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Pravin Gordhan’s high profile week in Washington

Work on the CRA should be completed by March, SA’s finance minister told Moneyweb.

WASHINGTON: It wasn’t just the meetings of G20 and BRICS finance ministers that kept Pravin Gordhan busy last week at the International Monetary Fund. South Africa’s top economic policy maker was everywhere, participating in three high level seminars attended by hundreds of bankers and academics from the around the world.

It began with Gordhan joining World Bank president Jim Yong Kim on a five-person panel discussing the advance from “poverty to prosperity.”  Eminent Financial Times economics columnist Martin Wolf chaired the session.

Next was a forum entitled “taxing times,” with Gordhan seated next to International Monetary Fund chief Christine Lagarde.  The Mexican and Ugandan finance ministers also participated.  There Gordhan emphasised the importance of a prudent fiscal strategy and tax equity and said SA is building a “sound, legitimate tax authority.”

Gordhan’s final panel was “developing a global development framework.” Here he was sandwiched between the World Bank’s chief economist and the French minister of development.

But the heavy lifting came on Thursday and Friday. Arguably, Gordhan’s most significant interchange was in the meeting of BRICS finance ministers who sought to advance both the proposed New Development Bank (NBD) and the Contingency Reserve Arrangement (CRA), a pool of money to be available for members who get into financial trouble.

Gordhan told Moneyweb that work on the CRA should be completed by the time BRICS leaders next meet in Fortaleza, Brazil this coming March.

Brazil’s central bank chief Alexandre Tombini said the CRA will have an initial capital of $100 billion. He is proposing that three BRICS nations—Brazil, India and Russia—contribute $18 billion each, leaving $47 billion for reserve-rich China and $5 billion for South Africa, whose economy is much smaller than its peers.

Concerning the BRICS bank, Gordhan said, “We’re making good progress. There’s lot of details that we’ve agreed on.” Those details were not disclosed.

Work on the BRICS bank – the NDB – is unlikely to be completed by the time of the Fortaleza summit. As yet there is no agreement on who will head the bank or where it will be located.  Brazilian central bank chief Tombini said the bank will have an initial subscribed capital of $50 billion, with each BRICS nation contributing $10 billion, only two billion of which would be paid in.  Non-BRICS nations will be invited to join but the BRICS countries will retain a voting majority.

Like other emerging market ministers, Gordhan expressed concern about the destabilizing effects of rapid flows of investment capital from advanced economies. These hot money flows, cash in search of yield, have whipsawed emerging markets ever since the US Federal Reserve began its money-creating quantitative easing policy in the aftermath of the great recession.

In 2011, with the rand at a three-year high, Gordhan worried that capital inflows may have excessively strengthened the currency. This year–until this month–capital has reversed course and flowed out of emerging markets as investors assumed that the Federal Reserve was about to cut back on asset purchases. Like the Indian rupee and Brazilian real, the rand dipped sharply and reached a four-year low, prompting Gordhan to say in August that the currency had fallen too much. The exchange rate, he said, remains the key indicator of capital flows.

In Washington, Gordhan called on the IMF to do more work on how hot money flows can be stabilised.  He said in the G20 discussions the advanced economies were reminded that extraordinary measures like quantitative easing have significant impacts on emerging economies.  He said the G20 has an important coordinating role, “which still must be shaped.”

While continuing to reject capital controls, Gordhan said there needs to be “certainty, predictability, and incrementality” in capital flows. What all emerging market economies want, said Gordhan, is “greater consistency and levelling” of capital flows.”

All in all, it was a whirlwind week for Gordhan. It was, to this reporter, reminiscent of the high profile presence that his predecessor Trevor Manuel used to maintain in Washington where for several years he chaired the World Bank’s multi-lateral Development Committee. Asked how he was coping with the frenetic pace, Gordhan replied, “I’m just doing my job.”  

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