Policy priorities lie with urgent economic reforms

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South Africa’s basic policy priorities now lie with urgently implementing overdue economic reforms and ensuring security of electricity supply to boost investor confidence, says NWU Business School economist, Professor Raymond Parsons.

“The decision by the Monetary Policy Committee (MPC) to leave the repo rate unchanged in the present economic circumstances is disappointing. Although the MPC has reduced interest rates substantially so far this year — as a result of the prolonged Covid-19 lockdown — the economic outlook is now even bleaker than previous forecasts made by the Treasury, the South African Reserve Bank (SARB) and many private sector economists about economic prospects in 2020.”

Parsons says to not cut the interest rates further at a time when, to quote President Cyril Ramaphosa this week, “the economy and society have suffered a great devastation” is therefore not a helpful or responsive judgement call.

“Global factors and the shock collapse in gross domestic product (GDP) growth in South Africa in the second quarter of 2020 created the need and space for more support from monetary policy, albeit modest. The MPC itself has now reduced its inflation forecasts as well as its growth outlook for 2020 and beyond.

“Even though the Covid-19 lockdown is now positively at alert level 1 and the economy will indeed slowly recover in the second half of 2020, GDP growth for the year as a whole could still be as low as -10% — even worse than the MPC’s latest forecast.”

Parsons explains that economic recovery, not inflation, is clearly the immediate problem. “This seems not well captured by the quarterly projection model, upon which the majority of the MPC members have apparently relied for their decision.”

He says business and consumer sentiment would thus have both benefitted from yet lower borrowing costs, with the psychological impact being as important as the real one in the present depressed economic conditions.

“In addition, businesses (especially SMMEs) that hold part of their stock in trade with borrowed money are sensitive to changes in interest rates. Cheaper financing of stocks would therefore have provided an extra basis for a revival of trade in the months ahead.”

Parsons says it remains true, as the SARB governor again emphasised, that monetary policy alone cannot turn the economy around. “It is not a major growth catalyst, and with the reality of continued Eskom load-shedding it is inevitable that the efficacy of interest rate cuts will be muted.”

He says the urgent implementation of pro-growth structural reforms and a guarantee of energy security are where South Africa’s policy priorities must now mainly lie, to build confidence and place the country on a path of investment and job-rich growth.

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