The government is making it harder for the South African Reserve Bank (SARB) to fight inflation due to the effects of ongoing load-shedding on the economy and general economic underperformance.
The SARB governor Lesetja Kganyago shared this information during a lecture at the University of Johannesburg last week.
Kganyago said the current spike in inflation was caused by the unusually large supply-demand imbalances caused by sudden restrictions and relaxations on economic activity.
Swift relaxation of Covid restrictions “fuelled what would eventually be the highest rates of global inflation in a generation”. The Russian invasion of Ukraine exacerbated the situation.
However, “idiosyncratic factors such as load-shedding and the country’s greylisting” keep inflation elevated in South Africa while it is declining globally.
In particular, the ongoing energy supply challenges are fuelling inflation by raising operating costs for businesses which are passed on to consumers.
The Reserve Bank estimates that load-shedding adds 0.5% to inflation in 2023, and this is something it can do nothing about.
Food inflation provides a good example of the idiosyncratic nature of South African inflation. It is increasing in South Africa while agricultural commodity prices are decreasing globally.
Such factors also keep investors wary of investing in South Africa, limiting economic growth.
The Reserve Bank has to fight inflation “in a context where many of the drivers of both inflation and growth are outside of its control”, according to Kganyago.
It can only “effectively smooth business cycle fluctuations” by raising or cutting interest rates.
Furthermore, “fighting inflation is much harder when the economy is already underperforming” due to structural constraints that must be solved at the government level.
The Reserve Bank is not capacitated to solve these structural issues nor influence long-term growth – this requires sound economic policy from the government.
Reserve Bank vs Treasury
Efficient Group chief economist Dawie Roodt said, “I feel very sorry for the South African Reserve Bank”, which is trying to reduce inflation while government policy is accelerating it.
Roodt said the Reserve Bank is doing the right thing in trying to bring inflation down by raising interest rates while calling on South Africans to support its efforts.
But, the SARB is limited in what it can do. It cannot address structural economic problems keeping inflation elevated, such as electricity prices and deteriorating infrastructure.
He is most concerned about the clash between the SARB’s monetary and the National Treasury’s fiscal policy.
This macroeconomic clash between the SARB and the government will result in low economic growth with high inflation.
The government’s commitment to expansionary fiscal policy actively undermines the Reserve Bank’s attempts to bring inflation down.
Roodt said politicians like inflation because it erodes the value of the government’s debt, allowing it to spend more while not increasing debt in real terms.
Thus, he suspects that “politicians will put more pressure on the Reserve Bank to relax monetary policy” in the future.
Such calls are heard already, with politicians in the government and the opposition calling for the nationalisation of the SARB and changing its mandate.