Better SME productivity will stop Bank being a punching bag
• In SA, inflation sets in quickly, forcing the Bank’s hawkish hand before the effect of stimulus is seen
The SA Reserve Bank’s monetary policy committee kept the repo rate at 8.25% in January, as was widely expected. The Bank has faced a lot of criticism for the round of rate hikes that preceded the January decision, especially where inflationary pressure has come from external factors such as the increase in global oil prices.
High interest rates weaken economic growth. But inflation might be even worse, and it has a disproportionate effect on the poor as well as wage earners and small and medium enterprises (SMEs), in whose name a lot of the criticism of the Reserve Bank is made.
Those who hold property and other assets often see an increase in the value of those assets when high inflation sets in. But inflation increases inequality. It is a regressive “tax” levied on the poor and it is no surprise there is a correlation between SA’s inflation over the years and the Gini coefficient, an index of inequality in income distribution.
SA seems to be trapped in this cycle of exogenous inflationary shocks, high interest rate cycles and low growth. With no clear plan to extricate ourselves from this “trap”, the Reserve Bank becomes the easiest and most visible target for the ventilation of frustration. There have been growing calls for the Bank’s mandate to be changed to include job creation and economic growth. These calls are understandable but are likely to lead us into a worse hyperinflationary “trap” if they are acceded to in the current environment of low productivity.
Most developed nations have been able to restart their economies after Covid-19 through aggressive central bank interventions that pumped in liquidity to stimulate demand and investment. And while the SA central bank similarly intervened by lowering interest rates and the reserve requirements of banks, among other initiatives, it was criticised for being too conservative.
But it is often ignored that developed countries have far higher productivity levels, which helps them mop up a significant portion of the increased money supply and achieve rapid growth before the inflationary effects of monetary easing set in. SA suffers from low productivity, so our inflation sets in quickly, which forces the Bank’s hawkish hand before we see the effect of the stimulus.
The Organisation for Economic Co-operation and Development (OECD) released a 2022 report, “Boosting productivity to improve living standards in SA”, which points to “sluggish productivity developments” as the primary reason for low economic growth. Productivity gains are said to be limited by “a deficit of high-quality infrastructure, namely electricity, transport and telecommunications infrastructure, regulatory barriers and severe skills shortages”.
Low levels of innovation are also singled out in the report as a critical weakness that further affects our “domestic value add” and limits exports to largely unprocessed resources. Similarly, the World Economic Forum recently released its “The Future of Growth Report 2024”, which identified innovation as one of the key drivers of economic growth. It scored SA at 44.09 out of 100 on innovation. We lag behind Singapore (76.43), Germany (69.41), and Switzerland (80.37) but do better than Brazil (41.81) and Nigeria (30.12).
So, we are not completely hopeless, but we need to start improving our numbers if we are to grow the economy and stop using the Reserve Bank as a national punching bag. A major lever we can use is increased investment in research & development (R&D). The OECD report points to SMEs as potential change makers and “key role players in creating and spreading new technologies and ideas”.
At 20/20 Insight, we have worked with numerous corporates to support SMEs through enterprise and supplier development (ESD) programmes. The broad-based BEE (BBBEE) codes of good practice require that corporates spend 3% of their net profit after tax on SME development to comply with the ESD element of the codes. This has stimulated significant investment in SMEs, estimated at R26bn by the BBBEE Commission for 2021.
A lot of this funding is used to provide SME beneficiaries with loans at no interest or low interest rates, as well as grant funding. This has been a critical source of support, providing much-needed access to funding and easing the burden of high interest rates on SMEs. Unfortunately, most ESD programmes focus on contract financing, and very little of the funding is dedicated to R&D. Consequently, most of these SMEs remain uncompetitive and struggle to achieve sustainability beyond the funded contracts.
A stronger focus on R&D is required, along with far longer programme investment horizons, beyond mere contact duration. Such focus slowly improves local innovation and productivity, adding to the global competitiveness of local products. The government also provides various R&D incentives, but they remain generally unknown to SMEs and are underutilised. Section 11D of the Income Tax Act offers a 14% tax incentive on local R&D expenditure by businesses, even if the expenditure is outsourced. The incentive can reduce the after-tax cost of R&D expenditure by up to 14%.
The department of science & innovation offers additional direct funding support listed on its website, which includes “the Support Programme for Industrial Innovation and the Industrial Innovation Partnership Programme, and grants/loans and equity support provided through the Technology Innovation Agency, which target market-ready technology development and commercialisation. The Technology for Human Resources in Industry Programme fosters R&D collaboration between private sector companies and universities and science councils.”
Corporate ESD programmes are well placed to assist SMEs in accessing and using these incentives. Most of the SMEs lack the internal capacity or capability to carry out R&D projects and should be assisted by corporates to source service providers, along with the corporates redirecting ESD contributions to support the R&D investment of their beneficiaries.
THE WORLD ECONOMIC FORUM IDENTIFIED INNOVATION AS A KEY DRIVER OF ECONOMIC GROWTH