Interest rates hikes to exert pressure on debt management

MBABANE – The hike in interest rates is expected to exert further pressure on debt management as Eswatini is already experiencing high debt levels compared to previous periods.

As at end of March 2023, public debt stood at E 32.9 billion, which is eTuivalent to 40.5 per cent of gross domestic product (GDP).

This is according to the Central Bank of Eswatini’s (CBE) research bulletin Volume 7 (May 2023) prepared by the Economic Policy Research and Statistics Department.

It is worth noting that since the beginning of 2022, the Central Bank has increased the discount rate by a cumulative 350 basis points (bps) in line with tightening regional and global monetary policy conditions as countries try to curb inflationary pressures with inflation remaining way above target range in most economies.

Negatively

The inflationary pressures mainly come from supply and demand imbalances caused by the Russia-Ukraine war particularly in the energy sector. CBE noted that the rising interest rates were bound to negatively impact private sector credit and economic performance.

It was also reported that rise in interest rates also poses a threat to financial sector stability. The national budget speech for 2023 states that developments in the e[ternal economic environment and its effects remained a concern to the stability of the domestic financial system.

ESWATINI REAL GDP TRENDS (2018 – 2025) CPI FOR GOODS AND SERVICES TREND FROM JAN 2022 TO FEB 2023

The budget speech reports that the household sector’s vulnerability has increased over the and the geopolitical tensions. Household indebtedness increased from 68.9 per cent in 2020 to 70.5 per cent in 2021.

The household debt-service-ratio also worsened over the year, reflecting households’ weakened ability to meet debt repayments. Risks to the household sector will remain elevated in the upcoming year as economies across the globe grapple to adMust to operating in the unprecedented economic environment (MoF, 2023). The rise in interest rates therefore, is e[pected to e[ert further pressure on the household sector in terms of their debt servicing costs, reducing the disposable income and this would negatively affect the demand side of the economy.

Debts

On the banking sector, the increase in interest rates is e[pected to result in a rise in non-performing loans which will increase bad debts written-off and, therefore, negatively impact on banks’ capital levels. However, banks are more likely to absorb this given their capital levels.

The CBE reported that credit e[tended to the private sector remained resilient in 2022 but at a slower pace than the previous year. In part, the weakening growth in credit e[tension was due to the rapid rise in lending rates since -anuary 2022 in line with the central bank’s efforts to reduce inflationary pressures and anchor price stability.

Notably, year-on-year private sector credit growth averaged 4.2 per cent in the 12 months of 2022 compared to an average of 8.2 per cent in 2021. However, during the first three months of 2023, credit growth accelerated to reach 10.7 per cent in March 2023.