South Africa has emerged safely from an eventful 2024. The once all-powerful ANC lost its parliamentary majority and a government of national unity (GNU) assumed power without riots or bloodshed. This transition is as important as the political changes South Africa saw in 1924, 1948 and 1994.
The GNU dealt with and survived challenges, mainly owing to the Tina principle: There is no alternative. The GNU is made up of parties that respect the constitution and constitutional supremacy. The alternative is a coalition of parties known (ironically) as the progressive caucus, advocating parliamentary supremacy. This is a terrifying prospect to be avoided at all costs.
South Africans want to see more political maturity from this GNU than we got from the one that held power from 1994 to 1996. Reflecting on that period, the uneasy feeling prevails that the previous GNU ended as a result of personality clashes of people inside and outside the government.
Personalities also play a role in this GNU. It has become obvious that certain cabinet members are not fit to serve. Others made unfortunate mistakes, some of which bordered on stupidity. The outstanding example of questionable action is ministerial appointments in the ministry of agriculture. I wish minister John Steenhuisen more wisdom in 2025.
From an ethical perspective, a simple general principle should always apply. If permission to bend rules is necessary to make a special ministerial (or any other) appointment, rather find another candidate. No single candidate is worth anybody’s reputation.
Ethics and reputation bring us to Stellenbosch University in 2024. Hardly ever in living memory did so many respected academics sacrifice their ethics and reputation to protect the questionable actions of a rector and vice-chancellor. This is the same rector and vice-chancellor who did not understand the ethical problems of special treatment of family members a few years ago. Little has changed, as he was then also protected by academics sacrificing their reputations.
If South African universities, as institutions of academic freedom and free speech, cannot act ethically and set an example, who will call the GNU to order? After all, a great deal of the opposition to the National Party government in the period before political change in 1994 emanated from universities.
Reflecting on an eventful 2024, one cannot help but ponder the question of whether there is ever a normal year. How would a normal year be described?
The main challenge facing the GNU in 2025 is not “continued global political tension” or “political unrest”, but South Africa’s economic malaise.
For some reason economists prefer the phraseology “continued global political tension”, which simply means major international wars will continue. “Political unrest” is the preferred phraseology for riots in Mozambique that could escalate into a new civil war.
Maputo is only 440km from Pretoria. In 2025, the GNU should therefore focus much more attention on the situation in Mozambique and concern itself less with the Middle East. The only problem is that a focus on the Middle East gives South African politicians more exposure in the international media. They crave such exposure, whereas helping deal with riots in Mozambique is much less sexy.
The main challenge facing the GNU in 2025 is not continued global political tension or political unrest, but South Africa’s economic malaise. The country has been in a trap of low economic growth for more than a decade.
With local government elections looming in 2026, the GNU must ensure that South Africa’s economic performance improves during 2025. By the end of the year, economic growth must be higher, with a concomitant decline in unemployment to ensure a positive election outcome in 2026.
Here are the first two of the “threes” that South Africa should aim to achieve:
- The real economic growth rate must improve to 3% a year;
- At the same time, unemployment must decline by three percentage points (about 10% of the official rate of about 33%) a year. Declining unemployment is dependent on higher economic growth, which should therefore be the main focus of the GNU.
The GNU can support improvement in economic growth in many ways.
One is logistics, where the private sector can render support. Similarly, better service delivery at municipal level and a general initiative to clean towns and cities will draw local investment and therefore economic growth and employment. To do this, the central ANC leadership will need to find the guts to act against its incompetent and corrupt local representatives.
The third of the threes is the easiest to achieve:
- The announcement of a lower inflation target. The target range of 3%-6% was set more than 20 years ago. This has evolved to a focus in practice on the midpoint of 4.5%, which resulted in declining inflation expectations.
South Africa adopted inflation targeting as a monetary policy anchor after considerable difficulty in containing high and accelerating inflation. People have short memories and the serious inflation problems of the 1970s and 1980s are widely forgotten. Our inflation started accelerating in the 1970s and the Reserve Bank seemed powerless to contain increases in the general price level, using measures such as credit control and a credit ceiling.
Achievement of the lower target of 3% will lead to lower nominal interest rates
The situation worsened in the 1980s, with the average annual inflation rate reaching nearly 15% in that decade. The Bank’s efforts to contain price increases by using a money supply growth target were unsuccessful. The result was considerable financial hardship for poor people, who had to survive amid rapid price increases.
A major contributing factor in the 1980s was erosion of the autonomy and independence of the Bank, which impeded its ability to conduct sound monetary policy. The infamous Primrose incident is the best example. The Bank got caught up in political pressures by lowering interest rates in November 1984, just before a by-election in the Germiston constituency of Primrose. Shortly after the by-election, won by the National Party, rates were increased to their previous level.
It took a new governor at the Bank to restore its autonomy and independence. Chris Stals used eclectic monetary policy to successfully contain price increases and inflation for the first time in more than two decades.
The gains in lowering inflation culminated in the announcement of an inflation target, as policymakers and the public realised that there was no reason that South Africa should have permanently high inflation. These hard-earned gains under the leadership of Stals and subsequent governors, using inflation targeting as a monetary policy anchor, should never be taken for granted. As accelerating inflation is always a clear and present danger, avoiding this should remain the focus of monetary policy.
The central bank uses interest rates as its monetary policy instrument. It is vital to understand that one instrument can be used for one policy objective only. In South Africa, this instrument is used to contain inflation. It cannot be used to achieve a whole series of other desirable objectives as well. If the level of interest rates is set with other objectives in mind, South Africans might soon again have to face the problem of runaway inflation as was the case in the 1970s and 1980s.
South Africa is now ready for the next bold step. It is time for the minister of finance to announce a lower inflation target of 3% a year. As inflation targeting is not an exact science, the target should allow for a range of one percentage point on either side: 2%-4%.
Achievement of the lower target of 3% will lead to lower nominal interest rates. At the same time, a lower target will also reduce inflation expectations from the current level of about 4.5%, thus feeding into lower wage demands. It will also align South Africa with the 2% inflation target used in many developed economies.
The main advantage of an inflation target of 3%, rather than 4.5%, can be seen in cumulative price level increases. An average annual inflation rate of 4.5% implies that the general price level will double after about 15 years and nine months. At 3%, this becomes 23 years and six months.
South Africa is ready for a series of threes in 2025. The GNU must deliver on these aspects to ensure its survival after the 2026 elections. There is no alternative.
*Rossouw is an honorary professor at Wits Business School and a former head of the school, and a former deputy general manager and currency specialist at the Reserve Bank
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