SA has some leeway on inflation - IMF

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Strauss-Kahn says the budget was inline with what is needed.

JOHANNESBURG (Reuters) - South Africa's government is right to set inflation targets but has leeway for some flexibility as the country looks to emerge from recession, International Monetary Fund head Dominique Strauss-Kahn said.

"I have to applaud steps taken in the new budget. The budget was in line with what is needed for the South African economy," he told reporters, adding that he agreed with "most points" of the government's economic policy.

Under plans presented last month, Finance Minister Pravin Gordhan aims to only gradually reduce the budget deficit to help spur a recovery, keeping up spending to help create jobs.

The government kept its 3 to 6 percent inflation target intact, though Gordhan wrote to Reserve Bank Governor Gill Marcus stressing she had the flexibility to also focus on growth and jobs.

"Inflation targeting is certainly for an economy of this size...the right policy to follow," Strauss-Kahn said. But it should be implemented with "some flexibility".

The trade union allies of South Africa's ruling ANC want inflation targeting to be scrapped, arguing the central bank's attempts to control prices have left interest rates too high, hurting the economy.

Analysts, though, say the Reserve Bank is already flexible in its decision-making, having cut the repo lending rate by 5 percentage points to 7 percent between December 2008 and August last year despite inflation being outside the target band.

RESPONSE APPROPRIATE

The government's response to the global economic crisis was appropriate on both the fiscal and monetary policy side, Strauss-Kahn said, while in South Africa as part of a three-country Africa tour to assess the fallout from the crisis.

South Africa's Treasury kept up spending during the global slowdown and a domestic recession despite a fall in revenue, while the central bank cut interest rates, although not excessively.

Africa's biggest economy fell into its first recession in 17 years at the end of 2008 but a recovery, that started in the third quarter of last year, appears to be gathering pace. The economy shed nearly 900,000 jobs in 2009.

Strauss-Kahn reiterated comments from Tuesday that some sectors of the economy, particularly banking and telecommunications, needed more competition. This would also help to contain inflation, he said.

The banking sector in South Africa is dominated by four major banks -- Standard Bank, Absa, Nedbank and FirstRand.

On Zimbabwe, Strauss-Kahn said the IMF was not yet at the point of resuming lending to the country.

IMF member countries agreed unanimously last month to restore Zimbabwe's voting rights after a seven-year suspension, a step toward normalising relations with major donors.

However, the IMF said that Zimbabwe was not eligible for financial aid until it had cleared its arrears to the Fund and had a plan to pay off arrears to the World Bank and African Development Bank.

Its voting rights were suspended in 2003 due to differences with the government of President Robert Mugabe, whose policies are blamed for an economic collapse.

The formation of a unity government with opposition leader Morgan Tsvangirai has helped ease tensions but the country is battling to recover from its slump.