Repo rate increase: Farmers need to tighten the belt

by Michelle van der Spuy

The South African Reserve Bank’s newest attempt to tighten the belt can be felt in consumers’ wallets and farmers’ operations, says Paul Makube, a senior agriculture economist from FNB Agriculture.

The repo rate currently stands at the highest it has been in the past 13 years after it was increased to 7,75% last week. Subsequently, the prime lending rate is 0,5% higher as of 31 March. 

The prospects for South Africa’s economic growth have decreased to 0,2%, especially due to power and logistical shortages. Economic growth has been estimated at 1% for the coming years thanks to renewed investment in power supply and improved global circumstances. 

Inflation expectations for the year have been adjusted from 5,4% to 6% and next year’s have been adjusted from 4,8% to 4,9%. “It will probably hinder expansion projects in the agriculture sector as debt’s service costs will probably eat away at profit margins,” says Paul. “The recent boom, for example, in the sales of processed agricultural products is likely to decline if interest rates continue to rise in an already uncertain environment due to erratic power supply, poor infrastructure and logistical constraints.”

Meanwhile, commodity prices have weakened, and farmers will consequently have less cash at their disposal. According to Paul, it can force farmers to postpone expansions or the replacement of machinery and equipment.

He adds that the weather prospects add further salt to farmers’ wounds as there is a strong weakening in La Niña conditions is expected, while an El Niño system is expected to develop in the coming months. “If this should realise, it could be catastrophic for the agriculture sector. Farmers thus have to be very careful with the financial obligations they incur for the rest of the year.”

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