G20 backs inflation controls
Lavinia Mahlangu
21 November 2006Finance heads of the Group of 20 (G20) key developed and emerging economies have voiced support for inflation controls, as practised in South Africa, and called for the reform of the World Bank and International Monetary Fund.
"Maintaining strong world growth and containing inflation will require ongoing adjustments to monetary and fiscal policies while ensuring appropriate exchange rate flexibility and structural reform," the G20 ministers of finance and central bank governors said in a joint communique after their meeting in Melbourne, Australia on the weekend.
"Faced with potential inflationary pressures, the normalisation of monetary policy underway in many G20 countries will need to continue."
South Africa was represented at the meeting by Finance Minister Trevor Manuel, who will chair the next meeting in South Africa in 2007, when the SA Reserve Bank and National Treasury will jointly chair the G20.
Inflation
targeting 'working for SA'
The Reserve Bank has maintained an inflation-targeting monetary policy framework since 2002, aiming to keep inflation within the 3% to 6% range in order to protect the value of SA's currency and so obtain balanced and sustainable economic growth.
The Bank's Monetary Policy Committee (MPC) meets every two months to set the repo rate, its lending rate to commercial banks.
At the last MPC meeting in October, the Bank hiked the repo rate by 50 basis points to 8.5% per annum, with Reserve Bank Governor Tito Mboweni pointing to the MPC's concern over the inflation outlook as the reason for the upward adjustment.
"Inflation targeting is working for South Africa," Absa economist Chris Hart told BuaNews this week. "The proof of the pudding is in the eating, and you can definitely see that our economy has been rising on a higher growth structure."
The benefits of this intervention are long-term, he said, pointing out that the current slow-down in economic growth to about 3.5% was cyclical and "taking place in a boom.
"When you consider this figure and look back a few years ago, you will find that 3.5% was our peak," Hart said. "Right now it is the bottom of our boom."
Hart said inflation targeting was a significant but not sole contributor to the country's economic growth and financial stability. Other contributors, he said, were fiscal credit and the recovery of the rand.
A fiscal rather than monetary policy intervention, Hart suggested, would be to shift the tax burden from income and investments towards consumption. This would encourage savings via retirement funds, an area where South Africans have a weak track record.
World Bank, IMF reform
The G20's views on the resumption of international trade talks and reform of the World Bank and International Monetary Fund (IMF) were expressed unequivocally on the weekend.
They warned of the threat to global prosperity posed by "rising protectionism in trade and investment," and called for the resumption of trade talks.
"The success of the Doha Development Round is essential for securing freer, more open trade, reducing the risk of economic and financial instability, and achieving faster economic growth, development and sustained reductions in poverty," the G20 ministers and central bank governors said.
The finance chiefs called for an early resumption of the World Trade Organisation's (WTO's) Doha Round. The talks, which include proposals to eliminate subsidies for various agricultural products from developed nations, have been troubled with delays at various stages since they began in 2000.
WTO Director-General Pascal Lamy suspended the talks indefinitely at the last round in July, after finding no significant changes in the negotiators' positions.
"To a large extent [South Africa's] whole agriculture sector is very well placed to take advantage of a world economy without subsidies," Hart told BuaNews.
"Our industry has learnt to live without subsidies while others would need to undergo heavy adjustments which, in some instances, would have both economic and political implications."
The G20 believes that the effectiveness and legitimacy of the IMF and World Bank must be enhanced through a comprehensive governance reform and strategic policy review.
"A strong, credible IMF that reflects today's global economic realities is in our shared interest," the G20 said. "As such, we welcome the support given by IMF govenors in Singapore for reform of quota and governance aimed at reflecting members' relative positions in the world economy and enhacing the voice of low-income countries in the Fund."
Reiterating its October 2005 Statement on Reforming the Bretton Woods Institutions, the G20 said the selection of senior IMF and World Bank management should be based on merit and ensure broad representation of all member countries.
"My feeling is that there is recognition in all three institutions [the UN, IMF and World Bank] that reform is needed. The only area of dispute is the shape the reform must take," Hart said, adding that the process might be easier for the financial institutions than the UN itself.
Source: BuaNews
