Municipal Finance Management Bill: deliberations; MTBPS Committee Report: adoption

Meeting report

FINANCE PORTFOLIO COMMITTEE
11 November 2002
MUNICIPAL FINANCE MANAGEMENT BILL: DELIBERATIONS; MTBPS COMMITTEE REPORT: ADOPTION

Chairperson: Ms B Hogan (ANC)

Relevant Documents:
Municipal Finance Management Bill: Draft of 13 September
Working draft of Chapter 8A: Utilisation of External Mechanisms for Performance of Municipal functions
Working draft of Chapter 9: Governance of Municipal Entities
Working draft of Chapter 11: Resolving Financial Problems in Municipalities
Working draft of Chapter 10: Financial Reporting and Auditing
Working draft of Chapter 12: General Treasury Matters

Report on Medium Term Budget Policy Statement (See Appendix)

SUMMARY
The Committee focused on Chapter 8A of the Municipal Finance Bill. The Committee Report on the Medium Term Budget Policy Statement was adopted.

MINUTES
Medium Term Budget Policy Statement
The Chairperson presented the Finance Portfolio Committee's report on the Medium Term Budget Policy Statement to the Committee. The Report was agreed to, with Mr Hanekom (ANC) remarking that it was a very good report.

Municipal Finance Management Bill
Mr Dorfling (SALGA) proposed a change to Chapter 4 Clause 16 (2). He suggested changing the time period from 90 days back to the original 120 days for logistical reasons. His proposal was accepted.

Chapter 8A Utilisation of External Mechanisms for Performance of Municipal functions
Ms Taljaard (DA) asked the Treasury what the rationale is behind the policy of prohibiting minority shareholders.

Mr Pillay (National Treasury) replied that it is intended to facilitate the utilisation of funds. He added that one of the biggest problems they encountered is the lack of transparency in reporting back to a municipality around those types of investments.

Ms Taljaard asked whether the definition of public-private partnership is intended to be an exhaustive description. With particular regard to subsection (a)(iii) it could questioned whether the definition was broad enough to also cover transfer contracts. If the intention is to have a broad-based description, she felt it is not broad-based enough.

Mr Pillay said he would double-check this.

Ms Taljaard commented that what she finds missing in (a)(i) is a reflection of infrastructure development by a private entity.

Mr Glasser (Treasury) commented that the kinds of public-private partnerships that are possible are dealt with by a variety of different provisions in this bill.

The Chair decided that they would put this issue on hold and come back to it later.

Mr Van Ronge (South African Local Government Organisation) proposed changing the words net benefit to financial benefit in the definition of "value for money".

Mr Glasser suggested replacing as defined in terms of with considering. This was agreed to.

Ms Taljaard commented that there is no indication that the payment of fees would form part of the agreement between the municipality and the external provider.

Mr Pillay said that this is a good point and that he would look at it.

On clause 45H Ms Taljaard asked if they should be so prescriptive as to determine that there has to be a specific public-private partnership unit in every municipality.

Mr Pillay replied that they are looking for a process that gets monitored by the municipality. For those purposes you need such a unit.

Mr Dorfling expressed his concern about the cost of these units.

Ms Hogan commented that public-private partnerships are not easy and that the managing of contracts is very important.

Ms Taljaard asked whether in Clause 45 I (2) they could supercede the Companies Act in this way.

Mr Pillay said he had asked Mr Grove (Treasury drafter) to look at this issue specifically and he was fine with it.

Ms Hogan admitted that she finds it astonishing that they can overrule the Companies Act.

Ms Taljaard expressed her doubt about the advisability and legality of superceding the Companies Act.

Mr Pillay stated that they have asked other legal advisers to look at it.

The Chairperson emphasised that they need to get clarity on the relationship between the two acts.

The meeting was adjourned.

