OPINION | Structural reforms needed to complement interest rate cuts

The South African Reserve Bank's (SARB) decision to lower interest rates by 25 basis points is a strategic move aimed at providing relief to the economy, though its overall impact will be limited if not followed by meaningful reforms.

This rate cut, though modest compared to the aggressive 50 basis point reduction by the US Federal Reserve, signals a cautious approach given the unique challenges facing SA. It provides short-term relief to households and businesses but it is not a silver bullet for the country’s economic woes.

Without addressing deeper structural problems, such as unemployment, policy uncertainty, and low levels of investment, this rate cut will not lead to sustained growth.

The economic environment in SA remains challenging, with unemployment sitting at a staggering 32.6%, according to Stats SA.

Inflation, while relatively stable, has fluctuated due to external factors such as rising global oil prices and food costs. GDP growth remains sluggish, recording only 0.6% growth in the second quarter of 2024.

These figures suggest the reality that SA’s economic troubles run deeper than what interest rate adjustments can address. The SARB’s decision to cut rates reflects its attempt to provide breathing room for the economy, but the long-term solution lies in structural reforms.

Globally, interest rate cuts have been used as a tool to stimulate growth, but their success depends on a range of factors. For example, in 2023, the European Central Bank maintained low interest rates across the Eurozone to combat inflation and boost sluggish economies.

However, countries such as Italy and Greece, despite benefiting from these cuts, experienced limited long-term growth. According to the European Commission's 2023 Economic Report, while interest rate cuts in Southern Europe reduced the cost of borrowing, high public debt and structural inefficiencies prevented meaningful economic recovery.

In contrast, the US, with its larger and more dynamic economy, has seen a greater impact from rate cuts. The Federal Reserve’s aggressive 50 basis point cut in early 2024, for instance, spurred borrowing and investment, helping to shield the US economy from a deeper recession.

According to the US Bureau of Economic Analysis, this move contributed to a 2.1% annualised GDP growth in the second quarter of 2024, demonstrating how interest rate cuts can work in conjunction with a flexible and competitive economic environment.

In SA, the situation is markedly different. While the interest rate cut provides some relief for indebted households, the benefit is likely to be modest. The reality is that many South Africans are already stretched financially, with household debt to disposable income ratios remaining high at 62.3%, according to the SARB’s quarterly bulletin (Q3 2024).

This suggests that while lower interest rates may reduce monthly repayments for some, they will not significantly boost household spending or consumer demand in the short term.

For businesses, particularly small and medium-sized enterprises (SMMEs), the 25 basis point cut will offer some relief in terms of reduced borrowing costs, but much like households, SMMEs face significant structural challenges.

Persistent uncertainty around government policies, inefficiencies in public service delivery, and high input costs limit the potential for lower interest rates to drive significant growth. According to the 2023 Global Competitiveness Report by the World Economic Forum, SA ranked 60th out of 141 countries, indicating that much work needs to be done to improve the ease of doing business.

While the rate cut may ease financial pressures for businesses, the focus should shift towards creating an enabling environment that encourages investment, innovation and growth.

This means addressing policy uncertainty, streamlining regulatory processes, and investing in infrastructure to support business operations. In countries like Singapore, interest rate cuts have worked well because they are part of a broader economic strategy that includes strong public institutions, efficient regulatory environments and a clear focus on innovation.

According to the World Bank’s 2022 Doing Business Report, Singapore ranks among the top globally for ease of doing business, a critical factor that enhances the impact of monetary policy decisions.

The government should take this opportunity to introduce structural reforms that complement the SARB's monetary policy moves. One area that urgently needs reform is labour market flexibility. The rigidity of SA’s labour laws has contributed to the high levels of unemployment, particularly among the youth.

According to the national development plan, reforms in the labour market that balance worker protection with increased flexibility are critical to unlocking economic growth.

Infrastructure development also remains a key priority. Inadequate transport, water, and telecommunications infrastructure continue to hamper business growth and reduce the country’s attractiveness as an investment destination.

Public-private partnerships (PPPs) could play a vital role in addressing these gaps, as seen in countries like Brazil, where PPPs have been used effectively to fund large infrastructure projects.

SA can draw lessons from this model by encouraging greater private sector involvement in funding infrastructure projects, particularly in sectors like energy, transport and digital connectivity.

• Malapane is a conference speaker, strategist, multidisciplinary researcher and analyst