INTEREST RATE HIKE PUSHING DOWN DEMAND

MBABANE – Business revenues will continue to drop as the Central Bank of Eswatini (CBE) has decided to raise the discount rate to 50 basis points from 4.5 per cent to five per cent.

An increase in interest rates means that the cost of borrowing also rises. The interest rate was hiked in May this year from 4 per cent to 4.5 per cent.
It was after CBE switched from using the expansionary monetary policy to the contractionary monetary policy. This now means that the prime lending rate for banks will also increase by 0.5 per cent, thus escalating costs of repaying loans. This also reduces consumer spending, which then causes business revenues to drop.

Investment

In the past, it led to businesses refraining from borrowing money for investment and growth, resulting in a fall in sales, especially companies supplying machinery. CBE Governor Dr Phil Mnisi said they held a meeting with the Monetary Policy Consultative Committee (MPCC) to consider the appropriate monetary policy stance. The meeting was on Friday. Mnisi said they then decided to increase the interest rate by 0.5 per cent after taking into consideration relevant, global and economic developments.“We took into account economic development; as well as the price and financial stability mandate, the bank then decided to raise the discount rate by 50 basis points from 4.5 per  cent to 5 per cent,” he said.

Mnisi also mentioned that the geopolitical tensions continued to weigh down on global growth prospects, the tightening global monetary policy in response to elevated inflation outlook impede economic growth.  “The International Monetary Fund (IMF) notes that the downside risk to global growth have worsen compared to their April 2022 assessment, the level of growth will be clarified in the next assessment,” he said. Mnisi mentioned that global supply chain disruptions, rising energy and other commodity prices would continue to weigh heavily on global economic outlook.
In the CBE monetary policy statement released yesterday, Mnisi said economic activity as measured by the quarterly gross domestic product (GDP) is estimated to have increased by a slower 4.5 per cent on a year on year and seasonally adjusted basis in the fourth quarter of 2021, from a revised growth of 4.4 per cent in the last quarter of 2021. He said the pick-up in economic activity was largely attributed to the resilient growth in the performance of the primary and secondary sectors.

Basis

“On a quarter on quarter basis, GDP declined by 0.3 per cent (seasonally adjusted) in the fourth quarter of 2021 from a revised growth of 0.1 per cent in the previous quarter,” he said. Mnisi also mentioned that credit extended to the private sector hiked by a marginal 1.5 per cent to settle at E16.3 billion at the end of May 2022, mainly due to improvement in credit to businesses and households. He said this was led by the fall in credit emanating from credit to other sectors of the domestic economy, which includes other financial corporations, parastatals and government. Mnisi added that banks were expected to increase the prime lending rate on loans extended to individuals and businesses to 8.5 per cent until the next monetary policy meeting. This means that repayment for loans and debit orders will now be more expensive.

Challenge

Economist Sanele Sibiya predicted that the contractionary move would challenge the economic welfare of the country. In an interview yesterday, the economist said this was now a supply side problem; it’s a problem that has to do with the oil market and the political situation surrounding the latter.
He added that this was not a problem that could only be solved by economic means. “Russian has upgraded their attacks towards Ukraine as they are no longer regional but affect the entire country which is an indication that the war is still to continue, thus more changes are to come,” he said. Sibiya said CBE’s move to increase the interest rate would push demand down, but it would not have an impact on the market. “If demand is pushed down we would enter an era where we have to contain with the recessional situation,” he said. He said price of goods and service are expected to increase in the next few days.

The CBE is now pursuing a contractionary policy aimed at hindering potential distortions to the capital markets.  Contractionary policy is a monetary measure referring either to a reduction in government spending, particularly deficit spending, or a reduction in the rate of monetary expansion by a central bank. Distortions include high inflation from an expanding money supply, unreasonable asset prices, or crowding out effects, where a spike in interest rates leads to a reduction in private investment spending such that it dampens the initial increase of total investment spending. This was mentioned by CBE Head of Strategy and Communications Mandla Luphondvo in an interview last week.

Policy

Luphondvo said the CBE has been pursuing an expansionary monetary policy to cushion the economy from the negative effects of the COVID-19 where the discount rate was lowered by a cumulative 275 basis points to 3.75 per cent. He said in line with the reduction in the discount rate, the prime lending rate was also reduced by 275 basis points to 7.25 per cent, last month. “The easing of monetary policy is envisaged to have contributed positively to economic growth. However, the discount rate began to rise again and was at 4 per cent in march,  in line with upside risks to the inflation outlook mainly due to increases in international crude oil prices, ”he said. Luphondvo added that in line with the upwardly revised forecasted inflation, the CBE was mostly likely to pursue a contractionary monetary policy going forward.

He said the increase in international crude oil prices led to increases in domestic fuel prices, mainly due to the Russian/Ukraine war, domestic inflation forecasts have been revised upwards for 2022 and 2023 while remaining unchanged for 2024. Southern African Research Foundation for Economic Development (SARFED) Regional Coordinator and Economist Dr George H Choongwa said the shift from expansionary to contractionary would mostly be felt by investors as well as business owners. Choongwa said more than 50 per cent of the private sector, mainly the SMEs (Small and Medium-Sized Entrepreneurs) in Eswatini have been dependent suppliers of government and they constitute most of its spending trends through payment of supplies both goods and services.

Measures

“In the event that contractionary measures were implemented, we expect to see a huge loss of business and flow of income to both industry and household,” said the economist. Choongwa also mentioned that though it was reported that Central Bank’s first step in execution of this policy option was to reduce government spending, the ripple effect to such decision was likely to fuel poverty levels as most jobs would be lost. He said this was against the national budget’s aim of creating at least 9 000 jobs through investments and stimulated economic activities. “Contractionary measures means reduction in economic activities at least in the short and medium term,” he said. The economist further mentioned that this might contribute to the reduction in GDP against the backdrop of the annual gross financing needs having been remained high with average of about 19.4 per cent of GDP, leading to continued financing vulnerabilities. He said this might then affect future SACU revenue, particularly for the year 22/23, thus generating additional budget and external financing pressures.

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