Appendix:
Report of the Portfolio Committee on Finance on the Medium Term Budget Policy Statement (29 October 2002)

The Portfolio Committee on Finance reports as follows:

1. Terms of Reference and hearings
The Minister of Finance tabled the 2002 Medium-Term Budget Policy Statement (MTBPS) before Parliament on Tuesday 29 October 2002. The 2002 MTBPS sets out the macroeconomic context and fiscal policy considerations against which the 2003 Budget will be framed. It outlines developments in tax policy and the main spending priorities for the next three-year (2003/4 to 2005/6) Medium-Term Expenditure Framework (MTEF) period, including allocations to provincial and local government levels.

The terms of reference of the Finance Committee were:
To hear from the Minister of Finance and the Director-General of National Treasury on the MTBPS and to report on these hearings.
To analyse and debate Chapters 2, 3 and 4 of the Medium Term Budget Policy Statement (MTBPS). These are the chapters covering Macro economic challenges and adjustments, fiscal policy and budget framework and Taxation.
To hold hearings on the issues dealt with in chapters 2, 3 and 4. Chapters 5 and 6, dealing with the medium term expenditure framework and provincial and local government finances were referred to the Joint Budget Committee which will report separately.

In a joint sitting with the Budget Committee, the Finance Committee heard evidence from and questioned the Director-General of National Treasury.
Then, in order to thoroughly analyse and debate the issues dealt with in chapters 2,3 and 4, the Committee invited the eonomists representing the following institutions to give evidence: JP Morgan, Mazwai Securities and Sanlam.

The content of the MTBPS is briefly summarised below, as are the individual presentations thereafter.

2. THE MTBPS IN SUMMARY
2.1 Introduction and overview
The Minister drew particular attention to our strong economic recovery over the past year, which requires upward revision of GDP growth projections, to 2.6 percent for 2002 and 3.5 percent for 2003.

Important signs of investment in the productive capacity of the economy are starting to show. Private consumption is growing steadily at some 3 percent annually, supported in part by tax reductions, and real spending on government services is also increasing.

The rise in inflation this year was a setback for the inflation reduction objectives, which are now been revised to remain 3-6 percent for 2004. The Minister expects inflation to decline during 2003, and to fall to under 6 percent of the CPIX average in the last quarter.

The Commission of Inquiry into the rapid depreciation of the Rand has endorsed government's policy of gradual exchange control liberalisation, which policy will continue. In the spirit of NEPAD the allowance for investment into Africa is sharply increased in the MTBPS.

2.2 Macroeconomic challenges and adjustments
The MTBPS is formulated against the background of macroeconomic projections, whose conditions determine its revenue envelope. Despite an unpredictable global economy, with shifts in key commodity prices, the investment climate and subdued global growth, the Treasury feels cautious optimism.

The domestic economy has shown robust and broad-based strength, despite the declining international trend. South African exports and tourism grew strongly - an unexpected benefit of the fall of the rand - and firm commodity prices (especially for gold and platinum) led to a trade account surplus of 5 percent of GDP. The exchange rate is now stabilising at a level which appears beneficial to sustained growth.

The rate of job losses has declined to the point of stabilisation, and net job creation is expected soon. The balance of payments shows an R27 billion surplus, with small current account and financial account surpluses. Domestic investment and consumption have also stayed positive so far. The latter may reflect tax cuts to low-income earners in the next budget.

Net foreign direct investment levels of R8,3 billion in the first half of 2002 were positive, with real gross fixed capital formation growing to 6 percent in the first quarter of this year, and 7 percent in the second, indicating healthy levels of net foreign investment. The exchange rate is stabilising

Inflation is the major challenge, impacting disproportionately on poor households. The depreciation of the rand during the fourth quarter of 2001 was followed by high oil prices, production cost pressures and a 20,2 percent rise in food prices in the year to September 2002. It is therefore expected that the projected inflation target for 2002/03 will be missed.

The Treasury expects CPIX to peak towards the end of 2002 at 9,6 percent. Accordingly, the Minister of Finance and the Reserve Bank agreed to adjust the inflation reduction objectives agreed between them to a band of 3-6 percent, with the 2005 target left open. The CPIX average is unlikely to fall within the target range again until the last quarter of next year.

Despite this, overall government debt is down, and debt servicing levels are healthy.

