Kganyago warns VAT changes are economic shock amid budget delay

South African Reserve Bank Governor Lesetja Kganyago says increases or decreases in VAT will be treated as an economic shock. This follows the postponement of this year’s budget after Cabinet disagreed on the proposed 2% VAT increase.

Kganyago was speaking to SABC on the sidelines of the G20 meeting of Deputy Miniters of Finance and Deputy Central Bank Governors.

This year’s budget proposed an increase of VAT from 15 to 17 percent to raise an additional R58 billion in revenue. The Reserve Bank says when VAT goes up it is treated as a negative shock, and when it goes down it’s treated as a positive shock.

The Bank says it only reacts when the VAT increase leads to further price increases.

“Part of it is that they are not only charging VAT but also paying VAT they might take that into account and it perpetuates the central bank has to react to that but if it is just a once-off shock and we also do not see prices continuing to rise as a result of VAT increase there is no need for the Central Bank to respond,” Kganyago explains.

Kganyago also comments on the 12.7% electricity tariff hike approved by the National Energy Regulator of South Africa.

“The tariff that we assumed in our forecast were higher than what NERSA had proposed so in that instance it does not change the inflation outlook, but it will still lead to inflation. What I’m saying is that we had made a particular assumption based on what Eskom has requested.”

President Cyril Ramaphosa will on Wednesday open the first meeting of the G20 of Finance Ministers and Central Bank Governors under South Africa’s Presidency.