Ashly DhaniOver 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 percent, 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.
As a custodian of monetary policy in a country where few instruments of intervention exist, the Sarb has reacted by increasing interest rates for 1o consecutive times.
Its approach is modelled on its own parameters for inflation management, which cites the range of 3 percent to 6 percent 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 fuelled 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.
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.
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.
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.
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. — Bloomberg
Bongani Ndlovu