2.3 Fiscal policy and budget framework
Expansionary fiscal measures will continue, made possible by declining debt service costs which enable higher levels of spending. Debt service costs continue to decline steadily to 3,9 percent of GDP by 2005/06, with the stock of national debt down to a healthy 37,7 percent of GDP by 2005//06.

Accordingly, the 2002 MTBPS states that the stabilisation and structural changes initiated from 1996, enable the growth oriented fiscal stance set out in the past two budgets to continue - increased poverty reduction in tandem with measures to stimulate growth have become possible. Thus strong real non-interest expenditure growth averaging 4.7 percent a year in provided for, while moderate tax relief will continue in the face of adverse global conditions.

R84.9 billion more has been allocated over the 2003 MTEF period to address social and economic needs over and above the 2002 MTEF allocations. R57.1 billionn is allocated to infrastructure development, land restitution, health, education, higher education restructuring and improved courts administration. A further R27.8 billion is set aside to offset the effects of inflation, primarily for social grants and increases in personnel spending.

Revenue forecasts indicate an R8.1 billion revenue overrun, which reflects the impact of inflation and efficiencies in revenue collection. However, as a percentage of GDP, tax revenue is marginally below the levels forecast.

The net open forward position (NOFP) has been brought down to US$1,7 billion, from US$4,8 billion at the end of 2001. Of concern are the losses sustained on forward contracts over the previous four years, which have been accumulating in the Gold and Foreign Exchange Contingency Reserve (GFECR), and have now been brought into the budget. The Auditor General will verify the amount, projected at R27 billion on 31 March 2002. Government plans to pay this over the four-year MTBP period through the issue of R7 billion of zero coupon bonds a year. This situation must be monitored carefully as projected losses may increase further. Due to the depreciation of the rand, the Reserve Bank has incurred significant losses in settling its obligations on the forward book. A consolation is that the amount owed is in rands.

Although these payments raise future interest costs above the figures projected in the 2002 budget, debt service costs are still projected to decline to 4 percent of GDP by 2005/6. National government debt declines to 37,7 percent of GDP by 2005/06 and foreign debt declines to 7,1 percent of GDP by 2005/06.

2.4 Taxation
Tax revenue is projected to remain at about 24,5 percent of GDP (excludes UIF and social security funds). The 20002/03 revenue estimate was increased by R8,1bn, reflecting conservative estimates as well as strong company tax performances and SARS efficiencies.

National budget revenue collection this year is running ahead of target, which should allow for a further moderate real reduction in the personal income tax burden on lower and middle-income earners again during the 2003/4 fiscal year.

A thorough review of the taxation of retirement savings is also under way, with wide consultations and enactment into law by 2004. The Mineral Royalty Bill containing a proposed structure and design of a mineral and petroleum royalty system in line with international best practices will be introduced in 2003.

In addition to the accelerated depreciation allowed for manufacturing assets in terms of the 2002 budget, government is considering further measures aimed at expanding capital formation and technology research and development. Measures to support savings by lower income groups are also being considered.

A budget deficit of 2,2 percent of GDP is projected for the 2003/04 financial year, projected to fall to 2,0 percent in 2005/06 financial year.

2.5 Medium Term Expenditure Framework
The 2003 MTEF has the following priorities:
Extending social assistance, health and education
Investing in municipal infrastructure and basic services
Expanding capacity in the safety and security sector, with particular focus on court administration
Higher education restructuring
Accelerating land reform and restitution
Better services to citizens provided by Home Affairs
South Africa's growing international role, notably in NEPAD and the AU

The preliminary budget framework proposes R84,9 billion in additional allocations over the 2002 MTEF baseline amounts. Social and basic service delivery is prioritised, with provinces receiving the largest adjustments - a further R12,3 billion in 2003/4 rising to R20,8 billion in 2005/6. In relative terms, local government receives the largest increase, at 18,4 percent, compared with 9 percent for provinces and 7,3 percent for national departments.

