In conversation with SA Reserve Bank Governer, Lesetja Kganyago

Power 98.7 in association with Old Mutual and the Mail & Guardian hosted Lesetja Kganyago, Governor of the South African Reserve Bank, in a live webcast.

As thousands of businesses closed their doors and unemployment surged to new levels in the wake of the pandemic, South Africans desperate for some kind of relief have put the central bank under increased scrutiny.

In response to the crisis, Reserve Bank Governor Lesetja Kganyago has presided over interest rate cuts amounting to a total of 300 basis points. Since January, rates have been cut at every monetary policy meeting except the most recent.

Now, the question on the lips of the many South Africans who continue to struggle to pay their bills is: can we look forward to interest rates of zero?

According to Kganyago, the answer is a definitive no. “It’s something that we will not even look at,” he said.

Typically, there is an interplay between interest rates and inflation. The government increases interest rates in order to drive down inflation and keep it within the target band of between 3% and 6%. Now, as South Africa faces the worst economic landscape it’s seen in decades, some analysts argue that inflation is no longer a concern, and that cash-strapped South Africans should be given the financial leg-up of no additional interest on their debts.

But Kganyago said that it is important to keep the long-term in mind.

“If inflation goes up, you are going to be losing money,” he said. “What ends up happening is that people usually end up saving less, because what is the point of me saving this money today if it is going to lose value in the future? Put simply … the higher the inflation, the higher the interest rates are going to be.” Even borrowers, while benefiting from a short-term inflation hike, are hurt in the long-term by higher inflation.

Kganyago observed that South Africa’s current inflation rate is 3.1%. “Make interest rates zero and tell me who we will save,” said Kganyago. “We need savings to fund investment in this country.”

The governor did not comment on whether the monetary policy committee had reached the end of its slashing cycle. He did however, reassure the public that the monetary policy committee would continue to make decisions informed by the most relevant information. “As the data comes up, as the economy opens up, we will make an assessment of what is the most appropriate stance that the South African reserve bank should take going forward.”

Some economists, such as Old Mutual’s Johann Els, argue that more decisive action should be taken. “I’m hopeful that this time around government realises the urgency,” he said, speaking as a panellist at the webinar. “We’re in a deep crisis. And that’s why I don’t think the Reserve Bank has done enough.”

Sifiso Skenjana, Chief Economist at IQBusiness, said that one of the things that needed improvement was collaboration across sectors and institutions. In contrast to the governor’s repeated iteration throughout the session that the various pillars of government need to “stay in their lane”, Skenjane said that society needed to overcome traditional hostile relationships and garner new solutions. 

“One of the first things that’s going to be an enabler for our growth is social compacting,” he told listeners. This should be “the first lever that we ought to pull”.

But Kganyago was adamant that the central bank has acted swiftly and aggressively in its three main efforts to prop up the economy.

Firstly, the slashed interest rate “means is that if you were fortunate enough to have a mortgage, you are getting these massive savings, and that is money that can then be spent in the economy.”

Secondly, said the governor, the bank provided “regulatory relief” to the financial sector through its loan guarantee scheme: where the treasury, the reserve bank and commercial banks guaranteed loans to assist eligible businesses through the Covid-19 pandemic.

“Banks are not permitted to profit from these loans and any surpluses generated will accrue to National Treasury,” a note from the treasury indicates. The reserve bank also enabled the financial sector to provide support to struggling entities through the restructuring of loans and the provision of payment holidays to those who needed it during lockdown.

Thirdly, the bank improved market functioning by buying government bonds in the secondary market. “We found that the bond market was dysfunctional,” said the governor. These actions had helped to restore stability and appropriate pricing.

These combined actions were “forceful and speedy”, said Kganyago. “I would challenge anyone who would say we didn’t respond adequately.”

But why does the central bank not institute quantitative easing (QE) in our ailing economy, several webinar attendees asked.

Although the reserve bank’s buying of bonds could be classified as one form of the QE tool adopted by countries such as the US in a bid to stimulate economic activity, Kganyago said that South Africa did not face circumstances that warranted classic quantitative easing.

“QE can only be used under particular circumstances,” he said. “Name one country which has got inflation at three or four percent or higher that is doing quantitative easing.”

The governor said that it was impossible to do an “abracadabra” to fix the country’s economic woes. Even before the pandemic, “this economy had significant structural constraints”, he said.

Debt-laden Eskom and the country’s ongoing blackouts stand at the top of the list. The country’s seeming predilection for making plans while not following through with implementation is another major impediment. And underpinning it all is the necessity to face hard truths.

“I worry that in the South African policy discourse, we don’t seem to appreciate that in economic policy there are trade-offs,” said Kganyago.

“What we should avoid is … to allow the excesses of today’s generation, to put a burden on our children and their children’s children because we are refusing to make difficult decisions that have to be made now.”

An example of those tough but necessary disciplines, according to John Manyike, Head of Financial Education at Old Mutual, is the need for consumers to drive down their debts.

“There is some disposable income in the hands of consumers, particularly those with mortgages,” he said. “If the prime lending rate is less, then there should be more money. The question is: what do you do with that money? Do you use that money to offset your debt, or do you use it to save, or do you just go and spend more?” Manyike advised that consumers keep paying their mortgages at the same rate that they were before. This not only mitigates risk for the individual, but also creates an environment that is more conducive to infrastructure development: something that the South African needs in order to grow.

Unless South Africans start to use their extra income prudently, “we are unfortunately not going to get out of this situation anytime soon,” said Manyike. “This is the right time to be charging down your debts, when you’re actually getting a bit more because of lower interest rates.”

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