Last week’s interest rate increase of 25 basis points should serve as a flashing warning light.
The effects of surging global inflation arrived on our shores with a major jolt through the R1.21/l hike in the petrol price early this month, taking it to a record high. Combined with the jarring 15% hike in electricity prices this year, consumers are being hit hard.
In developed markets consumer inflation is spiking — latest figures show it is at 6.2% in the US, the highest in 13 years, and at 4.4% in the EU. The SA Reserve Bank doesn’t expect a dramatic acceleration in our inflation rate, putting it at 4.5% this year, 4.3% next year and 4.6% in 2023, though each figure has been revised upwards by one basis point from its earlier forecasts.
The Bank also warned that a weaker currency, higher domestic import tariffs and escalating wage demands present upside risks to its inflation forecast. However, the “imported inflation” being felt through such things as the petrol price, with the substantial amounts consumers already have to pay in higher electricity and other administered prices, will have a harsh impact across society — particularly on those with low or no incomes.
Fast-rising administered prices are particularly destructive because they are driven not by increasing demand but by systemic inefficiencies and misgovernance — a glance at the state of service delivery emphasises the point.
This year has been rough in that sense. The 15% increase in electricity prices effective from July 1 was the biggest increase in the past decade. At municipal level inflation is also severe. In Johannesburg, budgetary hikes of 6.8% for water, 4.3% for refuse removal and 6.8% for sanitation also kicked in on July 1, with many other municipalities implementing bigger increases. And there is sure to be another electricity tariff increase next year, while there is always upward pressure on municipal rates and taxes.
These rising costs are taking big chunks out of people’s incomes and are likely to tip many household cash flows into a position of financial distress. This is a critical situation for an economy in such a precarious state.
Pitifully little
But what of the unemployed, who have no way to cope with their rising cost of living? There are about 11-million people without jobs, including discouraged job seekers, according to Stats SA figures.
The R350-a-month social grant introduced to alleviate the effects of the Covid-19 lockdowns is pitifully little in that context, and the financial pressures increase the importance of improving social welfare benefits. Unfortunately, the affordability proviso has to follow: our strained fiscus has no capacity to take on another significant debt burden.
Welfare benefits should be improved to the extent that the amount is manageable. It is a precarious situation, because the inflationary forces will have a direct effect on whatever that amount may be. As inflation feeds into more and more products and services, rising prices will leave consumers with less and less money to spend, even from month to month.
That will in turn directly hit company profits, reducing the amount of tax they pay and so further reducing the fiscus’s capacity to deliver welfare benefits. Should taxes be raised to pay for the welfare benefits, that deadly spiral would simply accelerate.
Deteriorated alarmingly
It is a situation that will need to be managed carefully, particularly with the spectre of July’s social unrest and looting still fresh in our memories. But the reason social welfare benefits should be increased is because the economy has deteriorated so alarmingly since 2008, when the formal unemployment rate was about 22%.
We are dealing with the consequences of the decade of misgovernance and corruption that followed. We now have to fix what is wrong with the economy so that it facilitates higher employment and eases the welfare burden on the fiscus.
The best solution for all economic woes, ours or anyone else’s, is a healthy, growing economy. That is what creates jobs because businesses, confident of healthy returns, invest heavily in such times in growth and expansion.
We have started down that road, given the important reforms already instituted in the energy sector and those being instituted in other important areas. But it is all happening too agonisingly slowly, and the longer everything takes the higher the unemployment rate will climb and the more unmanageable social welfare needs become.
We need a sense of urgency.
• Mavuso is CEO of Business Leadership SA.
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