The 2003 budget will consolidate and deepen the attainments of expenditure priorities in earlier budgets. Key priorities are continued investment in infrastructure, and extending basic and social service provision to reduce poverty and vulnerability. Government aims to strengthen service delivery to the poor, through higher rates of economic growth and development and through strengthening sustainable interventions to achieve increased equity and redistribution. The 2003 MTEF will therefore continue to emphasize spending on infrastructure and improving the quality of social service delivery.

Stable revenue performance and fiscal prudence which has led to declining debt service costs, has enabled Government to make possible higher levels of non-interest spending growth, averaging 4,7 percent in real terms over the 2003 MTEF.

2.6 Provincial and local government finances
The supplementary allocations to provinces will support the broadening and deepening of social services. Increased financial support to provinces will focus on the following programmes:
Social grants will continue to be adjusted to compensate for inflation;
A progressive roll-out of HIV/Aids prevention and treatment programmes together with a renewed focus on sexually transmitted infections, TB and malaria treatments;
Investment in hospital buildings and facilities, schools and clinics will continue to be enhanced;
Spending on learning support materials in schools and medical supplies in health facilities will be stepped up; and
Steady increases in investment in the provincial road network will be supported.

Capacity development which enables institutions to disburse allocations with increased effectiveness is an element of infrastructure building. Allocation to local government continues the emphasis on municipal infrastructure investment and the broadening of access to free basic water and electricity. Government rural development and urban renewal strategies provide a coordinating framework for creating jobs and extending development of communities.

The real growth in government spending on services is expected to contribute to moderate growth in employment in the years ahead. An amount of R400 million a year has been set aside for emergency relief for those facing desperate circumstances as a result of food shortages and food price increases.

3 TREASURY DIRECTOR-GENERAL'S PRESENTATION TO JOINT COMMITTEE
Director General of Treasury Maria Ramos gave evidence before the Joint Budget Committee on 30 October. In overview, the MTBPS was formulated against the background of an unpredictable global economy. But against this trend, the South African economy has seen steady real economic activity improvement, despite a marked increase in the inflation rate.

3.1 Highlights
The D-G drew attention to the following MTBPS highlights:
The Treasury has revised (GDP) growth forecasts upwards to 2.6 percent this year, from the 2.3 percent forecast in the budget. GDP growth is projected to rise further to 3,5 per cent in 2003/04.
The inflation target for 2002 and 2003 is projected to be missed, primarily because of direct and second-stage effects of currency depreciation and oil and food price increases. However, the Treasury expects inflation to drop to within the newly expanded 3-6 percent band in the last quarter of 2003.
Exchange control limits on investment into Africa will be increased from R750 million to R2 billion, in the spirit of support for NEPAD. Though further relaxation of exchange controls may be possible in the budget, the government remains committed to a strategy of gradual relaxation.
Expenditure will show strong real growth, averaging 4,7 percent a year over the 2003 MTEF period. Increased spending on social priorities is balanced with measures to increase economic growth, notably development of infrastructure and tax cuts targeted to low and middle income groups which enable stimulatory increases in consumption, as well as investment and technology friendly measures.
Revenue is again in excess of estimates, with an additional R8 billion reflecting both South African Revenue Service (SARS) efficiencies and robust company tax performances. In each of the coming three years, revenue is projected at just under 24 percent of GDP.
Revenue allocation between national, provincial and local government shows a shift towards the latter two. And important element of this involves developing local and provincial capacity to disburse allocated funds.
Budget priorities build on gains arising out of previous budgets: Social services - health, education, plus water and electricity for households - receive the largest increase, followed by crime fighting and justice, land restitution and mainly African international commitments.

4. ECONOMIST'S RESPONSES TO CHAPTERS 2, 3 AND 4 OF THE MTBPS:
Economists from three institutions - JP Morgan, Mazwai Securities and Sanlam - presented responses to the MTBPS.

It is important to note that their responses shared several common themes:

Each endorsed the trends of the medium-term budget policy as positive, while submitting input and suggestions on particular issues.
All saw, and endorsed, a shift in policy emphasis whereby fiscal mechanisms play an increasing role in combating inflation, rather than using monetary policy alone to lower inflation.
All felt that the deficit can be allowed to grow from its present low level, given the principles which structure expenditure at present.

