IN THE MEDIUM-TERM BUDGET Policy Statement, Enoch Godongwana announced a downward shift in target inflation from the 3–6 percent range to a specific target of 3% (plus or minus 1 percentage point). This marks a further tightening of South Africa’s inflation targeting framework, following the SARB’s 2017 declaration that it preferred a 4.5 percent inflation midpoint. This article argues that the current exclusive prioritisation of low inflation is incompatible with addressing South Africa’s deep socioeconomic challenges. Instead, the SARB’s mandate should be reoriented towards promoting employment and structural transformation.
The problems of inflation targeting
South Africa officially adopted inflation targeting in 2000, although this approach had been informally applied since at least 1994. Under this regime, the Finance Minister sets the inflation target, while the SARB retains independence over the instruments used to achieve it. The main instrument used by the SARB to reduce inflation is a higher interest rate. It is true that inflation harms the poor by eroding real incomes, but South Africa’s inflation rate in the democratic era has been relatively low and stable. However, when prices have risen, they have not been a consequence of too much money chasing too few goods – domestic inflation. Rather, price increases have been driven by external factors such as increases in the international price of fuel, energy and food, for example. So some scholars suggest that whether the domestic inflation rate increases or decreases has less to do with domestic monetary policy and more with changes in the level of global inflation. The implication of this is that, as I have written about in Amandla before, increasing the interest rate is not the answer to curbing inflation. And, as a former National Treasury official has warned, “reducing the inflation target would lead to more austerity, and lower economic growth and employment”.
In addition, the concern that inflation negatively impacts on prospects for economic growth can be exaggerated, as historical evidence suggests. Some even suggest that it is only when inflation exceeds 40 percent that it begins to reduce growth rates. A World Bank economist has indicated that economic growth continued at inflation rates of 15 to 20 percent.
Despite this, the SARB has consistently maintained high real interest rates in its effort to keep inflation within target. As left economist Ashgar Adelzadeh (2022) observes, South Africa has recorded some of the highest interest rates globally over the past two and a half decades.
Consequences of high interest rates
High interest rates result in higher domestic borrowing costs and higher debt repayment costs. These mean less disposable income and a reduction in the buying power of the majority of people in the country. High costs of borrowing, coupled with declining domestic demand, lead to the stagnation or contraction of the economy, which in turn leads to job losses and declining levels of government revenue from income taxes. Higher interest rates also mean higher debt service costs on loans denominated in foreign currency, and an interest rate higher than GDP growth will normally increase the debt-to-GDP ratio. In response to this, the South African government has drastically cut spending in the form of harsh austerity budgets.
Austerity, along with high interest rates, discourages fixed investment, particularly in sectors like manufacturing, where the requirement for borrowing is greater, due to higher capital requirements than in other sectors. Between 1994 and 2015, gross fixed capital formation in South Africa averaged only 18 percent of GDP—around 10 percentage points below the average for upper-middle-income countries.
In stark contrast, South Africa’s financial sector has expanded dramatically. The country now has one of the highest market capitalisation-to-GDP ratios globally, with capital markets reaching more than five times the average for its income group. This reflects a broader process of financialisation, in which finance sectors dominate the economy while productive sectors like manufacturing decline.
This is a serious concern for a country with an unemployment rate exceeding 40 percent, as the finance sector is less employment- and labour-intensive than manufacturing. By narrowly focusing on price stability via high interest rates, the SARB undermines employment creation and reinforces an economic model driven by short-term financial returns rather than long-term productive investment. As such, the current inflation-targeting framework limits the ability of monetary policy to support structural transformation.
An alternative approach
For monetary policy to support employment, the real interest rate must be significantly reduced to stimulate investment. However, South Africa’s ability to lower interest rates is constrained by global financial conditions. As the CEO of Nedbank noted, “I can’t see the US Federal Reserve cutting rates, and on that basis, it will be difficult to see SA cut much further.” This reflects South Africa’s vulnerability to global capital movements, rooted in the liberalisation of financial markets of the mid to late 1980s. After 1994, the post-apartheid government continued to deregulate its capital markets, opening its economy to short-term international capital flows. As a result, the SARB relies on high interest rates to attract foreign portfolio investment and maintain balance of payments stability. Without capital controls, lowering interest rates risks capital flight and a weakening rand.
Yet there are viable alternatives, including reintroducing capital management measures—such as capital and exchange controls. Exchange controls regulate local currency in relation to international currency markets by preventing convertibility (direct exchange) of the rand to other currencies. Capital controls prohibit the export of capital from the country, including foreign and local expatriation of investment income, domestic ownership of foreign assets and vice versa. Some examples of exchange controls include taxes on cross-border financial transactions; establishing a dual exchange rate system – used effectively in South Africa from 1979 until 1995, through the creation of the financial rand (finrand). The goal of the dual exchange rate system was to insulate the market for current account transactions from the more volatile financial market transactions.
In terms of capital controls, one measure could be restrictions on the repatriation of capital, such as minimum stay requirements – this restricts capital outflows by placing a holding period on foreign investors from withdrawing capital and/or dividends from South Africa. This prevents the short-term movement of capital and discourages speculative investments. Other regulatory tools include limiting non-resident purchases of domestic debt securities and restricting foreign currency borrowing by domestic institutions. Strengthening the regulation of capital markets through imposing capital and exchange controls reduces speculative inflows and breaks the direct link between domestic and foreign interest rates.
The case for capital account regulation
High interest rates have suppressed productive investment and contributed to deindustrialisation and mass unemployment. To break this cycle, the SARB’s mandate must be reoriented towards employment creation and structural transformation.
As macroeconomic instruments, capital and exchange controls aim to regulate money flowing in and out of the country. This allows governments greater space to adopt countercyclical policies – economic policies that move in the opposite direction to current economic trends, i.e in a downturn, it would mean expansionary fiscal and monetary policies. Constraining capital flight and limiting exchange rate volatility mitigate the inflationary effects of currency depreciation and reduce the pressure to raise interest rates.
Capital controls also enhance policy sovereignty. When financial outflows are controlled, the central bank does not need to maintain high interest rates to attract inflows. This gives the state greater autonomy over both monetary and fiscal policy. Furthermore, Fine and Mohamed (2022) argue that regulating financial flows helps shift the composition of capital toward less volatile and more productive investments. Moreover, exchange rate stability improves when capital controls limit the volatility of demand for domestic currency. As John Maynard Keynes famously argued, the management of the domestic economy depends on having the freedom to set appropriate interest rates independently of international conditions. Capital controls are a necessary condition for that independence.
The need for radical change
South Africa’s current inflation targeting regime, rooted in a liberalised financial framework, has failed to address the country’s core development challenges. High interest rates, driven by the imperative to stabilise prices and attract capital, have suppressed productive investment and contributed to deindustrialisation and mass unemployment. To break this cycle, the SARB’s mandate must be reoriented towards employment creation and structural transformation.
Achieving this requires both a shift in the objectives of monetary policy and a reassertion of capital and exchange controls. By strengthening these controls, the SARB can significantly reduce interest rates and engage in greater levels of direct lending for preferred purposes in order to enable employment creation. This will also increase macroeconomic (fiscal and monetary) policy space, enhance financial stability and reduce the foreign debt component of total public debt. Strengthening capital account regulation is not a radical proposal—it is a necessary step towards reclaiming policy space and realising an inclusive, developmental macroeconomic agenda.
Dominic Brown is the manager of the economic justice programme at the Alternative Information and Development Centre (AIDC). He also serves as a member of the Amandla Magazine Editorial Collective. This article is published jointly with the Daily Maverick.
