RAYMOND PARSONS | Mitigating the fallout from the oil price spike

“When the facts change, I change my mind; what do you do, sir?” is the well-known response attributed to renowned British economist John Maynard Keynes to encourage strategies based on new evidence, rather than on sentiment or fixed ideology.

The huge overall shock of the latest Middle East conflict to global and national economies calls for principled pragmatism, not economic dogma. The magnitude of the economic shock should not be underestimated, as the ripple effects of the US/Israeli war with Iran have had negative effects on most economies, including South Africa.

This is a time for evidence-based decision-making rather than rigid ideological stances. It was therefore inevitable that in response the GNU should announce some last-minute relief to soften the impact of far higher fuel prices in the economy as from April 1. There are, of course, the purists who are concerned about South Africa’s continued fiscal vulnerability, of which mainstream economists are fully aware.

But there are some pundits who go so far as to deplore any government decision to give temporary relief to business and consumers — such as now by partially reducing the fuel levy — saying it will jeopardise the country’s strained public finances. They are right to remind us that South Africa does not have unlimited fiscal space. And the need for “fiscal neutrality” is indeed still recognised in the official announcement about the partial and temporary suspension of the fuel levy.

But a completely hands-off policy is not an acceptable official response to the extraordinary global shocks and economic pain South Africa is now experiencing. For this we need some breathing space to craft the right solutions. At this unusual time, and within the existing fuel pricing structure, the free play of market forces simply cannot be pursued by South Africa today without being tempered. But it also needs to be coupled with a firm commitment to overhaul and reform the fuel pricing system soon.

Contrary economic forces are too strong to be entirely ignored at present, and, inevitably, policy choices become more acute. We also need to remind ourselves that the National Treasury has, on previous occasions, such as with the Russia-Ukraine war and the controversial VAT proposal last year, eventually been able to find realistic alternative financing solutions to shocks that did not upset the fiscal apple cart. There remain accessible fiscal space and options for it to be able to do so again, especially after the recent successful budget.

At this unusual time, and within the existing fuel pricing structure, the free play of market forces simply cannot be pursued by South Africa today without being tempered. But it also needs to be coupled with a firm commitment to overhaul and reform the fuel pricing system soon.

We already know that many countries like South Africa have had serious concerns about the magnitude of the global fuel price shock to their economies, especially the negative impact on poorer households and small businesses. In several cases such countries are facing fiscal sustainability challenges bigger than those found in South Africa. Yet mitigating action has still been found necessary, because of the clear and present danger posed to these economies by the new global situation.

There is nothing unique in South Africa’s fiscal circumstances that is not largely shared with many other economies, but for one additional factor that needs to be navigated by policymakers. In South Africa the huge spike in oil and other prices has coincided with other converging cost increases, such as higher fuel levies and Eskom tariffs on April 1, and created a domestic cost situation of unprecedented severity requiring some mitigation.

South Africa is experiencing price challenges of a magnitude where policymakers must be ready to consider flexible remedies, but within a credible framework and with a realistic game plan. It should not be seen as a zero-sum game, but rather as an imperative to select and implement the right trade-offs to deal with the new challenges. To suggest that the GNU could stand by and do nothing in these circumstances is unrealistic. South Africa will do well if it escapes with a minor setback to growth and a temporary bout of inflation.

It may well be that South Africa should have shown earlier economic preparedness, better policy co-ordination and clearer communication to timeously address the emerging fuel price and supply challenges. The global energy crisis had introduced new urgency, not just new risk, into policymaking. But what is good for policy certainty is to now assess what South Africa can do in future in credible and collaborative ways, against the background of the decisions taken so far.

Future solutions

A cabinet task team has indeed been appointed to identify future solutions. The official task team will need to consult key stakeholders to build support for what must ultimately be done. The cabinet team needs to quickly access advice from valuable sources such as the President’s Economic Advisory Council, the Financial & Fiscal Planning Commission, the social partners in Nedlac, and key academics. It should be possible to fast-track the best combination of policy options available for South Africa’s future fuel policy.

Well-designed and innovative steps to manage the new energy risks need not endanger South Africa’s public finances. Given the persistent uncertainties in the global energy outlook, it was prudent to put the fuel levy concession on a temporary basis, to be reviewed monthly for now.

Other renewed promises about fuel pricing reforms and additional social assistance to households and key sectors of the economy should nonetheless now be viewed as urgent, and timelines set. As the well-known adage says, you should never waste a good crisis.

• Parsons is a professor at the North-West University Business School and extraordinary professor at the University of the Western Cape.