By Sthandiwe Msomi
South Africa finds itself in perilous economic times.
For a country that proclaims a litany of developmental and pro-poor rhetoric, the way we are handling the cost of living crisis does nothing to protect poor and working-class families.
With the SA Reserve Bank (SARB) increasing interest rates, Treasury tightening its purse, and state-owned entities critical for business activity deteriorating, it is worth considering that our approach to lowering the cost of living and increasing the real wages of poor and working-class families is dismally failing and requires structural interventions.
South Africa is currently experiencing stagflation. Most economists describe stagflation as a period where an economy experiences high inflation and high unemployment rates. According to Statistics SA, annual consumer inflation for April 2023 sits at 6.8%, down from 7.1% in March. Both of these inflation rates fall outside of SARB’s inflation target band of 3%-6%.
Unemployment, as reported by Stats SA in the Quarterly Labour Force Survey for the first quarter of 2023, sits at a figure of 7.9 million people without a job. While South Africa’s unemployment remains structural in nature due to rapid failure of small, medium and micro enterprise to create meaningful jobs, skills shortages, the inequities created by apartheid and inflation being brought in from the supply side of the economy, current interventions are doing more damage to the survival of the poor while richer echelons of society do not feel the economic pinch.
The danger of contractionary monetary policy
The SARB has opted to follow global trends in the use of monetary policy tools by consistently increasing interest rates to try and deal with inflation. Elementary economics depicts how any stimulus in the economy, say from an increase in government spending, increases demand in the economy, which forces firms to increase production and to do that, firms will hire more workers.
The increase in employment pushes the nominal wage, and firms make up for that by increasing prices -resulting in inflation caused by demand. To keep inflation at bay, the SARB steps in to increase the interest rate to decrease people’s money holdings and prevent the economy from overheating. In this context, hiking interest rates makes sense, and it is warranted. Unfortunately, this is not the South African context.
Apart from the stimulus to the economy made by the government during the Covid-19 pandemic, South Africa has generally been on a path to reduce the fiscal deficit of the economy from the implementation of GEAR (Growth, Employment, and Redistribution), South Africa’s economic plan, primarily through decreasing government spending and an increase in taxes such as VAT, which hit poor communities the hardest.
This leaves most of the provision of public goods in the hands of the private sector and the underdeveloped communities abandoned in the squalor of poverty through a lack of investment in social infrastructure needed to catalyse economic activity in communities.
With joblessness on the rise, budget cuts to crucial departments that service poor families, it is clear that inflation is not being driven by increased demand for goods and services.
The average South African household has some form of debt or the other and limits spending to ensure monthly survival. With a plethora of households also headed by women in South Africa, who are institutionally paid less than men and are prone to work in the informal sector with intermittent income (currently 46.7% of South African women work in the informal sector), poor and working-class households have very little purchasing power.
Apart from an analysis of income, the decline in the manufacturing sector and other ancillary sectors is also a sign of lowered production levels in South Africa.
With load shedding increasing the cost of doing business, barely making it easy for youth-owned (and black women-owned) small businesses to survive, interest hikes are not providing a remedy for the problem. In fact, the decisions of the Monetary Policy Committee merely exacerbate the economic conditions of the most vulnerable in society.
The nature of our inflation
Most of the inflation faced by South Africa emanates from supply side constraints that have made firms increase their mark up. The biggest elephants in the room here are Eskom and Transnet. The role of SOEs for any developing economy is so crucial to lowering costs and achieving a minimum efficiency scale, hereby making it cheaper for businesses that utilise the services of the SOE to operate.
In 2022, Transnet recorded an export loss of R50 billion for iron ore, coal, chrome and manganese, measured against the contracted rail tonnages. A country like South Africa, that is well endowed with minerals and relies on revenues from exporting commodities, cannot afford to lose out on the revenue that could be generated from increased exports.
While National Treasury argues about where money will be sourced for social programmes to develop rural and township communities, much must be done to ensure that an SOE like Transnet works so that costs for producers are lowered, thereby lowering local prices and in addition to that, fund key departments that are supposed to service poor communities through the increased revenues by firms and increased company taxes and/or royalties for these sales.
One cannot re-emphasise the role of load shedding on inflation. The very same township businesses that are supposed to be uplifted by pieces of legislation such as the Township Economy Bill and other interventions are the very same businesses that are being killed by power outages.
It’s the black-owned salons that employ black women who were deprived of the opportunity to get an education and the factories of black aspiring industrialists that are hit the hardest, while JSE- listed companies that pre-date democratic South Africa have a bottom-line large enough the mitigate the effects of load shedding.
The Reserve Bank reported that load shedding would raise inflation by 1.1% in 2023. Eskom must be fixed. Electricity, something that should be regarded as a public good, becoming privately supplied is the Pandora’s box that none of us want to open.
While Independent power producers and the unbundling of Eskom may lighten the burden on the national grid, the crux of the matter is that we need Eskom to work and to work well if we are to deal with inflation in South Africa.
Of course, added to domestic cost-pull inflation factors lies the exogenous factors such as the global inflation rate spiral, the Russia-Ukraine war and supply chain disruptions. While these may be out of our control, we need to think about how we create an external shock proof South Africa.
While we are an emerging economy that has multilateral trade deals, signatories to international treaties etc., there must be a dynamic, forward-looking vision of how South Africa could participate in the global economy as a value-adding country whose voice and economic value is listened to, taken seriously and unshaken by forces that give us the sweetest deals at the expense of our people.
To mitigate against global rising inflation, the government must consider lowering import tariffs in the short run on essential goods or intermediary goods used in production processes locally. The implementation of price controls on essential goods must be implemented to ensure that the real wages of poor and working class families are not reduced.
Moreover, South Africa must invest in the creation of value-adding industrial activities such as beneficiation, manufacturing, research and innovation to create global demand for South African goods apart from our minerals and raw materials. The growth of our economy will ensure that we not only solve local economic issues but also have the bandwidth to control our monetary policy as opposed to just increasing interest rates because the US Federal Reserve chair decides to increase the US interest rate.
The long and short of it is that hiking interest rates will not solve the thorn in our flesh called inflation any time soon. Will it benefit the 1% whose wealth probably equals the value of South Africa’s gross domestic product with sophisticated financial assets that are bearing interest from higher interest rates? Absolutely.
Will it make commercial banks richer as they increase the bond repayments and vehicle repayments of middle class folks and young professionals? Definitely.
But for the young person, who sees themselves as a big industrialist one day, seeking a business loan from one of the big banks, or even for the household headed by a young black woman who has to choose between buying groceries for her family or budgeting for her commutes in between Soweto and the city every day to work, interest hikes make life in South Africa hell on Earth.
It is in the interest of the future of young, particularly black, people in South Africa to reconsider how we deal with inflation. Let monetary policy work for the African context. Imported economic views on monetary policy will not get us out of the quagmire we find ourselves in.
Sthandiwe Msomi is the spokesperson for the South African Youth Economic Council.
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