Times Of Swaziland: COST TO REPAY BUSINESS LOANS INCREASES

COST TO REPAY BUSINESS LOANS INCREASES
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Mhlengi Magongo on 26/09/2022 08:23:00


MBABANE - Business revenues will continue to drop as the Central Bank of
Eswatini (CBE) has decided to raise the discount rate to 50 basis points from
4.5 per cent to five per cent.
An increase in interest rates means that the cost of borrowing also rises. The
interest rate was hiked in May this year from four per cent to 4.5 per cent. It
was after CBE switched from using the expansionary monetary policy to the
contractionary monetary policy.  This now means that the prime lending rate for
banks will also increase by 1.5 per cent, thus escalating costs to repay loans.
Revenues
The move by the CBE further reduces consumer spending, which then causes
business revenues to drop. In the past, it led to businesses refraining from
borrowing money for investment and growth, resulting in a fall in sales,
especially companies supplying machinery or buildings for businesses. CBE
Governor Dr Phil Mnisi said they held a meeting with the Monetary Policy
Consultative Committee (MPCC) to consider the appropriate monetary policy
stance. The meeting was held last week Friday. Mnisi said they then decided to
increase the discount rate by 100 basis points (one per cent) from five per cent
to six per cent.“The International Monetary Fund World Economic (IMF) Outlook
released in July 2022 reflects stalling global economic growth with a forecast
of 3.2 per cent for 2022 (from 3 .6 per cent in April projections) and 2.9 per
cent for 2023 (from 3.6 per cent),” he said.
Mnisi also mentioned that the geopolitical tensions continued to weigh down on
global growth prospects, the tightening global monetary policy in response to
elevated inflation outlook impede economic growth.  “Advanced economies are
expected to grow by a lower 2.5 per cent (from 3.3 per cent) in 2022, while
emerging markets and developing economies are expected to grow by 3.6 per cent
in 2022 (from 3 .8 per cent) .,” he said.
Commodity
The Governor mentioned that global supply chain disruptions, rising energy and
other commodity prices would continue to weigh heavily on global economic
outlook. Economist Sanele Sibiya predicted that the contractionary move would
challenge the economic welfare of the country. In an interview on Thursday, the
economist said this was now a supply side problem; it’s a problem that has to
dowith the oil market and the political situation surrounding the latter. He
added that this was not a problem that can only be solved by economic means.
“Russian has upgraded its attacks towards Ukraine as they are no longer
regional but affect the entire country, which is an indication that the war is
still to continue, thus more changes are to come,” he said. Sibiya said
CBE’s move to increase the interest rate would push demand down but it would
not have an impact on the market.
Situation
“If demand is pushed down we would enter in era where we have to contain with
the recessional situation,” he said.He said price of goods and service are
expected to increase in the next few days.  Southern African Research Foundation
for Economic Development (SARFED) Regional Coordinator and Economist Dr. George
H. Choongwa said the shift from expansionary to contractionary would mostly be
felt by investors as well as business owners. Choongwa said more than 50 per
cent of the private sector, mainly the SMEs (small and medium-sized
entrepreneurs) in Eswatini have been dependent suppliers of government and they
constitute most of its spending trends through payment of supplies both goods
and services. “In the event that contractionary measures were implemented, we
expect to see a huge loss of business and flow of income to both industry and
household,” said the economist.
Option
Choongwa also mentioned that though it was reported that CBE’s first step in
execution of this policy option was to reduce government spending, the ripple
effect to such decision was likely to fuel poverty levels as most jobs would be
lost. He said this was against the national budget’s aim of creating at least
9 000 jobs through investments and stimulated economic activities.
“Contractionary measures means reduction in economic activities at least in
the short and medium term,” he said. The economist further mentioned that this
might contribute to the reduction in GDP against the backdrop of the annual
gross financing needs having remained high with an average of about 19.4 per
cent of GDP, leading to continued financing vulnerabilities. He said this might
then affect future SACU revenue, particularly for the year 22/23, thus
generating additional budget and external financing pressures.