Plain and simple solutions to complex matters rarely produce effective results. Interest rate adjustments are a case in point and have proved to be an instrument that is blunt on its own.
There is a lot of media interest and speculation about what the SA Reserve Bank’s (SARB) next decision on interest rate hikes will be, but one thing is for sure: the SARB will do almost anything to protect the value of the rand through keeping inflation within their set inflation band of 3 – 6%. But that is not the real issue here. Together with the ministers of finance and employment and labour, the SARB, should set monetary and fiscal policy in line with the needs of South African citizens, both in the short term and medium to long term. The one without the other is like a doctor operating on a patient without the assistance of the anaesthetist.
The value of the rand is not the be all and end all, and it is not merely dependent on the level of inflation and interest rates set by the SARB. For one, South Africa was recently grey-listed, for numerous reasons, and that also had a detrimental effect on the value of the rand. The ongoing issues at Eskom have also substantially more to do with perceptions of the value that South Africa offers investors is not much at all. In addition, the insistence on strict and outdated BEE regulations are preventing the richest men on earth from offering the best value for money in terms of internet connections to our rural areas in particular. South African-born Elon Musk’s Space Exploration Technologies Corp is authorised to launch 11 943 satellites for its Starlink fleet, making it by far the leader in a total of nearly 13 000 low-Earth orbit satellites currently approved by the Federal Communications Commission, which co-ordinates trajectories and radio-frequency use. In addition, uncertain policy positions in the mining industry are preventing investment in our minerals sector.
The table below is an extract from StatsSA relating to the March 2023 consumer inflation numbers. The SARB looks at these numbers and comes to the conclusion that they need to raise interest rates because prices are going up too fast, but I do not know how anybody could explain this reaction – managing price inflation by limiting money supply – to a first-, second- or final-year BCom student within the scope of three months, nor to make it understandable to the layman farmer or shopkeeper, let alone to the layman on the street.
How will the hike in interest rates keep product prices in check?
Speaking of the proverbial “man in the street”. There are say 60 million people living within South Africa’s borders. Not all of them are affected to the same extent by interest rate hikes, but all of them are affected by price inflation. The man with excess cash enjoys higher income from his savings, while the asset-rich person hopes that inflation drives the prices of other asset classes higher. In theory, this should happen, but lately, a house in the suburbs of Johannesburg and Pretoria that should be replaced for R5 million can hardly fetch market prices of around R2 million. The rise in farm input cost more than wipes out the profit margins for local farmers. So by extension the poorest of the poor now has to pay 45% more for an onion and 34.8% more for maize meal – the country’s staple food –and 25% more for potatoes and paraffin.
According to a StatsSA media release dated March 28, total employment increased by 0.5% quarter-on-quarter, from 9 920 000 in September 2022 to 9 968 000 in December 2022. Total gross earnings paid to employees increased by R67.8 billion or 8.5% from R798.7 billion in September 2022 to R866.6 billion in December 2022.
I checked their media release two years back and these numbers were quoted. First, one must assume they refer to “total employment” as the formal sector. Even so, it seems we have lost 1 252 000 workers. According to StatsSA, average monthly earnings showed a quarter-on-quarter increase of 4.5%, from R24 916 in August 2022 to R26 032 in November 2022.
Former Eskom spokesperson Sikonathi Mantshantsha highlighted that employee benefit expenses cost the company R33 billion. With 44 772 employees at the time, it meant that Eskom employees received an average salary package of R737 000 per year, or R6 416.67 per month, 236% higher than the average salary in South Africa. Now their union representatives are demanding salary increases of over 10%. So it is clear that other state interventions are needed, including interest rates to eradicate such income inequality.
The table below reflects the numbers of two years ago.
These worrying numbers above show what the real problem facing South Africa is. Not inflation or interest rate numbers. Employment is the top topic of discussion, and what politicians and supposedly their constituents care about. But the first political party to build solutions around this aspect that will take all factors into consideration will rule South Africa for a very long time.
This solution must entail the building of new capacity – not to take away a job from one and offer it to another or to appoint non-essential people to jobs at SOEs or other organs of state. There is no real contribution to be made there.
It will not be easy, but we need to start by getting rid of overpaid personnel such as the ridiculous situation at Eskom, for example, where the people there are earning 236% more than the average salary in the country. This drains the economy of much-needed capital.
The SARB should take a serious look at themselves and how they serve the country both this and in price control. The calls for reform at the central bank have merit. Even the Federal Reserve in the US has a dual mandate: pursuing the economic goals of maximum employment and price stability.
Surely such a similar integrated mandate holds more merit than simply adjusting interest rates up or down in line with inflation, irrespective of the origin of such inflation. As the old saying goes: there are always two sides to a story.
Kruger is an independent analyst.
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