IF INTEREST rates had remained accommodative since Gill Marcus was governor of the Reserve Bank, South Africa’s gross domestic product would have been more than R560 billion higher last year, two economists contend.     Bongani Shilubane African News Agency (ANA)
IF INTEREST rates had remained accommodative since Gill Marcus was governor of the Reserve Bank, South Africa’s gross domestic product would have been more than R560 billion higher last year, two economists contend. Bongani Shilubane African News Agency (ANA)

SA has a 'crimped economy' - Economists

By Edward West Time of article published Mar 19, 2020

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The Hawkish monetary policy adopted by the monetary policy committee (MPC) of the South African Reserve Bank (SARB) has significantly crimped economic growth and government coffers, a new study by two prominent economists has found.

The study is timely, because central banks worldwide have been aggressively cutting interest rates to boost economies that are slowing due to the spread of Covid-19.

The MPC surprised some commentators in January when it cut the repurchase (repo) rate by 0.25 basis points to 6.25percent, and many economists expect rates that might be cut today, due in part to the low oil price.

The econometric study was conducted by Professor Ilse Botha of the University of Johannesburg’s College of Economics, and Dr Roelof Botha, a part-time economics lecturer at the Gordon Institute of Business Science.

They found that if interest rates had remained accommodative since Gill Marcus was governor of SARB, South Africa’s gross domestic product (GDP) would have been more than R560billion higher last year than the more than R5trillion published recently by Statistics South Africa, which would have made an additional R145bn available to the government in this year’s Budget.

The additional funding to the government would have led to more fiscal stability in the Budget and could have been used to provide assistance to Eskom. The government would also have been able to create new infrastructure, deliver basic services, and probably keep rating agency Moody’s Investor Services at bay, the study’s authors said this week.

For the past five years, the economy has been suffering from a lack of demand - one of the key reasons for real GDP growth having stopped in its tracks.

“The adoption of a restrictive monetary policy stance immediately after the retirement of Marcus as the previous governor of SARB resulted in an increase in the financing cost of capital of more than 100 percent - an act of economic absurdity,” they said.

“The result has been predictable: negative real growth of private-sector credit extension, negative real growth of fixed-capital formation and, ultimately, negative GDP growth and a substantial increase in unemployment,” they said.

The negative effect of unduly high interest rates operates through two primary channels: households who rely on some form of credit to purchase goods and services, particularly houses and flats that are mortgaged, incur higher debt-servicing costs, which means the higher repo rate has the same effect as raising tax rates, as individuals are left with lower disposable incomes.

Second, businesses that want to expand their productive capacity have to factor the higher cost of capital into their feasibility calculations, which leads to a decline in the net return on investment and, in many instances, leads to expansions being cancelled or postponed.

Lower interest rates stimulate capital formation and household consumption expenditure, which together account for 78 percent of South Africa’s GDP, the authors said.

“In the face of the dwindling GDP growth and the country’s rising unemployment, it defies comprehension that the MPC has not been able to grasp the error of its ways and provide a much-needed stimulus to consumers and businesses alike,” they said, adding that the current monetary policy stance of the Reserve Bank was akin to self-inflicted economic sanctions.

“SARB is way behind the curve. A very deep cut in the repo rate is required - at the very least the removal of the gap between the upper target range for inflation and the average Consumer Price Index for 2019, amounting to 190 basis points,” they pointed out.

Absa said in a note this week that it expected the Reserve Bank would cut the repo rate by 25 basis points today, as well as in July.

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