4.1. SUBMISSION BY JP MORGAN (JPM)
4.1.1 MTBPS growth prediction over-optimistic
JPM expects weaker growth in 2003 than the official budget forecasts. They predict growth at around 2.5 percent while the MTBPS predicts growth of 3.5 percent in 2003. They believe that the MTBPS growth forecast is optimistic for a number of reasons:
Recent monetary tightening is likely to lead to a slowdown in household consumption over the next 12 to 18 months. Demand indicators are already showing signs of slowdown (retail and auto sales).
Lower investment: both bond and equity portfolio flows, notoriously volatile, turned negative in the second half of 2002. Outflows have picked up as expected, now that the Myburgh Commission investigation and report are complete.
Higher inflation: JPM predicts a further interest rate hike in November.
The official forecast of 6.4 percent export growth in 2003 looks difficult to achieve during subdued global growth recovery. There has been strong trade performance in the past 10 months thanks to a weak currency, but export performance is starting to drop off due to an uncertain global outlook.

4.1.2 Fiscal conservatism
JPM are disappointed that government has not taken the opportunity to reduce the tax burden further, believing that emerging economies have a window of opportunity to do this with positive effect at a particular stage of their restructuring. They believe that government now has plenty of scope to increase expenditure to advance tax reform, and to spend on infrastructure, given the capacity to absorb this. JPM believes that a larger fiscal stimulus could have been made in the budget statement, but government expenditure control remains unnecessarily tight.

They were generally very positive about Government's initiative to move away from regulating inflation purely with monetary policy and to use fiscal mechanisms such as reducing taxes to achieve their goal of keeping inflation low; however they felt that much more was needed.

4.1.3 Budget deficit is unnecessarily low
JPM believes that our budget deficit for 2002/3 and 2003/4 is unnecessarily tight at 1.6 percent and 2.2 percent of GDP, given infrastructure spending and tax reform needs. High infrastructure spending in the health and education sectors is needed in emerging markets, and ours is very low relative to other European emerging markets (Czechoslovakia 6.4; Poland 4.4; Hungary 5.3). We should be spending more. We may be missing our window of opportunity because all of our indicators are ripe now for increased expenditure.

It was however highlighted that although a more expansionary fiscal policy was desirable, this increased government spending should be carefully balanced between tax reduction and infrastructure spending because we still need to work on improving institutional capacity to absorb expenditure increases.

4.1.4 Further inflation overshooting of official forecasts is likely
JPM believes that inflation will continue to overshoot official targets. Therefore inflation forecasts for 2002/3 look optimistic, given evidence of second round effects of wage settlements and broad-based increases in inflation in 2002. They believe that, given the scale of inflation overshoot in 2002, and to prevent deterioration in inflation expectations, the SARB is likely to increase interest rates by a further percentage point in November. They expect inflation to peak at 12.2 percent in November. Their reasons are as follows:
Food price inflation remains a major cause for concern, and has been increasing steadily at both the producer and consumer level in the past year. JPM expects further increases.
Current inflation is broad-based: although inflation was initially driven by exogenous shocks, it has become very widespread.
Petrol price increases remain a major risk.
More pass-through from the Rand depreciation is a risk, both directly (although behaviour of corporate margins makes the extent difficult to predict) and through second-round effects via deterioration in inflation expectations and wage settlements.

4.1.5 Revenue collection
JPM believes that Government has been very cautious on revenue projections for 2002/3. Growth in Government revenue is forecast to be 10.1 percent for the year while JPM expects revenue growth close to 13 percent. This, due to very strong growth in corporate tax revenue (especially mining), strong retail sales which have helped VAT collection and continuing improvement in the efficiency of tax collection.

