Picture: African News Agency (ANA) The South African government can help to reduce the burden of rising costs of living on its citizens by reducing its own expenditure, says the writer.
By Bonke Dumisa
The world is currently battling to deal with inflation pressures that can be traced back to various factors, which are mostly external in nature, including the Russian invasion of Ukraine last year. How did the Russian invasion of Ukraine worsen global inflationary pressures?
When Russia invaded Ukraine, the US and its allies quickly advocated for the total boycott of any type of trade with Russia, including oil and gas. This created global jitters about a lower global supply of crude oil, which saw the Brent crude oil price moving from an opening price of $97.14 per barrel on February 23, 2022, to a closing price of 102.37 per barrel by the following day.
These sharp increases in Brent crude prices escalated as high as $140 per barrel within two weeks. To be exact, the opening Brent crude oil price was $131.50 on March 9, 2022. The unexpected quick rise in Brent crude oil prices immediately had negative multiplier effects on petrol and diesel prices globally.
This directly led to many successive upwards fuel price adjustments in South Africa from March 2022 onwards. The South African government temporarily tried to subsidise the fuel price by foregoing about R1.50 per litre, which was due to the government through the fuel levies. This was unsustainable, and it had to end in a matter of a few months.
The Russian boycott had many other direct global negative consequences. Many food exports from Ukraine were directly negatively impacted by the Russian invasion. By the same token, the boycott of Russian products led to a lower supply of many products which, in turn, pushed up the prices of many essential food prices globally.
For example, this saw the prices of cooking oil in South Africa jumping from as low as R75 per 2-litre container to as high as R140 per 2-litre container in a matter of a few weeks. All these global factors were responsible for the sharp rise in global food inflation, which has ultimately led to the current food inflation of as high as 14 percent in South Africa.
What worsens the food inflation in South Africa is that as much as over 90 percent of our food supplies are transported by road, hence the many fuel price increases in the country have directly pushed up the food prices and the cost of doing business for most businesses involved in either food production and/or food distribution.
It is important that we now look at the inflation rates of five countries, including South Africa. Inflation in South Africa was inside the South African Reserve Bank (SARB) target range of 3-6 percent before the Russian invasion of Ukraine; and it gradually increased to 7.8 percent by the end of 2022. It subsequently decreased to 7.6 percent, then to 7.4 percent, then to 7.2 percent and then to 6.9 percent.
We were all excited when South Africa’s inflation reduced to 6.9 percent, hoping it was soon going to go back to inside the target range of 3-6 percent. It was not to be. The inflation rate rose back to 7 percent, then 7.1 percent and is now at 7.2 percent. The SARB’s eagerness to keep the inflation rates low has seen repo rates from as low as 3.5 percent in October 2021 to the current repo rate of 7.75 percent today.
To them, it was immaterial that most of our domestic inflation was effectively due to imported inflation due to the factors mentioned above. Meanwhile, the current inflation rate in the UK, which is one of our largest trading partners, is 12.7 percent, coming down from 13.7 percent; yet their unemployment rate is only 3.8 percent.
The current inflation rate in the EU is 8.3 percent, coming down from 9.9 percent, yet their unemployment rate is only 6 percent. The US economy is buoyant despite all the global jitters about a possible global recession. The US created over 250 000 jobs in April this year.
Their inflation is expected to reduce to 5 percent soon, having been far above 8 percent at the beginning of this year; yet their unemployment rate is only at 3.4 percent, with most of those unemployed people in the US being said to be “not actively looking for employment”.
It is much easier for the US, the UK, and the EU to ameliorate the negative effects of these high inflation rates on the poor and the unemployed because of their low unemployment rates; hence they did not have much civic upheaval due to rising costs of living, even though we saw significant nationwide wage strikes in the UK, which the government simply ignored.
The situation is different in South Africa, where administered prices, including electricity, water and local government property rates, have contributed a lot to the rising cost of living. The negative multiplier effects of Eskom’s load shedding, which is destroying businesses and jobs, mean increasing unemployment rates, where our expanded unemployment rates are already above 44 percent. South Africa has been in junk status for more than three years already, with our Debt-to-GDP levels already above 70 percent.
Under these circumstances, the South African government effectively has very little it can do to ameliorate the burden of rising costs of living on its citizens. It is precisely for these reasons the government could not meet the doubledigit wage increase demands by the public servants. But, this may be the time to trim its bloated national Cabinet, among other things.
Prof Bonke Dumisa is an independent economic analyst