World Bank lifebuoy for SA

R11bn loan to reinforce state’s Covid fight, economic recovery

● The World Bank has approved an R11bn ($750m) loan for SA’s under-pressure National Treasury, which, besides needing to fund the battle against Covid, is desperate to boost an ailing economy facing another interest rate increase.

The low-interest development policy loan will form part of the government’s R500bn fiscal relief package.

Besides boosting the fight against the pandemic, the money will also offer support for a resilient and sustainable economic recovery, the Treasury said in a statement.

The loan is in addition to the $4.3bn from the International Monetary Fund (IMF), $1bn from the New Development Bank and $288m from the African Development Bank, secured shortly after the outbreak of the pandemic in 2020.

The funds have come at a good time for finance minister Enoch Godongwana, who is scheduled to deliver his maiden budget speech in February and is expected to announce several additional support measures for South Africans.

The World Bank loan “will assist in addressing the immediate challenge of financing critical health and social safety net programmes while also continuing to develop our economic reform agenda to build back better”, Treasury director-general Dondo Mogajane said in a statement.

The Reserve Bank, meanwhile, is expected to continue its rate-hiking cycle when its monetary policy committee meets this week, with most economists surveyed by Reuters last week expecting the Bank to hike its benchmark repo rate by 25 basis points.

Expectations are growing that an increase could herald a series of hikes for the year, with some economists seeing the repo rate rising by as much as 125 basis points.

The likelihood of an increase on Thursday was given further impetus after Stats SA reported on Wednesday that inflation, as measured by the consumer price index, jumped to 5.9% in December, near the upper limit of the Bank’s 3%-6% target range.

That’s the highest annual increase since March 2017, when the rate was 6.1%. Food, nonalcoholic beverages, housing and utilities, transport, and miscellaneous goods and services were the biggest contributors to the increase.

Central banks around the world have been signalling their intention to step back from their accommodative stances and normalise interest rates as economic growth recovers from the pandemic and higher inflation appears to be sustained.

After cutting the rate to a record low of 3.5% last year, the Bank hiked it in November for the first time since 2020, to 3.75%.

The move came despite concerns that SA’s economy was still battling the ravages of the pandemic, high unemployment and the fallout from the riots and looting in KwaZuluNatal and Gauteng in July.

While there has been talk of the Bank having the space to provide support for a little longer, BNP Paribas senior economist Jeff Schultz said higher rates could act as a buffer against a weaker rand.

“While this [rate hike] is likely to come at a difficult time for the still-struggling domestic economy, we believe this to be a necessary evil to help shield the currency from significant weakness, which could lead to even higher inflation and more rate hikes down the line amid what we believe will be a less supportive global financial environment,” Schultz said.

He added that the Bank acknowledges the growing risks to higher inflation alongside a need to slowly “normalise” interest rates as the US Federal Reserve is expected

We believe an interest rate increase to be a necessary evil to help shield the currency from significant weakness

Jeff Schultz

BNP Paribas senior economist

to raise rates by at least 100 basis points this year in addition to reining in its huge bondbuying programme in the second half of the year.

Schultz said that even if the Bank did raise rates by as much as expected over the course of 2022, they would still be 150 basis points lower than they were before the onset of the pandemic.

“The [Bank] is therefore still likely to view its monetary policy stance as ‘accommodative’, we believe,” he said.

Though higher interest rates will have a detrimental impact on growth in 12 to 18 months’ time, the more pressing issue is a lack of meaningful structural reform to promote sorely needed investment and economic growth.

“Monetary policy alone cannot address the structural shortcomings in the economy — this has to come from policy implementation across the labour market, electricity sector, telecoms, land reform and solid management of state-owned entities, to name a few — but rather aims to support the economy through providing a suitable real return on investment, ensuring sustainably lower inflation and promoting financial stability through prudent, credible macroeconomic policies,” Schultz said.

“This, we believe, is how the [Bank] is likely to argue its decision to raise interest rates as we expect in 2022 and ultimately allow it to keep policy rates lower than preCovid levels for longer,” he added.

Business Unity SA (Busa) CEO Cas Coovadia said: “It is incorrect to expect [the Bank] to consider only the impact of interest rate hikes on growth, when its mandate is to keep inflation in check.

“What we need is for the government to act decisively on implementing structural reforms in the economy to attract investment and enable growth. Also, administered prices, one of the critical contributors to higher inflation, need to be controlled.”