4.1.6 Inflation targeting suggestions
Much of the South African policy regime conforms to international best practice, but the 2002 experience suggests:
More frequent meetings of the Monetary Policy Committee are desirable, to enable rapid reaction to inflation-generating shocks. There is uncertainty over inflation forecasting due to structural change in the economy.
More information is required on transmission mechanism and inflation pass-through from rand fluctuations to improve accuracy of predictions.
The SARB should have a secondary objective of stabilising employment; its current escape clauses deal only with shocks.
The SARB is correct to just have an inflation target 1 to 2 years and not forecast too far in advance, until they know what is stable.

4.2 SUBMISSION BY MAZWAI SECURITIES (MS)
Overall, MS sees the MTBP as positive for economic growth together with poverty relief. It believes a still more expansionary stance could have been adopted without compromising fiscal discipline. MS perceives a seemingly conflicting stance in relation to inflation targeting, and is concerned that some issues on which the market wanted more information were not addressed.

4 2.1 Positive overview
MS welcomed the budget as both providing for poverty relief and pro-growth. The revenue overrun, the low 1,6 percent budget deficit and the estimated 41,4 percent debt to GDP ratio are all signs of fiscal health. The practical efforts to meet expenditure objectives are also positive, notably:
Increased infrastructure spending on public services at national local and provincial levels
The rise in the ratio of capital to current expenditure
Enhancing service delivery by grants for capacity building and restructuring

This budget provides for increased expenditure over the medium term, with expenditure expected to grow by 4,7 percent per annum in real terms over the period. The emphasis on poverty relief and social security spending is especially welcome as a step that is solely needed in poverty stricken areas of the country. The emphasis on education, health and improved infrastructure is also positive. Increased spending should also drive economic growth and social advancement.

Macroeconomic factors of note:
MS is bearish about international equity recovery, expecting it to stay where it is for the next 12-24 months
On the prospects for the rand, MS is positive, believing that export-based currencies should outperform others.
The issue of long term capital investment prospects for South Africa is hard to calculate. MS hopes it is seeing the beginning of a shift in international investor modalities from investment based on the growth rate, to investment based on the real interest rate, as theory would recommend.

4.2.2 Budget deficit may be unnecessarily low
Though expenditure is increasing and is being directed to Government's priority areas, nominal expenditure growth decreases over the period from 16 percent between fiscal years 2001/02 to 8,5 percent between 2003/04 and 2004/05. Non-interest expenditure growth also falls from 6,7 percent to 4,7 percent in the period.

MS questions whether a deficit at 1,6 percent of GDP is not too low, given the extent of socio-economic challenges that South Africa faces. They believe that the country could afford to borrow more, especially in the local bond market which is subject to supply pressures, and direct additional resources towards the economic upliftment of the people and job creation.

In such a situation, the deficit should be assessed in relation to real growth, with the deficit rate always kept below the real growth rate.

4.2.3 Concern: fiscal versus monetary policy framework
Though monetary policy is the sphere of the Reserve Bank, the government sets the inflation targets. The increase in government personnel spending this year was largely due to a 9 percent wage hike and the expansionary stance taken by fiscal policy. This raises the question of how effectively fiscal policy supports the desired lower inflation outcome.

The CPIX inflation forecast in the MTBP statement has increased from 6,7 to 10 percent this fiscal year, but falls to 4,8 percent in the outer year of the 2003 MTEF period. MS believes that this indicates that government is gearing itself up for higher inflation than targeted in the medium term, and will spend likewise. MS fears that there is a danger that this inflation scenario could become self-fulfilling because spending has been adjusted upwards. MS therefore believes that this budget adjustment indicates a marginal shift in government policy towards growth and away from low inflation.

4.2.4 Issues omitted in the MTBPS

There are a number of issues that the market wants clarity about, which were not addressed in the MTBPS:
Privatisation and Telkom: Market consensus is that the Telkom listing at the tabling of the 2002 budget in February is likely to realise less than half of the R12 billion proceeds originally expected. The market expected clarity as to what the expected proceeds from the IPO would be and how national treasury was going to make up for the shortfall in funding. This information was not forthcoming.
The Arms procurement deal. The market anticipated an update on costs of the arms procurement deal and expectations thereof. This information was also not forthcoming in the statement.
Inflation Targeting. Market participants were looking for clarity and predictability on how inflation targets are set, and for predictable procedures for rapid policy response to any shocks in future. The market is therefore still left with uncertainty on how the Reserve Bank will respond in future to inflationary crises, and what procedures will be in place for this.

