I was in Windhoek last week when the Central Bank of Namibia announced a surprise 25 basis point rate cut.
The bank is tolerating a historically wide interest rate differential with the SA Reserve Bank as the worst drought in 100 years starts to bite into the country’s economic muscle while the diamond industry is battling the onslaught from lab-grown stones.
But it struck me that Namibian central bank governor Johannes !Gawaxab could teach our own governor, Lesetja Kganyago, something about the art and science of central banking.
Kganyago delivered a compelling lecture at the University of the Free State the other day. His theme — as timely as it was important — monetary policy and inequality in our postpandemic world. But as I read his words I couldn’t help but feel something crucial was missing — a recognition of SA’s unique economic challenges and the need for a more balanced approach in navigating them.
The governor spoke eloquently about the inflationary pressures that have plagued global economies since the pandemic. He emphasised the dangers of inflation, particularly for poor households whose purchasing power is eroded as prices rise. It’s a well-worn argument and one that few would contest. After all, inflation is a pernicious force that can widen the gap between rich and poor.
But in SA, a country grappling with persistently low growth, high unemployment and a host of structural challenges, one wonders whether the governor’s persistently hawkish stance on interest rates might now be doing more harm than good.
Kganyago’s lecture was a reminder of the difficult choices central bankers must make. He argued that maintaining low and stable inflation is essential for long-term growth and reducing inequality. But as anyone familiar with SA’s economy knows, this is only part of the story. The inflation we face is not the result of an overheated economy or excessive demand; it is driven largely by supply-side factors — (rapidly improving) energy shortages, (slowly improving) logistical constraints, and (structurally sticky) imported price pressures.
In such a context, raising interest rates to tame inflation is akin to using Eben Etzebeth to run your game from the flyhalf channel.
The result is that we risk stifling what little economic growth we have, further worsening the unemployment crisis and deepening the very inequalities we seek to address. Many (usually conservative) economists I speak to are starting to question whether the Reserve Bank’s continued hawkishness is appropriate.
High interest rates raise the cost of borrowing, discourage investment and limit the ability of businesses to expand and create jobs. In an economy in which growth has been stagnant for more than a decade, and where demand-pull inflation is notably absent, this approach is clearly out of step with the realities on the ground.
I’ve been listening to Kganyago’s speeches and monetary policy committee statements for years. I fully support his relentless emphasis on reminding policymakers that they ultimately hold the primary levers to spur higher levels of growth and investment though economic reforms and radically improved governance.
However, the one blind spot in the governor’s analysis is his failure to grapple with and incorporate compelling evidence that a more accommodative monetary policy — especially when the fiscal outlook is improving and the government of national unity (GNU) has already provided a window of welcome investor confidence — could spark a virtuous cycle of economic growth and improved credit ratings for SA.
Research published in the Journal of Banking & Finance suggests monetary policy, specifically rate cuts, boost GDP growth. This growth in turn could lead to an upward revision of the country’s credit ratings, which would lower borrowing costs and further stimulate the economy. In essence, lower rates could set off a positive feedback loop in which improved economic performance leads to better credit ratings, which support even stronger growth.
Manages resources
In another study — a 2007 European Central Bank working paper — António Afonso, Pedro Gomes and Philipp Rother uncover what really drives ratings assessments. Titled “What ‘hides’ behind sovereign debt ratings?”, it’s a meticulous analysis of how the big three credit ratings agencies — Moody’s, Standard & Poor’s, and Fitch — determine the creditworthiness of nations.
The authors build a robust econometric model that spans a decade (1995-2005) and covers 130 countries. The findings reveal that the most critical factors influencing a country’s sovereign rating include GDP per capita, real GDP growth, government debt, government effectiveness, external debt and external reserves. In short, it’s not just about how much a country owes, but how well it manages its resources and economy.
Yes, debt is the primary factor, but you cannot simply ignore that improving the denominator (growth) through lower rates radically improves the debt-to-GDP ratios used to assign ratings. A higher credit rating would reduce the cost of servicing debt, freeing up resources for essential public investment and, over time, reducing the need for austerity measures that disproportionately harm the poor.
While low inflation is indeed a desirable goal, it should not come at the expense of economic growth and job creation, especially in a country in which unemployment hovers at about 33.5%.
• Avery, a financial journalist and broadcaster, produces BDTV’s ‘Business Watch’. Contact him at Badger@businesslive.co.za.
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