The management of S Africa’s economy needs urgent restructuring…

The South African Reserve Bank has increased the repo rate from 2021 by 4.75% to the current repo rate of 8.25% and the prime rate to 11.75%. In its last meeting, the Bank’s Monetary Policy Committee decided to increase the repo rate by 0.5%, even as the latest inflation rate for April fell to 6.8%.

The SA Reserve Bank is hell-bent on returning the inflation rate to a point between its inflation target of 4.5%. To get to this point, there is nothing but the rate of inflation, not even economic growth.

The last GDP results released by Statistics SA indicate negative growth of minus 1.3% in the fourth quarter of 2022. Results for Q1 2023 are expected on 6 June 2023 and there is major concern over a second negative quarter in a row. We know what it is.

The South African economy is experiencing cost-push inflation, not demand-pull inflation, meaning that the pressure on inflation is coming from the supply side, not the demand side. Consumer demand growth has been slowest since 2019. Annual increase in consumer demand from Q4 2019 to Q4 2022 is only 0.59%. Hence there is no pressure on inflation from the demand side. From the pressure supply side.

Cost-plus inflation occurs when the general price level rises due to an increase in private sector production costs. Businesses primarily aim to make a profit; Therefore, if production costs increase, they increase the prices of goods and services.

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Cost-plus inflation is driven by factors of production and input costs, including increases in energy costs, including fuel costs and electricity costs (load shedding has a major impact on production costs); government taxes and policy uncertainty; Municipal expenses relating to rates and taxes; supply chain processes and logistics; And wage hike as a result of above factors. Cost-plus inflation reduces the purchasing power of consumers.

In a cost-plus inflation environment, monetary policy has limited positive impacts on inflation by increasing the repo rate; This mainly results in the destruction of economic development efforts.

Steps to be taken

Possible policy interventions include, first, specific price controls – for example, keeping electricity prices stable, limiting municipal fees and tax increases, and keeping fuel costs stable.

All of these costs are rising far above the inflation target and are rising even faster, fueling inflation. From July 1, electricity charges will again increase by more than 30%. Fuel costs can be stabilized and reduced by eliminating fuel charges.

Second, wage increases should be below the current inflation midpoint of 4.5%.

Third, supply chain processes and logistics need to be urgently improved. Producers incur considerable costs in transporting their goods to markets, and those exported goods face a bottleneck at export ports.

Fourth, policy certainty is at a low point, preventing the business community from expanding and investing.

Lastly, load shedding significantly affects production costs and secure power supply is urgently needed. Governments should invest in infrastructure development to help businesses become more productive and competitive globally.

The SA Reserve Bank has been ruthlessly successful in keeping inflation within its target range of 3% to 6% from early 2022 until today over the past decade.

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The start of Russia’s war on Ukraine has disrupted global energy prices and other essential prices, causing inflation in South Africa. A decade of low inflation has created a low growth environment in the country.

We need more growth than we have achieved in this low inflation environment. We need growth of at least 3% per annum, but can this be achieved within the SA Reserve Bank’s 4.5% (mid-point) inflation targets? Inflation targeting policy has not yet succeeded from an economic growth perspective.

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A recent research project, using an econometric method called the Inflation and Growth Nexus, found that an inflation rate of 6% allows for an optimal „sweet-spot” growth environment. So the question is: Is our inflation targeting policy implemented by the SA Reserve Bank realistic for a developing country in Africa? Most developing countries have higher inflation targets with higher growth levels.

Lastly, rising interest rates cause a series of domino effects; It stifles economic growth, reduces investment, destroys jobs and increases poverty, and exacerbates upheavals and instability.

Immediate changes in economic governance are needed. DMK

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