4.3 SUBMISSION BY SANLAM
4.3.1 Macroeconomic consolidation and growth forecasts
Sanlam's chief economist commended the government's contribution and commitment to growth in recent years, and welcomed government's increasingly expansionary fiscal policy. South Africa's fiscal consolidation after the 1998 Asian crisis has been paying off increasingly strongly after 2001.

Growth rate: Sanlam forecasts 2,7 percent economic growth in the 2002/03 financial year, and is cautious about the 2003/04 financial year to be 2,9 percent, in contrast to the treasury's forecast of 3.5 percent for next year. Overall, hSanlam expects steady growth to continue.

The private capital spending trend is encouraging, but treasury's projected increase in consumption expenditure is unlikely in the near future, as the impact of 400 base point interest rate hikes experienced this year will be felt increasingly in the near future. An increase in consumption expenditure is only possible in the third quarter of 2003/04 financial year.

Export growth in particular has enabled South Africa to buck the world recessionary trend so far. Job losses have slowed, despite external shocks which have set off a number of second-stage inflationary trends, which will result in slower growth than projected by the MTBPS.

4.3.2 Inflation and the exchange rate
Sanlam believes that current inflation rates are at their peak with CPIX around 9 percent. They expect CPIX to decline to an average of 6 percent in 2003, falling further to 5,4 percent in 2004.

South Africa's inflation targeting regime is set to become increasingly effective, especially now the band has been broadened to 3-6 percent, which is realistically attainable. It is also an appropriate level for an emerging economy which needs to develop infrastructure and stimulate poorer households' consumption. Therefore, increasing use of fiscal mechanism rather than interest rates to contain inflation is appropriate.

Interest rates now are also at a peak, but cannot be expected to fall back to pre-shock levels, due to emerging economy dynamics.
Exchange rate: The volatility, and hence unpredictability, of South Africa's exchange rate is a major problem. The current balance between currencies seems in South Africa's best interest, and the rand outlook is steady, although in world terms the dollar is 20% overvalued, in the view of a number of economists.

4.3.3 SA trends compared to other economies
Sanlam compared South Africa's GDP growth and that of USA after 1994. South Africa's growth, though volatile in comparison, stands up well, with only five quarters of negative growth over the period.

He then compared South Africa's growth experience with other emerging economies in Asia, South America and Eastern Europe, based on the IMF World Economic Outlook, May 2002. On average he found SA economic growth is the least rapid, but it is also the least volatile - the most steady the eleven compared.

Recent falloffs in equity investment in SA of course reflects the bursting of the technology bubble, slowdown in world growth and concern with corporate accountability making investors increasingly bearish. South Africa's Mining Charter, Financial Charter, and Community Re-investment Bill have also caused foreign equity investors t o "vote with their feet".

4.3.4 Key macroeconomic policy shifts
The shift in priorities from inflation containment via interest rates to growth is positive.
The inflation target is now realistic, and the secular inflation decline trend is intact.
However, further structural decline in inflation will be difficult to achieve in this context.

4.3.5 Productivity and savings structurally important
Sanlam noted that productivity increases to date had come at the expense of job losses. They are however positive that steady economic growth will in future create more jobs, although these are likely to be in the skilled sectors.

Their other concern is lack of skilled labour, and they accordingly endorse government's strategic investment programmes and the introduction of learnership allowances.

4.3.6 Supporting savings/investment
The MTBPS intention to promote both a culture of saving, and its present work on a support strategy for increased access to deposit facilities by the poor is important, since tax relief alone cannot encourage savings by poor and remote households. Further measures are required.

However tax policy on the retirement industry is seen as regressive by Sanlam, although its introduction has been postponed till next year, Sanlam's view is that the proposed regime will also discourage people from savings.

Further relaxation of exchange controls is also important for this purpose.