Reserve Bank fighting a losing battle against government incompetence: Dawie Roodt

The South African Reserve Bank cannot win its battle against inflation as long as government incompetence keeps pushing it up, says Efficient Group chief economist, Dawie Roodt.

In a column this week, Roodt commended the Reserve Bank for following its mandate and doing what it can to quell stubbornly high inflation in the country.

However, he said that the central bank was unlikely to make the needed dent in the rising cost of living because many of the factors pushing prices higher are outside of its control.

Instead, Roodt argued, much of the inflationary pressure is being exerted by the national government – or more specifically, its absolute failure to stop spending money it does not have on increasingly exorbitant ticket items.

This includes billions of rands given to poorly-run state companies in the form of bailouts – or debt transfers in the case of Eskom – and ballooning social spending budgets, which keep millions of South Africans covered while footing a tiny tax base with the bill.

Roodt argued further that the government and its state-owned companies are so poorly run, that most public servants and employees of these companies can also be regarded as grant recipients.

“There are approximately 30 million people receiving a grant from the state every month: 28 million grant recipients – that is, the “normal” grant recipients and the “Covid-19” grant recipients – and approximately two million civil servants.

“Given the inefficiency of the services that the state provides, most – not all – civil servants are glorified grant recipients,” he said.

Roodt said that workers at state-owned enterprises are also just civil servants. While they often think of themselves as working for “companies”, they do not, he said.

“Eskom, the Post Office, Denel, and other ‘parasitals’ are not real companies. ‘Real’ companies are not bailed out by the taxpayer when they go belly up.”

Efficient Group chief economist, Dawie Roodt

The reason this ties into inflation – and why the Reserve Bank has no hope of fighting against it – is because the government has to keep spending on these “grants” no matter what.

While the budget is severely tight, pressure from SOEs for bailouts, trade unions for above-inflation wage increases (after more than a decade of exorbitant wage hikes) and the ongoing drive for more social spending (National Health Insurance, state banks, etc), means that Treasury often has no choice but to keep spending – and keep borrowing.

“Put all of this together, and the fiscal deficit this year is likely to exceed 6% of GDP, which is highly expansionary, while the debt – properly calculated to include the guaranteed debt of the SOEs – is in the mid-80% and rising range,” Roodt said.

“The answer to this problem is easy; the state must spend less, and better. But will they? Certainly not.”

If the government were to spend less and better, the country would likely be hit with a recession in the short term – after all, one of the biggest drivers of economic growth is expenditure from government and consumers – but it would significantly decrease inflation over the longer term.

“Unfortunately, most state spending goes to people in one way or another. Cutting back on spending inevitably means spending less on people. And when you spend less on people who got used to being overpaid (in the case of civil servants), then people get angry, and they tend not to vote for you. And that is our dilemma,” