COMBATING RISING INFLATION: five alternatives to interest rate hikes!

by Sep 16, 2022All Articles

The Reserve Bank’s recent 75-basis point increase in interest rates is the highest once-off increase in a decade. Meanwhile, the governor, Lesetja Khanyago, received an income of R8.45 million for the year, (including fringe benefits).

GIVEN ALREADY RAPIDLY RISING food, electricity and transport prices, the August reduction in the petrol price is said to be a drop in the ocean. It will offer little relief for cash-strapped and indebted South Africans. Making light of the tumultuous situation, there are memes on social media showing how the petrol price per litre is more than the minimum wage per hour. Stats SA’s CPI release points out that the annual consumer price inflation of 6.5 percent in May 2022 is the highest since January 2017.

To combat rising prices (inflation), the South African Reserve Bank (SARB) has increased the interest rate, most recently by 75-basis points. This is the highest once-off increase in a decade, and more hikes are expected during the year. Elsewhere, I explain why conventional monetary policy, which involves interest rate hikes, is not only a blunt instrument, especially in the current context where external factors are driving inflation. It will also exacerbate unemployment, hunger and inequality.

The interest rate hike is therefore a bitter pill to swallow, not least given that the SARB’s 2,305 workers are mostly protected from the unfolding socioeconomic crisis in the country. They receive an average annual salary per employee of R911,062. That’s more than 50 times what most people in the country live on each month. The governor, Lesetja Khanyago, alone received an income of R8.45 million for the year, including fringe benefits. The total remuneration for the SARB’s four executive directors was more than R25 million for 2021.

In light of rising inflation globally, and some recognition of the limitations of mainstream monetary policy, there are discussions about what alternatives exist. Government has extended the suspension of the fuel levy, offering some respite. But a recent Mail and Guardian editorial is correct when it says that if this suspension and interest rate hikes are the only policy options before us, we are set for a long, bitter winter.

There are a number of ways to make the winter less bitter for the majority, but they would require a break from neoliberal austerity policies, including mainstream monetary policy. Below are five policy proposals that go beyond monetary policy and include an essential role for government and fiscal policy.

Proposal 1: Strengthen capital controls

As the post-apartheid government integrated into the global economy, it also started to phase out capital controls. Chris Stals, former Governor of the SARB, argued that there was “general consensus” that capital controls “should be removed”. The only question was the speed of the process. And so, government proceeded to deregulate the country’s financial markets – enabling greater inflows and outflows of money, to and from the country.

South Africa has a balance of payments strategy that is based on having high interest rates compared to other economies. The balance of payments is the balance between money coming into South Africa and money going out. High interest rates attract short-term financial investment from foreign investors. This helps to balance out the fact that otherwise financial flows out of South Africa tend to be greater than flows coming in.

This high interest strategy is compounded in the context of inflationary pressures globally. These pressures have led many central banks in developed countries to tighten monetary policy through interest rate hikes. This effectively forces many developing countries, including South Africa, to do the same. Otherwise, there is a risk of financial outflows and the currency weakens. This begs the question; how much independence does the SARB really exercise?

The alternative to high interest rates is to strengthen capital controls to limit financial outflows. If financial outflows are controlled, it is not so necessary to increase interest rates to attract inflows. This enables greater independence over monetary and fiscal policies. And it creates increased stability of the balance of payments and the exchange rate. For example, halting financial outflows means that the value of the currency is maintained because there is no dramatic drop in the demand for rands.

Capital controls have proven to be a useful instrument in the past. In fact, most states used capital controls until the International Monetary Fund forced them to “liberalise” as part of structural adjustment in the 1980s.

Proposal 2: Break from austerity – finance a BIG and an expanded public sector

The next critical step is to pay increases in social grants in line with inflation. Social grants are a critical source of income for large parts of the population. The real cuts to social grants (through increases below inflation) increase the vulnerability of millions of people. In Free State, Eastern Cape, Limpopo and Mpumalanga, primary income for the majority of households is from social grants. Over the next three years Treasury is projected to cut social grants (excluding the social relief of distress grant) in real terms. The “buying power” of most people in the country, especially those on low wages or dependent on social protection and the SRD, will be less. Especially taking into account the Pietermaritzburg Economic Justice and Dignity’s (PMEJD) inflation estimates of between 14 percent and 17 percent year-on-year, depending on where in the country you are based. 18 million people and their dependents are going to be in even more precarious situations than they already are.

Worse still, the SRD grant has not increased since it was introduced more than 2 years ago. R350 in 2022 is actually worth approximately R35 less than it was in 2020. To add fuel to the fire, the SRD grant was not paid to more than 10 million beneficiaries due to government failing to renew contracts with banks responsible for means testing. Moreover, besides the devastating fact that the SRD support is scheduled to come to an end in March 2023, the income level of the means testing has been reduced from R595 to R350. This excludes many more from receiving the much-needed relief, underscoring the need for the implementation of a universal basic income grant. The level of the grant should be introduced at R1,500, above the upper bound poverty level of R1,335 per month.

The SARB should step in to cover the cost of the BIG in the short-term. It can do this by financing government directly. If we don’t make these urgent reforms, we can imagine many more will join the more than 10 million people (30 percent children) who go hungry each week. This situation drives people to desperation. We can anticipate new manifestations of the July 2021 unrest as well as more outbreaks of violence in society. Government must also end the real cuts to the public sector wage bill and seek to immediately fill the just under 165,000 vacancies.

The conflict between public sector workers and government is well documented. Some have falsely put forward an argument that public sector workers’ interests are at odds with the majority of people who are unemployed. This view fails to consider that the unemployed are dependent on the services delivered by public sector workers. The cuts to the wage bill will not only mean lower wages for the majority of public sector workers. They will also require a reduction in the headcount and the continuation of unfilled vacancies in key public sector institutions. Service delivery will deteriorate even further. Government itself has acknowledged how low compensation growth in education will have a negative impact on no-fee schools. Workers in the private sector should demand above inflationary wage increases too. Increasing social grants and workers’ wages at above the level of inflation will help to soften the blow of the rising costs of goods and services.

Proposal 3: Invest in a low-carbon, localised reindustrialisation programme

Greater social protection and improved wages are critical, but they are not enough. In the medium term we need to tackle mass unemployment and low wages through investing in the localised productive capacity of the county, particularly directed at driving a lowcarbon re-industrialisation programme.

AIDC research publication, Eskom Transformed, shows that if we are to decarbonise at both the speed and scale to meet our climate commitments and create the largest amount of jobs, Eskom must be transformed into a full, public, renewable energy utility. Eskom must be the sole driver of decarbonising our energy sector in the country. Included in this would be the need to decorporatise Eskom. This would eliminate the need for the public utility to make a profit and abandon the user pays principle. The objective of the energy public utility must be to provide a stable supply of affordable, low-carbon energy based on a public goods approach.

The manufacturing of renewable energy infrastructure must be done domestically because this is where most of the jobs are. This will require an import-substitution policy for South African renewable energy infrastructure producers to compete with the international market. Currently, we import virtually all renewable energy components and only assemble the infrastructure in the country.

This would require large levels of investment; some estimate at least R3.7 trillion by 2050. That is equivalent to R132 billion each year for the next 28 years, to decarbonise the SA economy. The immediate issue would be to address Eskom’s debt which sits at just under R400 billion. This is where the government employees’ pension fund (GEPF) can play a role. The GEPF has close to R2 trillion in accumulated reserves, most of it under the asset management of the Public Investment Corporation.

Currently, the GEPF holds approximately 20 percent of Eskom’s debt. It could take on more of Eskom’s debt and offer below market interest rates, on condition that Eskom remains fully public and becomes the driver of a transition to a low-carbon energy sector. Secondly, the agriculture sector has been liberalised. This has included the removal of market and import controls. As a result, local food prices are dramatically influenced by international market prices and the exchange rate. The deregulated agriculture sector serves the interest of financial speculators and big scale commercial farmers who make the majority of their revenue through exporting crops. This comes at a high cost. An export-led agriculture sector incentivises mono-cropping. The soil degradation associated with monocropping harms the environment.

There are a number of other ways in which the current form of food production induces environmental destruction. They include over-fishing of oceans and rivers; commercial production of livestock, resulting in deforestation; and catalysing phenomena like the Covid-19 pandemic. Furthermore, and fundamentally, export-led agricultural production comes at the expense of sufficient provision of nutritious food for the majority of the population. The transformation of food production is therefore key. This necessitates reintroducing certain market controls, land redistribution, and promotion of and investment in more localised food systems aimed at producing nutritious food. Improved and regulated local food production also means less dependence on importing goods. These measures will become increasingly vital as we move into a period of more climate shocks

Critically, both of these initiatives – the transformation of our energy and agricultural sectors – will provide the country with greater energy and food sovereignty and create thousands of jobs that simultaneously contribute to reducing greenhouse gas emissions. This should be accompanied by a reduction of borrowing costs through a reduction in the interest rate. This can help to incentivise greater private sector productivity, expanding supply and increasing the demand for labour.

Proposal 4: Price controls

Another important measure would be to implement price controls to limit prices of certain key products. While some kinds of price controls are not uncommon – for example rent control – there are lots of mainstream critiques of its wide-spread use. A paper for the World Bank group suggests that price controls have good intentions but generate bad outcomes. Some argue that they cause shortages; that they can lead to spending greater periods “in-line” waiting to purchase products; and that once the controls are removed, the impact on the poor is worse than the impact of inflation would have had been. Others have a different view. They point out how targeted price controls (for example controls on prices of fuel and rent, along with minimum wages) offer an important alternative to austerity and can help address inequalities.

Proposal 5: Tax the rich

The costs of these reforms must come from higher taxes on the rich, among other financing options. Economic modeler, Asghar Adelzadeh, says that “government’s decision to avoid permanent tax increases in the overall tax burden has significantly benefited the country’s well-off class at the expense of the majority.” This is without considering a tiny elite’s accumulation of large levels of wealth. AIDC’s Dick Forslund shows that just taxing high income earners at the same effective tax rate as in 2000 could raise between R145 and R160 billion in additional revenue each year.

It is also high time that we redistribute accumulated wealth through the introduction of a progressive net wealth tax. Rising interest rates are a major cost on the majority of people in society. In a context where there are extreme inequalities, it is important to avoid tightening monetary policy and rather to utilise all the available tools to address rapidly rising pricing. Of course, this won’t happen without a fight against the power of individual and corporate elites.

In summary

As we have shown here, there is no shortage of alternatives to interest rate hikes as a means to mitigate against rising inflation. What’s lacking is a government ready to advance the interests of the majority over those of a tiny minority.

Dominic Brown is a member of the Amandla! editorial collective.

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