Hon Speaker, hon Ministers, Deputy Ministers and hon members, the Medium-Term Budget Policy Statement provides the basis upon which the 2011-12 Budget and Medium-Term Budget Expenditure Framework will be funded. The fiscal policy guides government's decisions about revenue spending and borrowing. The South African government's fiscal policy enables it to deliver on its developmental mandate by providing resources in a manner that is sustainable and reinforces the stability of the economy.
As we all know, the budget is a function of economic growth that underpins sustainable developmental goals of governments. Therefore, this Medium-Term Budget Policy Statement has based its proposals on the assumption of how the economy might perform globally and locally. Our starting point is premised on the understanding that the world in which we live in inherently imperfect and that we are part of the same world we ourselves seek to understand.
However, our approach should be underpinned by our understanding that globalisation is not about bridging the economic divide between poor nations and rich nations. Evidence has shown that it has engendered sovereign interests, greed and prosperity for the few rich nations and hence it should not come as a surprise to all of us that big economies such as the US have recently resorted to currency depreciation and pumping billions of US dollars into the market, which will definitely have serious and dire consequences for emerging economies such as ours. One of the key lessons that world policy-makers, particularly from developed countries, have come to terms with in relation to this recent financial economic crisis, is that when money becomes free, even the rational lender will keep on lending until there is no one to lend to. They will lend to people with no jobs, people with no income and sometimes to people with no assets. That is the basis on which we have found the world economy to be today.
The above observation can be attested to by the current currency war debate which has dominated the recovery path of the world economy. Whilst it is important to focus internally on the value of our own currency the rand, in particular, and the exchange rates, coupled with low inflation and slow economic recovery, it is equally important to note that countries such as Brazil, China and India, which are export driven, have chosen to retain their currencies at a low level to stimulate and propel their economic growth, supported not only by exports, but by domestic demand and domestic savings.
Therefore, it is understandable that there is a need in our case to find a balance between external and domestic demand for goods and services we produce on our own. The 2010 Medium-Term Budget Policy Statement indicates that the net capital inflows to South Africa have risen strongly over the past two years, reaching 5,5% of GDP in the first half of 2010, compared to 4,7% in 2009 as a whole. This shows that the positive achievement of our flexible exchange control mechanisms strengthens investor confidence, although short-term speculative investments dominate the current phase of our economy.
The key economic questions that require our immediate attention are as follows: What are the implications of retaining relatively high interest rates as compared to the developed and developing economies in the same space in which we operate? The implications of short-term speculative capital inflows in the long run need to be examined. We also need to ask: Can a weaker currency improve domestic demand and productivity? What is the impact of all those things on foreign reserves?
Considering South Africa's low savings propensity and its dependency on foreign capital inflows to finance its current account deficit and funding requirements, negative perceptions may have serious adverse repercussions. The timing of interventions is of critical importance in our own currency in order to minimise the unintended consequences, for example a negative impact on the cost of investments related to imports, while exports may not recover sufficiently owing to weaker global demand.
As we ponder these questions, we must also remind ourselves that our key priority spending on infrastructure projects such as roads, stadia and social spending, particularly on health and education, were sustained over difficult periods. We must thank the Minister and his team for those achievements. Secondly, key to the responses we give to the above challenges should remain the creation of decent work and youth employment in particular. Despite the positive global economic outlook, the forecasts are that recovery remains fragile and uncertain.
The growth prospects are likely to be negatively affected by the following factors as defined in the Medium-Term Budget Policy Statement: depressed employment and low demand in many countries, particularly in the United States; a threat of deflation in developed economies attributable to low levels of capacity utilisation and weak demand; a threat of rising debt levels in most of the world's largest economies; and the challenge of banking sector reforms in reducing nonperforming banking system assets.
Monetary policy instruments alone are not sufficient conditions to tackle the current economic challenges. Therefore, we must explore other possibilities that emerge from this crisis. This presents us with an opportunity to look into improving our competitiveness and productivity to stimulate our own local economy. The need to integrate regional economies to broaden our consumer base and demand for own products is imperative to the future of the continent and ourselves.
We agree with the Minister that the challenge is not to dwell and yelp about the past, but to focus on what needs to be done to improve the lives of ordinary citizens. As we do so, we must think of the younger generation's prospects to realise employment. For us as South Africans to meet our priorities, the Medium-Term Budget Policy Statement seeks to put us on a new growth path that will propel economic growth from 6% to 7%. Such growth will require serious engagement and compromises by all social partners.
Therefore, we welcome and support the executive for adopting a new economic growth path that will form the basis of engagement with all relevant stakeholders, business, labour, government and the rest of civil society. In entering the space of discussions, we will require people with sober and practical minds - leadership that will not elevate sectarian interests above the interests of the nation as a whole.
The Medium-Term Budget Policy Statement analysis of the global economic outlook and its attendant policy propositions are consistent with the ANC policy of positions regarding South Africa's role in the global economy to better the standard of living of ordinary citizens. On the basis of this, the ANC supports the Medium-Term Budget Policy Statement. I thank you. [Applause.]