EDITORIAL: Structural reforms or stagnation

Our central bankers often remind us that they have to make their interest rate decisions based on what inflation and growth are forecast to do over the next few years, not what they did last month or last year.

Forecasting is always a risky and difficult endeavour. But it’s seldom been more so than in the post-Covid period, when the supply chain strains that came with the reopening of economies were compounded by Russia’s invasion of Ukraine. The uncertainty was compounded by conflict in the Middle East and the rise of global geoeconomic tensions in general. Many central banks were wrong about how high inflation would go and wrong again about how long it would stay high. And all of that post-Covid geopolitical uncertainty pales compared with the uncertainty US President Donald Trump has now brought the US and the world.

In the face of all that uncertainty, central banks — including our own Reserve Bank — have taken to publishing their economic growth scenarios, not just their forecasts. In this week’s monetary policy review, the Bank detailed two scenarios it used at its March monetary policy committee meeting. They make for some bleak reading.

Scenarios generally start with the baseline forecast and work back from that to see how events might make that better or worse. The Bank’s baseline forecast is that economic growth will increase to 1.7% this year and reach 2% by 2027. That’s a big improvement on last year’s 0.7% but still depressingly far below other emerging markets’ expected average growth rate of about 4%.

Worse is that a worst-case scenario shaves 0.69 percentage points off the baseline — so this year’s growth falls to hardly more than 1% and there’s no 2% in sight soon. This worst-case scenario that the Bank has modelled is one in which the US imposes a 25% tariff rate on all SA imports into the US and  the African Growth and Opportunity Act (Agoa) is terminated, and the rand depreciates by 15% because of “risk premium spillovers”.

Sad to say, at least some of that has already happened. The rand is down, Agoa is effectively out the window and while Trump has suspended his initial 30% “reciprocal” tariff on SA for now, we are still subject to the 10% on all US imports from SA — and unless we can do a deal with the US during the 90-day window that may end up higher.

The trouble is no-one knows, not just what will happen with tariffs, but also whether the dollar will get weaker or stronger, or what will happen to markets and bond yields. And that’s without calculating the effect of trade wars or other possible wars in a volatile world.

On the upside, the Bank modelled a more optimistic scenario for SA in which the dollar weakens by 5% against the euro and commodity prices shift up 10% over the forecast period. In that scenario, SA’s growth rate this year lifts to 1.8% and still rises gradually to almost 2% by 2027.

This is still not great, but certainly better. We have to hope the better-case scenario materialises rather than the worst case. But SA can’t just rely on hope. It must do its best to repair relations with the US and negotiate strategically for a better tariff dispensation. It must look for new export markets.

But crucially, it must also do what it takes to press ahead much faster on long-promised structural reforms to boost economic growth. That means more decisive action on opening up rail and ports, and electricity and other network industries to competition. It means tackling bureaucratic incompetence and red tape. It means all the reforms that everyone has long agreed on but have long progressed at hardly more than a snail’s pace.

The global environment is an uncertain and unfriendly one. But SA has levers at its disposal to make itself more competitive and more dynamic, and if it pulls hard on those it could grow faster, even in tough times.