South Africa’s central bank governor urged nations where investment opportunities exceed local saving rates to cautiously embrace capital flows, rather than shun them and miss out on the potential economic growth benefits.
“We need to remain optimistic about capital flows and vigilant about the risks, rather than pessimistic about the flows and allergic to the risks, or naïve about the flows and blind to the risks.” Recent capital flows into South Africa have permitted the build-up of a large sovereign debt position, which has eroded potential growth, the governor said. Gross government debt stood at 70.9% of GDP for the year through March 2023, from 23.6% in 2008-09.
The “reserve accumulation approach may well work better than trying to restrain surges with capital flow measures, in a general sense, with reserve growth during inflow phases and the option to release reserves during outflows,” the governor said. “And it is a particularly useful option where flows are going to government debt and regular capital flow measures are not viable,” he said.