December’s 0,5% reduction in the base interest rate disappointed many South Africans. It now looks mean against the very low inflation figures published soon afterwards.
The strong rand has dragged down exports and revenues and cost jobs. Import prices are down, putting pressure on the current account. The drought heralds higher food prices and probably a demand for massive state relief.
And, always a threat to orderly economic management, speculators are ready to rush off to other currencies like sheep the moment the rand’s upward trend wobbles.
Then the cycle of a weakening rand, higher import prices, higher inflation and, later, improved export performance will follow, as happened three years ago.
The Reserve Bank is right to be cautious. But it cannot bring greater certainty and stability to the exchange rate, hold inflation down for long or indefinitely avoid a fresh round of interest-rate hikes.
The Reserve Bank’s limited mandate and concentration on the interest rate as the only weapon against inflation make South Africa a “victim”. Policy tracks, but does not change or lead, the effects of foreign speculation. Domestic savings incentives, the foreign exchange regime and our ongoing dependence on foreign capital inflows to finance economic growth and deficits on the current account are ignored. They should be treated as a set of policy issues alongside the interest rate.
The central goals of policy should be to hold down inflation, spur domestic savings and investment to underwrite longer-term stability, and create a domestic mass market for simple goods and services. We have an opportunity to do something more important than just manage inflation.
Although interest rates track falling inflation, high “real” interest rates are unaffected. South Africans with mortgage bonds and debts give their little spare cash to the banks, while high interest rates serve to lure and hold foreign investors and cash to finance the trade gap. It is a pro-foreign, anti-citizen set-up.
With a perverse logic, foreign goods and capital come first. Shoring up the rand opens the door to deficits on the current account as imports exceed exports. This requires more foreign capital to finance the trade gap. Cheap imports displace workers in South Africa’s agriculture and industry.
Global interest rates may rise this year, and South Africa should not be caught playing catch-up from a high base. At present, citizens fuel the banks, there is little domestic saving and foreigners are buying the country with citizens’ help.
The right approach is to cut the interest rate closer to the inflation rate, as Western countries have done — even if that requires a drop of 200 basis points next month.
But here is another idea: instead of receiving all the lower charges as an income boost, citizens could receive 50 basis points in the form of 0,5% lower interest, with the balance — 150 basis points, or 1,5% — being converted into forced savings.
Ordinary people and companies would welcome the redirection of 1,5% of their monthly debt charges into savings and national investment. Bank computers would send that portion of monthly payments to a national investment fund “contracted out” to existing agencies.
The fund’s investments would support public and private companies, ensuring the capital to provide high levels of investment in mining and other resource sectors.
The advantage of such a system is that the money saved would not simply end up financing more bank business in the shape of bigger consumption loans.
Interest would come down sharply with only a mild fuelling of consumer demand to help take up the slack of unused productive capacity, which now stands at almost 30%.
At a stroke, one would boost domestic savings, channel them into investment, and reduce the reliance on foreign capital — all national socio-economic goals the banks don’t care about and the Reserve Bank does not act on.
The total “saved” annually and directed to investment would be enormous — bank loans by all financial institutions to individuals and companies in October 2003 were R731-billion.
The savings generated by a 1,5% forced savings programme would amass a staggering R11-billion a year. Interest and other earnings would help offset the effects of higher interest rates in future.
Citizens and companies would save hugely, the economy would grow from enhanced domestic demand and by way of new local investment, and the rand could be allowed to depreciate as the need to attract foreign capital wanes.
Interest-rate policy, inflation and domestic saving should be managed together.
And South Africa should seriously consider a “Tobin tax” on foreign transactions, as some governments have done.
Set at 0,1% of the R9-billion in foreign capital flashing in and out of South Africa daily, the tax would raise more than two-thirds of current revenue, allowing taxes to fall dramatically.
Norman Reynolds is a development economist