COST TO REPAY BUSINESS LOANS INCREASES AGAIN

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 6.0 to 6.5 per cent.

An increase in interest rates means that the cost of borrowing would also rise. The interest rate has been increasing by 50 basis points from March this year to date. The change was notable 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. The move by the CBE further reduces consumer spending, which then causes business revenues to drop. Therefore, it has 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 yesterday. Mnisi said they then decided to increase the discount rate by 50 basis points from 6.0 to 6.5 per cent. The increase is effective from today. “The International Monetary Fund (IMF) forecasts global growth to slow down from 6.0 per cent in 2021 to 3.2 per cent in 2022 and 2.7 per cent in 2023. The IMF cites tighter financial conditions, Russia-Ukraine conflict and the lingering COVID-19 pandemic as the main factors weighing down on growth prospects,” he said.

Growth

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 impedes economic growth.  “Advanced economies are expected to slow down from 5.2 per cent in 2021 to 2.4 per cent in 2022 and further down to 1.1 per cent in 2023. Emerging markets and developing economies are also expected to slow down from 6.6 per cent in 2021 to 3.7 per cent in 2022 and 2023,” he said. The governor mentioned that global supply chain disruptions, rising energy and other commodity prices would continue to weigh heavily on global economic outlook.

An Economist, Sanele Sibiya, predicted that the contractionary move would challenge the economic welfare of the country.In an interview yesterday, the economist said this was now a supply side problem; it’s a problem that has to do with 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. “Russia has upgraded their attacks towards Ukraine as they are no longer regional, but this affects the entire country which is an indication that the war still continues, thus more changes are to come,” he said.
Sibiya said the CBE’s move to increase the interest rate would push demand down but it would not have an impact on the market.

“If demand is pushed down we would enter in era where we have to contain with the recessional situation,” he said. Sibiya said the price of goods and services 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 Small and Medium-sized Enterprises (SMEs) 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. He also mentioned that though it was reported that central bank’s first step in executing this policy was to reduce government spending, the ripple effect to such decision was likely to fuel poverty levels as most jobs would be lost.

Stimulate

He said this was against the national budget’s aim of creating at least 9 000 jobs through investments and stimulate 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 been remained high with 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.

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