Over the past few weeks one of the country’s most painful experiments finally started to bear fruit. The announcement by Statistics South Africa that the country’s core inflation rate had declined to 4.7%, brought some welcome relief to citizens.
Over the past few years, the inflation spike that was precipitated by the post-pandemic bounce-back and the Russian invasion of the Ukraine, has pitted the South African Reserve Bank (Sarb) against indebted South Africans, who bore the dual brunt of the inflation spike and the Reserve Bank’s reaction to it.
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Read: Too soon to celebrate the drop in inflation
As a custodian of monetary policy in a country where few instruments of intervention exist, the Sarb has reacted by increasing interest rates over 11 consecutive cycles.
Its approach is modeled on its own parameters for inflation management, which cites the range of 3% to 6% as the room for latitude that balances the needs of both savers – who need to see some growth in their savings – and borrowers who need debt-service costs to be as low as possible.
The problem is that borrowers depend on savers to exist and any interest rate that fails to make a difference between hiding your money in a couch on a farm and banking it, would simply discourage the savers from engaging in formal savings. That ironically would reduce the amounts available to be advanced to borrowers unless some other creative model emerged.
The science of economics
Part of the tensions between the Reserve Bank and the citizens has been fueled by the reality that much of what drove the cost-of-living spike was due to exogenous supply shocks that would never respond to the actions of a local reserve bank.
This brought into question the wisdom of using domestic interest rates as a tool of tackling inflation, whose origins were far removed from the local economy.
In spite of the criticism, the bank persisted and part of the reason the persistence was warranted is due to the intersectionality of economic drivers.
Read/listen:
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Multi-mandates versus inflation targeting
So, while one may agree that oil prices for example are largely immune to the pronouncements of the local Reserve Bank, once imported at those elevated prices, they form a critical part of the local economic nucleus whose other parts are indeed more responsive to monetary policy actions.
The problem with the science of economics is that it is as imperfect as the buffalo exchange in the Phala Phala saga.
This makes it rather difficult to isolate particular items and implement specific initiatives with the hope that it all has a spillover effect on the economy.
Administered prices
One exception to this is the basket of administered prices, which are a combination of the necessary and the relatively optional.
In its report to Parliament last week, which was overshadowed by the Phala Phala fiasco, the Reserve Bank once again reiterated the impact of administered prices on its efforts to fight inflation. The increases in water and electricity rates over the past five years, have remained static and elevated and affected all citizens. The models used to set these prices are elements of the economic structure that provides capacity for intervention that is not readily available among other elements of the economy.
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Unfortunately for citizens, such administered prices serve as a lucrative and critical source of revenue for the entities that levy them and municipalities that charge them. For municipalities that have no financial viability in the absence of rates or taxes, the idea of sacrificing them is simply untenable.
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In Eskom’s case, the theory it advances is that citizens of yesteryear enjoyed unduly favourable tariffs that squeezed out the investment breathing space from Eskom and contributed to the current crisis. To this end, the power utility argues that the tariff increases granted by the energy regulator are still not sufficient and if one follows Eskom’s own logic, the crisis of underinvestment will persist and hit us hard later on.
The Road Accident Fund (RAF), whose business model is premised on the extraction of a levy on fuel litres sold in the country, is equally adamant that the current levy is insufficient for it to fund its mandate. Admittedly, the RAF’s open-ended mandate and uncapped fees means that its problems run much deeper than the question of the right levy to charge.
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It is in this case where the interactions between monetary and fiscal policy measures stand a chance of converging towards new models and solutions that ease cash flow pressures on rate- and levy-paying consumers and inflation for the general population. Regrettably, such actions are taken as a matter of accident rather than policy design.
Fuel levy
In 2022, as the Ukraine invasion threatened to bankrupt every motorist and commuter, the government opted for a moratorium on the increase in the fuel levy. While that eased pressure, it turned out that in the absence of a comprehensive review of the model and the assessment of the trade-offs and upsides of the moratorium, government did not know whether to extend it or restructure it.
As a result, the moratorium expired and runaway fuel prices are once again the order of the day. This week the fuel levy adjustment is expected to raise prices to levels reminiscent of the height of the energy crunch in the immediate aftermath of the Russian invasion of the Ukraine.
Read: Fuel prices to take the spring out of your step
While citizens have no choice but to bite this bullet, those in authority have been provided with new insights into how this can actually be addressed. The Sarb recently published a paper that analyses some of the administered prices and their effects on inflation. In the case of the fuel levy, administered prices are estimated to account for 40% to 60% of the price ultimately paid at the pump.
Disturbingly, over a seven-year period from 2015 to 2022, administered prices actually exceeded the basic fuel price for every month except one. This turn of events was ironically only interrupted by the spike in the basic fuel price as a result of the invasion of the Ukraine.
This means that rather than being driven primarily by exogenous factors, the fuel price and the cost of doing business are materially influenced by the choices that have been made by those responsible for the country’s fiscal policy.
The question of whether they have the appetite to revisit issues like this in order to mitigate the impact on citizens, is the major elephant in the crisis room.
Core to the problem is the reality that South Africa’s economic planning exists in an ideological drift that lacks anchoring principles. In this ideological drift, important interventions like strong social security nets, are regarded as wonderful reference points for political rhetoric that do not have to be coupled with important questions about long-term viability and equity.
Until that changes, critical policy debates about administered prices and their bottleneck effect on the larger economy, will remain footnotes in publications that are condemned to be read by those whose power to act on it, shares the same imperfections as the Phala Phala transaction.
