Slow implementation of reforms is hampering economic progress
Without a strong and sustained recovery, South Africa risks losing some of its hard-earned social progress in areas such as education, housing, welfare and health, according to a new OECD report. By
Improving the country’s tax system and reducing spending inefficiencies would help to put South Africa’s public finances on a more sustainable path, the Organisation for Economic Co-operation and Development (OECD) says in its latest survey of South Africa, which was released this week.
Taking action to revive productivity growth would help to revive GDP growth and raise living standards, the report says.
If needed, the tightening of monetary policy should continue to allow inflation – which disproportionately affects the poorest households – to return to the Reserve Bank’s target range of 3 to 6%.
SA’s inflation rate accelerated to a 13-year high of 7.8% in July, from 7.4% in June, above market expectations of 7.7%.
Álvaro Pereira, the OECD’s acting chief economist, said in a statement that strengthening public finances, creating a more growth-friendly tax system and fostering higher productivity through enhanced infrastructure, education and competition as well as a more reliable power supply were key to getting the country’s recovery back on track and ensuring higher living standards.
After a rebound of almost 5% in 2021, GDP growth is expected to slow to 1.8% this year and to 1.3% in 2023, the OECD report says. Inflation is projected at 6.3% this year, with risks remaining from future Covid-19 outbreaks and from the global repercussions of the war in Ukraine.
Electricity shortages remain “the most pressing bottleneck” to economic activity.
Proceeding with a planned split of state
The call for a national shutdown on Wednesday, 24 August by trade union federations Cosatu and the SA Federation of Trade Unions appears to have shut little down, but the key reason behind the planned protests – the surging cost of living – was thrown into sharp relief by data from Statistics South Africa (Stats SA) that showed the consumer price index (CPI) racing to a new 13-year high of 7.8% in July from 7.4% in June.
“Consumers are feeling the pinch, particularly for non-durable goods – those items bought most frequently, such as food, drink, electricity, fuels and medicine,” Stats SA said in a statement on Wednesday.
“Annual inflation for non-durable goods is in double-digit territory, at 14.4%. This is much higher than the rates recorded for durable goods (4.8%) and services (4.2%).”
Transport costs increased 25% in the year to July, whereas food inflation for consumers was 10.1% compared with 9% in June. In April, food inflation was running at 6.3%.
“Municipalities increase service charges in July every year. Electricity tariffs increased on average by 7.5%, equivalent to utility company Eskom into three distinct entities for generation, transmission and distribution, and easing regulatory barriers to entry, would enable other producers to enter the market, adding supply as well as bringing down prices, the report says.
However, Minister in the Presidency Mondli Gungubele told Cosatu and Saftu union members this week that “there is no plan in this government to sell Eskom. It does not exist; you’ll not find it in any document.”
According to PSG chief investment officer Adriaan Pask, economists estimate that power cuts are costing the country more than R700-million per stage, per day. the 7.5% benchmark approved by the National Energy Regulator of South Africa (Nersa). This increase is lower than last year’s rise of 13.8%, but higher than the 2020 increase of 6.3%,” Stats SA said.
“Together with the rise in electricity tariffs, consumers also had to deal with further fuel price increases.
“Transport costs were up by 4.8% between June and July, with fuel rising by 9.4%. Fuel is 56.2% more expensive than it was 12 months ago, with the price of a litre of inland 95-octane petrol rising from R17.39 in July 2021 to R26.74 in July 2022.
“Those relying on public transport didn’t escape the pain. Taxi fares jumped in July too, rising by 9% from June and taking the annual rate to 16.4%,”
Stats SA said.
“On a provincial basis, this translates into R75-million per stage, per day. Over the longer term, Eskom’s woes are underpinned by a lack of investment and maintenance,” he said.
Accelerating the green transition by increasing the share of renewable energy would also support growth through investment and reducing electricity shortages.
The carbon tax introduced in 2019 is welcome in a country where coal remains the main energy source, but the level needs to be increased and exemptions reduced, the OECD says in its report. South Africa’s productivity growth, it says, is also being held
Inflation increases are a global phenomenon, being spurred by a range of factors including Russia’s invasion of Ukraine as both countries are major grain producers.
July’s inflation read will not be lost on the South African Reserve Bank (Sarb), which has hiked its key repo rate by 200 basis points since November 2021 from record lows in a bid to cool scorching prices. back by the insufficient provision of high-quality infrastructure. Improving the effectiveness of public investment, in part through strengthening the selection process for large infrastructure projects, would be a step towards restoring productivity growth.
In October last year, the government unveiled a pipeline of 55 new infrastructure projects valued at about R595-billion that it estimated would create 538,500 jobs.
Isabell Koske, a deputy director in the OECD’s economics department, says this is welcome, but more could be done.
“Improving skills in line with employer needs will also be key to revive GDP growth. While educational performance has improved in recent years, progress has slowed since 2015 and the supply of graduates remains limited… Changing the financing formula of universities would reduce the cost per student and allow enrolling more students,” she says.
The OECD was critical of the country’s tax system, saying it could be made more progressive and efficient at raising the revenues needed to reduce the budget deficit and finance investments.
“For example, the allowances and deductions in personal income tax that tend to benefit high-income earners could be reduced while wealth transfer taxes and estate duties could be adapted to limit the transmission of wealth inequality.
“Once inflation has abated, there is room to raise the relatively low VAT rate, balancing that with increased transfers to low-income households,” the OECD says.
The Sarb’s Monetary Policy Committee is scheduled to meet again in September and it will almost certainly hike the repo rate again as CPI is speeding past its 3% to 6% target range.
This will squeeze hard-pressed South African consumers with debt burdens even more and weigh down the country’s fragile economic recovery.
The alternative of runaway inflation, however, would inflict even more pain, especially on the poor and working class.
The conundrum on this front is that South African inflation is being stoked by outside forces and rising administrative costs, not demand pressures. But rising rates are needed to shore up the rand, which is currently near 22-month lows of about R17 to the dollar.
If the rand was to really tank, import costs would potentially throw consumer inflation into double digits.
Against the backdrop of an unemployment rate of 33.9% and with an economy that is widely expected to have contracted in the April to June quarter, South Africa is now in the grip of a spiral into “stagflation”.
This, in a nutshell, means the economy is screwed.