SAFTU believes that the July 18 rate cut must exceed the tokenistic 0.25% widely predicted. Our situation is so dire, that we desperately need both a kickstart to economic growth and relief for poor and working people who can’t pay our bills. We demand a major adjustment of the interest rate, even if it requires tighter exchange controls to offset resulting capital flight.
We have nothing to fear from inflationary tendencies. The current ‘real’ (after-inflation) rate of 2.3% – given the first quarter of 2019’s -3.2% GDP shrinkage – is far too high. As The Economist records, South Africa’s interest rate compares unfavourably with other emerging markets, with only four countries out of more than 50 that issue 10-year state bonds paying a higher price to borrow internationally.
If South Africa’s rate was in the region of that paid by Brazil and the Philippines, we would finally break out of the stagnation that is causing such misery, and repayments of our outstanding debts would be more manageable.
Historically, when inflation falls the interest should quickly follow. But in 2018-19, the opposite has happened. The only question is whether the real interest rate can drop to the level it needs to be – 0% in real terms – so as to spur a recovery.
South Africa’s economic growth rate has been in steady decline since 2007, when the artificial stimulation caused by cheap, easy consumer credit and the commodity super-cycle both came to an end, and as the world financial meltdown began. At that point, a dozen years ago, the narrowly-defined unemployment rate rose from 23 to the present 27.5%.
The average worker was by then suffering from a massive level of consumer indebtedness: more than 85% as a debt/household income ratio, although it has declined a bit to 70% (still making loan repayments very difficult.)
In addition, major firms went out of business, for example in steel when the second largest (Evraz Highveld) went bankrupt and the largest (ArcelorMittal) cut back on its foundries, resulting in a production drop from 800,000 tons per year in the 2000s to around 500,000 tons in the 2010s.
Changing this situation presents two problems, showing that there is no self-correction mechanism in capitalism. First, even though President Cyril Ramaphosa was the overwhelming choice of the corporate elite, the underlying structural problems are so severe that big business has embarked on an even more decisive ‘capital strike,’ by refusing to invest in plant, equipment and productive real estate. The -9.8% crash in gross fixed investment in the first quarter of 2019 is a devastating blow to the myth that simply replacing one ANC president with another – without adjusting macro-economic policy in the slightest – would boost growth.
Indeed, when businesses reveal their ‘confidence’ in a Stellenbosch University survey, the February 2018 rate of 45% confidence has plummeted to 27% now. And one reason for that decline is the economy’s ever-lower level of international competitiveness: from 35th most efficient a dozen years ago to 67th in the 2018 World Economic Forum survey.
For these reasons, the dramatic cut in the interest rate needed from the Monetary Policy Committee would radically change the outlook for our indebted workers and their households – who would then resume higher levels of spending – and for the businesses which need lower interest rates so as to change the cost-benefit calculations that now prevent them from investing.
The second problem is the expected backlash if the Reserve Bank cut the rate as dramatically as we believe it must: a lower repo rate would send a signal to flighty financiers, to move their money out of South Africa because of a pro-people monetary policy. And the simple way to halt this sort of capital flight, is to tighten exchange controls, an action the Reserve Bank and Treasury could take immediately, so as to ensure more funds circulate inside the South African economy, rather than escaping to international tax havens and financial headquarters.
Unless these kinds of radical economic transformations in monetary policy are debated and then carried out, the result will be more stagnation, socio-economic misery and fury by a working class already gatvol with such high interest rates, such extreme consumer debt, and business which refuse to invest … all because of SA Reserve Bank policy.