With the interest going up, the economic crisis in South Africa is getting worse Photo Pexels
South Africa – In recent times, South Africa has been facing a challenging economic environment, with the South African Reserve Bank deciding to increase interest rates once again. This decision has sparked concerns about the state of the country’s economy and has significant implications for the economy and its future growth.
One of the primary reasons behind the decision to raise interest rates is the belief it is preferable to suffer from higher interest rates than to face rampant inflation. This means to prioritise long-term stability over short-term economic pain, explained Economist, Dawie Roodt.
“The Reserve Bank doesn’t want to let us suffer but it’s much better to take short-term high interest rates than to suffer because of inflation being higher on a medium and longer term. That’s going to be far more painful to the South African economy. I’m afraid to say it’s better to take the bitter medicine now rather than go into surgery.”
Another important point is that the macroeconomic environment in South Africa presents several hurdles to achieving a productive and strong growing economy. This is primarily due to flawed macroeconomic policies implemented by the government.
“The reason for that has to do with the wrong macroeconomic policies and there’s a long list of things that I’m talking about. A lack of electricity means that we are just not very competitive in South Africa. The local authorities are a complete mess. Meaning that it increases cost making us less competitive in South Africa. Minimum wages is another good example. The fiscal accounts are a complete mess. So there are many other things that we need to fix which will actually contribute to lower inflation.”
However, those things are politically difficult to do so the Reserve Bank is forced to increase interest rates. Roodt argued the high interest rate is due to government persisting with a failing macroeconomic policy.
SMread: Ravaging cholera outbreak in South Africa demands urgent government action
Consequences of the high interest rates for consumers and the economy
The impact of high interest rates is felt by consumers who experience an erosion of their income. In addition, supply chain disruptions caused by events like the COVID-19 pandemic have led to rising prices on basic necessities. Things may get worse before they get better. According to Roodt, his calculations show the economy will hardly grow this year.
“It’s very easy to see that if the economy is growing at a rate slower than population growth, it means that we are going to get poorer. Unemployment will go up and this is happening in an environment with rising food prices that you alluded to. I am very concerned about what’s going on in South Africa.”
Forecasting economic growth and interest rate changes in an uncertain environment becomes challenging. Economists, like everyone else, cannot predict the future with certainty. Economic forecasts are based on available information and microeconomic policies.
“What economists do is that they’ve got microeconomic policies. They’ve got information and they’d use this information to make an informed kind of prediction of what’s going to happen in future. Like I’ve said a month ago I would have told you I don’t think the Reserve Bank is going to increase interest rates again. But I had to change my mind the last couple of weeks because of changing factors.”
The interest rates depend on a few things, namely the exchange rate of the Rand and the price of oil.
Looking ahead with cautious optimism
Despite the current difficulties, there is hope for improvement. While interest rates may continue to fluctuate in the short term, Roodt believes there are indications the worst may be behind us. The Reserve Bank aims to stabilise inflation, which may eventually lead to a reduction in interest rates, allowing the economy to recover.
“With a bit of luck, the Rand can come back to R18,50. That will create an environment where the Reserve Bank stops increasing interest rates and perhaps even start looking at the possibility of cutting rates again. So the worst is probably behind us but it’s important, for especially our political leaders, to understand that they have to be careful of what they say, what they do because that can affect the financial markets and the exchange rate of the Rand.”
The recent interest rate hikes in South Africa reflect the Reserve Bank’s efforts to tackle inflation and ensure long-term economic stability. While these hikes may impose short-term hardships on the economy and consumers, they are deemed necessary to address macroeconomic challenges and pave the way for sustainable growth. To overcome these challenges effectively, it is crucial for the government to implement appropriate policies that stimulate economic growth and prioritise the well-being of its citizens.
Dawie Roodt engaged in a captivating discussion with Inayet Wadee, shedding light on the intricate political factors that lie at the heart of the recent interest rate hike and highlighted the potential remedies that the government could explore to curb the pace of this monetary tightening. Listen to that discussion here:
