The Organisation for Economic Co-operation and Development (OECD) has called on the Reserve Bank to stay the course in fighting inflation, which has stayed stickily above its target range of 3%-6%. SA’s inflation rate is now at 6.8%.
The Paris-based organisation said in its economic outlook released on Wednesday that SA’s power cuts will keep pushing up consumer prices. It expects inflation to remain above the target midpoint of 4.5% in 2023 but to fall back into the target range of 3%-6% in 2024 “as the delayed effects of monetary policy are felt”.
“Falling commodity prices and slower growth will lower revenues. Broadening the income tax base and raising property and environmental taxes would help to offset this decline and improve equity. Monetary policy should stay the course to bring inflation down,” it said.
“Household spending will be limited by high inflation and tight financial conditions. After a weak patch in 2023, private investment, particularly in power generation, will become the main driver of growth over 2024. This should reduce the frequency of electricity cuts and relax constraints on growth by the end of 2024.”
The central bank has hiked interest rates a cumulative 475 basis points since November 2021, taking the cost of borrowing to the highest level since 2009.
The Bank last month said electricity prices and other administered prices continue to present upside risks to the inflation outlook.
Wage demands
The bank said load-shedding may have “broader price effects on the cost of doing business and the cost of living in particular as diesel consumption increases”.
Citadel chief economist Maarten Ackerman said record high load-shedding, over-budget wage demands from trade unions and the battered rand are putting pressure on SA’s fiscal framework
“On the back of a poor global economic outlook and serious structural issues hampering growth in the country, SA consumers are finding themselves under severe pressure. The average South African is facing lower take-home pay, high unemployment, high inflation and rapidly increasing interest rates counter to the rest of the world,” he said.
The IMF suggested last week that SA should formalise 4.5% as its inflation target.
The OECD also warned that the recent weakening of the rand points to upside inflation risks. The entity said it expects the SA economy to grow 0.3% this year.
The dire economic outlook for SA comes after data from Stats SA showed the economy grew 0.4% in the first quarter of the year after a drop of 1.1% in the prior quarter.
The marginal growth in the first three months of the year caused SA to avoid a technical recession, despite record levels of power cuts in the period.
In its report the OECD also said the rolling power outages will slow the pace of fiscal consolidation as necessary public support to the sector results in additional expenditures. It expects load-shedding to persist in 2023 and weigh on exports, recommending that government reduce bottlenecks in the electricity sector, and make it a priority.
Exposing banks
“Lowering the regulatory burden and entry barriers in network sectors, namely rail and energy, would increase supply, foster competition, boost private investment in high-quality infrastructure, improve the quality of services and lower consumer prices,” it said.
“Electricity cuts and reduced activity from SMEs could lead to vulnerabilities in the corporate sector, exposing domestic banks. On the upside, additional investment in electricity generation could alleviate supply constraints more rapidly than expected.”
President Cyril Ramaphosa met captains of industry to carve out a pathway to get SA out of the energy and infrastructure crisis.
The work streams that emanate from the agreement between industry and government will zoom in on the energy, logistics and crime crises. CEOs of Remgro, Sibanye, Sanlam will form part of business representatives on the work streams.
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