added.
About two-thirds of tax revenue is allocated to constitutional mandated rights such as healthcare, social security and housing. Compared to countries like Brazil and Chile, South Africa’s fiscal distribution has been effective, despite criticism, said Jonas.
Professional control of fiscal spending is essential to ensure inclusive growth for the country. Jonas explained that spend should be done in an “orderly and transparent” way. The strength of South Africa is that the budget is managed in an open, democratic way, he said.
However if tax rates are too high, it may stifle incentives for investment which will hinder inclusive growth, he said. Jonas also pointed out that the integrity of the South African Revenue Service is important. If this is “destroyed”, it would have “huge implications” and possibly lead to a tax revolt, he explained.
He added that Treasury needs to remain a strong institution in the light of the low economic growth environment and rising government debt. This debt is a hindrance to radical economic transformation. “If we have a weak Treasury at this point when we need tighter controls, then we will be courting disaster,” he said.
The Reserve Bank operates in the national interest. Although not fully owned by the government, the SARB’s shareholders can only vote for seven board members. Eight other members are appointed by the president, and these include the governor and three deputy governors, said Jonas.
Additionally, the government meets regularly with a parliamentary portfolio. In the light of this, assertions that the institution is controlled by outside forces and not the state are not correct, explained Jonas. The SARB accounts to the finance minister and essentially the people of South Africa.
The Reserve Bank supports radical economic transformation by serving its function of protecting the value of the rand, preserving an efficient national payment system, bank credit creation and preserving and supporting private investment. It also ensures the stability of the financial sector and manages foreign exchange reserves and foreign exchange regulations.
Among the hindrances to transformation are efforts to control inflation. Interest rates are manipulated to prevent rand depreciation and target inflation.
However, volatile currency swings “work against” the economy's structure. Jonas explained that exports of manufactured products and services often underperform because of a volatile currency. “The swings are too large and discourage investment in the sectors.”
Jonas added that the financialisation of the economy, where the financial sector holds the biggest share of GDP, is not progressive. The sector pulls capital away from other productive sectors in the economy, like manufacturing.Read Fin24's top stories trending on Twitter: Fin24’s top stories