Bitter medicine intended by repo rate increase is fatal to the quality of life for all
By Dr Sibongile Vilakazi
In an economy that continues to shed jobs, shrinking tax base and increasing social grant bill, you can imagine the shock on the May 25, 2023 when South African Reserve Bank Governor Lesetja Kganyago announced an increased in the repo rate by 50 basis point to 8.25% and prime lending rate to 11.75% with effect from May26.
This being the 10th consecutive increase in rates adding a total of 475 basis points to the repo rate since policy tightening began in Novembers 2021, also raising the borrowing costs to the highest level since May 2009.
The reality is that because of the difficult economic conditions, an average South African lives on credit and saving is a stretch. Since, each time the SA Reserve Bank increases the repo rate, it causes the commercial banks to also increase the rates at which they lend money to people and businesses, this makes life even harder for many.
As interest rates increases, we expect to pay more for bonds, loans, credit cards and even our Woolworths’ store card.
For businesses, it causes them to reduce on their expansions as input costs are on a rise, which slows growth and, ultimately, impacting on profits and future cash flows.
For the middle and lower class, it means retrenchments from work as employers reduce expenses, and it becomes near impossible for one to meet their financial obligations on credit repayments. This is a strain on the indebted who are already facing increases in fuel and food prices, while their income erodes.
Ironically, the continued increase in food and fuel prices, and load shedding having price effects on the cost of doing business and cost of living, and consumers demanding more money and credit are the main reasons for the repo rate adjustment.
With the economy suffering from inflation rate of 6.8%, which is outside the target range of 3% - 6%, and significant depreciation of the rand, the repo rate was increased to reduce the amount of money in the economy by curbing consumer spending. If inflation is high, rates are raised to control it, and if low, rates are lowered to encourage consumer spending and borrowing of money. Rates are therefore lowered or raised to stimulate economic growth and manage inflation.
With load shedding as part of our lives, we all have had to adjust and find ways to mitigate the shedding, such as buying inverters, gas stoves and to some extent, solar panels to light our houses. With these solutions, money that could have been channelled somewhere else has been spent on electrifying our houses during load shedding.
Farmers who play a huge role in food security are also greatly affected by load shedding, which in turn affects our food costs and security. This has required farmers to consider other energy alternatives to keep farming operations going. It is reported that farmers had to pay 40% more for inputs to maintain current levels of production.
For commercial farmers every cent made is ploughed back into farming, covering costs from diesel, fertiliser, seedlings, and increased labour costs. With the repo rate increase, farmers are unable to fund their farms with loans due to the increased levels of repayments and with increased input prices and energy alternatives, farmers are failing to make sustainable profit margins, forcing some of them to retrench workers as they find themselves working from hand to mouth.
These retrenched workers are mostly from disadvantaged groups who are left jobless and often unable to feed their families, resulting in the increase of unemployment and poverty. This is a self-generating cycle that requires innovative ideas to put an end to it.
The inflation targeting strategy applied by the Reserve Bank is positive only for a few who have savings, who will earn a higher savings return.
For the vast majority this medicine is not bitter, it’s fatal.
Studies have also shown the middle class, who are the engine of the economy live from one salary to the next and are in fact one month salary away from slipping back into poverty.
As Duma Gqubule puts it, the repo rate increase is taking from the poor to give to the rich, which is morally questionable. We need a holistic way of managing our economy that takes into consideration our collective aspirations as citizens of the country to improve our quality of life. We need an economy that works for us. Our monetary policy must be biased towards driving investment into growing the economy rather than managing the value of the rand at all costs.
Dr Sibongile Vilakazi is the president of the Black Management Forum.
BUSINESS REPORT