Monetary Lessons from Africa’s Biggest Economy

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The 2013 African Economic Conference (AEC) was the most opportune place to launch “Monetary Policy and the Economy in South Africa”, a new book by Prof. Mthuli Ncube, Vice-President and Chief Economist at the African Development Bank (AfDB), and Eliphas Ndou, an economist with the South Africa Reserve Bank (SARB) Research Department.

The book launch was during the eighth installment of the annual conference that brought more than 500 participants – from policymakers to economists and PhD candidates, from across the continent and overseas– to Johannesburg, South Africa, over three days to discuss regional integration in Africa. A few of the key conference themes included: inclusive growth, convergence and monetary unions, fiscal policies as well as trade and transportation liberalization.

Speaking at the 2013 AEC, Ncube said: “What motivated this book is what we are experiencing globally with the use of unconventional monetary policy, since the advent of the crisis in 2008 to deal with the crisis.

“What we are trying to do here is to see how monetary policy in South Africa is responding to the slowdown of the economy and whether there is any transmission as well of QE [quantitative easing] globally into South Africa.”

The book, published in August, presents a historical account of the evolution of South Africa’s monetary policy. It analyzes the channels through which monetary policy takes effect and considers the impact on output, such as GDP. The introduction of inflation targeting into South Africa, at the turn of the new millennium, had positive effects as it dropped the variability of inflation and the variability of output. Furthermore, the SARB ensures that inflation remains in the three to six percent band.

The authors also highlight the South African housing market in which the higher the interest rate, the higher the market rate, the lower the disposable income once the mortgage is paid, which mean less money in pockets and therefore lower consumption.

But monetary policy also has an impact abroad: “Something that surprised me was that monetary policy and even exchange rate policy perturbations have a bigger impact on imports than exports, because if I am squeezed for income I just import less,” said Ncube.

Similarly, just as monetary conduct in the United States has an impact on South Africa – in terms of output, stock prices and the exchange rate – so South Africa’s activities have an impact on the Southern African Development Community (SADC) and the rest of Africa.

Victor Murinde, Director at the African Development Institute at the AfDB, praised the book, alongside numerous participants, and demonstrated its significance. “It [South Africa] has a kind of Germany-policy-in-Europe effect. Before the euro, whatever monetary policy the German Government adopted had an impact on all the other countries in Europe. So, this is a very timely and important book at a time when we are talking about regional integration.”

“Increasingly, we realize that most of the middle-income countries are looking for knowledge from the [African Development Bank], you can never find enough money, but knowledge adds to policy debate,” noted Ncube.

Indeed, many valuable lessons come from the biggest economy on the continent.