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Change the world


This article appeared in the Herald of 2 August 2018 written by Siyabonga Sesant after a public lecture delivered at Nelson Mandela University by Governor of the Reserve Bank, Lesetja Kganyago.


South Africans with a salary of R14,400 a month are among the top 20% of households in the country, while 10% of the population have to make do with less than R18,000 for an entire year.

These are some of the figures revealed by SA Reserve Bank governor Lesetja Kganyago during a visit to Nelson Mandela Bay on Wednesday.

Kganyago said inequality in the country was the highest it had ever been.

Kganyago was speaking at Nelson Mandela University during a masters class at the institution’s Business School in Summerstrand.

His lecture, entitled “The history and the role of the Central Bank in building and enabling democracy”, followed a presentation to economics pupils from various schools around Nelson Mandela Bay at the Nangoza Jebe Hall in New Brighton as part of the Reserve Bank’s outreach programme.

Kganyago spent a large portion of his speech explaining some of the misconceptions about monetary policy and how it affects inequality.

It is a bleak picture. Explaining the relationship between interest rates and borrowing costs, Kganyago said the reasons households borrowed – and at what interest rate – depended mostly on their jobs and income.

“To give away the punchline, however, if your family income [is] about R14,400 a month, you are in the top 20% of households [in the country].

“Getting into the top 10% of the income distribution requires just under R270,000 a year, or R22,500 a month.

“Compare those income levels to a household in the poorest 10% of South Africans, which is getting less than R17,721 a year. That is under R1,500 per month,” he said.

Kganyago said there were different kinds of debt which carried different interest rates among the estimated 25 million so-called “credit active” South Africans.

“When we move the repo rate – which is the rate at which commercial banks borrow from the central bank to fund their reserves requirements – the decision has a direct and strong effect on the prime rate, which is the rate at which commercial banks lend to their safest customers.

“This, in turn, changes the loans that are tied to prime, such as mortgage loans and vehicle loans.

“To put numbers on this, we currently have the repo rate at 6.5%, the prime rate is 10%. The average interest rate on a mortgage is also 10%, but the average rate on a vehicle loan is almost 12%.

“As you can see, if you reduce the repo rate by 25 or 50 basis points, people with mortgages and vehicles get a nice saving, but the same repo rate move has little or no effect on a micro-loan. As a result, there is almost no relationship between the repo rate and the interest rate on higher-cost debt.

“Changes in monetary policy have a much stronger effect on the top 20% of households than they do on the rest of the population,” he said.

That was not because poorer households did not borrow, but rather because they borrowed at interest rates that were shaped by factors other than monetary policy, including factors like higher risk of default, Kganyago said.

“Many poorer people when they take out a micro loan, they don’t even check what the interest rate [on the loan] is.

“They just get told, ‘you can get R50,000 and all you have to do is repay R1,000 a month’, and they are happy.

“What is hidden in there [in the agreement] is the interest rate associated with that loan.

“So, when interest rates go down, the more wealthier households save more on interest costs than poorer households do, borrowing at microloan rates. This by itself worsens inequality.”

Reducing SA’s extraordinary high unemployment rate was crucial to fighting poverty and moderating inequality, Kganyago said.

“The problem for us at the central bank, however, is repo rates are not the right tool for addressing the country’s inequality problem, especially joblessness among the poor.

“Targeting employment and not inflation could worsen inequality even more, especially if we were to target employment for the poorest South Africans.

“This is because the poorest households are more disconnected from labour markets.

“In fact, as data from Statistics South Africa tells us, jobs are not even the primary source of income for the poorest 30% of households, they rely heavily on [social] grants.”

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