Kganyago says local government reforms are now urgent

Story audio is generated using AI South African Reserve Bank governor Lesetja Kganyago has sounded the alarm on the urgency of reforms to put the economy on the path to recovery. He says recovery from inflationary pressures will have to start domestically. Announcing the unchanged policy rate to reporters in Pretoria on Thursday afternoon, Kganyago said the country’s first-quarter growth was stronger than expected, running close to 2% year-on-year, although this was largely attributed to higher net exports rather than growth in domestic demand. “We started this year with good momentum, but households have suffered from higher fuel prices while uncertainty has weighed on investment. It is also increasingly clear that municipal dysfunction has become a binding constraint on growth,” he said. “With domestic reforms, we think the economy can get back to a rising growth trend as global conditions stabilise. Our baseline forecast is that the economy starts to recover in the second half of this year, as the shock fades. But the outlook is uncertain.” Despite inflation rising to 5% in June and broad expectations of a rate hike, the Bank’s monetary policy committee (MPC) kept the policy rate unchanged at 7%. Four members preferred to keep rates on hold, while two favoured an increase of 25 basis points. Kganyago said the central bank expects slower growth through the second and third quarters of this year, as consumer confidence has fallen sharply, business confidence has weakened and the war between the US and Iran has dampened activity. We started this year with good momentum, but households have suffered from higher fuel prices while uncertainty has weighed on investment. It is also increasingly clear that municipal dysfunction has become a binding constraint on growth. — Lesetja Kganyago “We recognise that South Africa’s growth prospects will be driven mainly by domestic reforms,” he said. “This covers structural interventions, such as fixing local government and improving productivity in the network sectors, such as transport and energy. It also includes the macroeconomic goals of sustainable debt and permanently lower inflation.” Kganyago’s warning comes amid significant interventions being made in the local government crisis, including the National Treasury temporarily withholding equitable share transfers from municipalities it says have not adequately dealt with unauthorised, irregular, fruitless and wasteful expenditure. In Stats SA’s release on the June CPI print, statistician-general Risenga Maluleke said annual consumer price inflation (CPI) was 5.0% in June, up from 4.5% in May, and housing and utilities were the second-largest contributor after transport. “The CPI increased by 0.7% month-on-month in June 2026,” Maluleke said. “The main contributors to the 5.0% annual inflation rate were transport [at] 12.7% and contributing 1.7 percentage points; housing and utilities [at] 5.5% and contributing 1.3 percentage points; and insurance and financial services [at] 5.9% and contributing 0.6 of a percentage point.” In its second-quarter update for 2026/27, the Business Leadership South Africa Reform Tracker said that because the National Treasury plans to review the local government fiscal framework by 2028, there will be little movement in terms of local government reforms before then. “The first phase of the review of the local government fiscal framework was expected in March 2026. No progress updates were reported in the April 2026-June 2026 quarter. The review aims to critically examine the financial viability, effectiveness, stability and long-term sustainability of the fiscal framework governing local government finances.” Water boards have been left reeling by the truancy of municipalities they supply with water. The Umgeni-Uthukela Water corporate plan 2026-2030 warned that immediate work must start to engage local and national government and negotiate and enforce payment plans with municipalities. “The short to medium objective is to focus on building resilience through operational efficiencies, while the long-term goal is to maintain liquidity buffers and diversify funding sources to mitigate risk,” it said. The corporate plan said in August 2018 that the KwaZulu-Natal MEC for co-operative governance & traditional affairs had resolved to invoke section 139 of the constitution at the uThukela District Municipality due to its lack of capacity to undertake water and sanitation functions. “The lack of capacity has led to poor infrastructure, which led to plants operating above design capacities and being in poor condition. However, invoking section 139 of the constitution did not yield its intended objectives.” Rand Water’s corporate business plan 2027-2031 said the entity continued to operate within a highly constrained economic environment characterised by escalating input costs and poor municipal payment performance. The lack of capacity has led to poor infrastructure, which led to plants operating above design capacities and being in poor condition. However, invoking section 139 of the constitution did not yield its intended objectives. — Umgeni-Uthukela Water corporate plan “Key cost drivers, including energy, treatment chemicals and labour, have increased significantly, placing upward pressure on operational expenditure,” it said. “These cost pressures are further exacerbated by high levels of non-revenue water at municipal level, driven by infrastructure leaks, illegal connections and unbilled consumption.” North-West University Business School economist Prof Raymond Parsons says — as does the MPC — that South Africa has the potential to drive its economic growth higher by strengthening confidence in its domestic reform agenda. “If the economy is to break out of its current narrow 1%-2% growth corridor, the pace, co-ordination and implementation of growth-friendly policies and projects will have to be bolstered,” he said. “This is now the priority if the GNU’s growth target of 3.5% by 2030 is to be achieved.” Dr Andrew Golding, CEO of the Pam Golding Property Group, said consumers continued in a challenging environment, but the MPC’s decision recognised the importance of balancing inflation risks with the need to support economic activity and household finances.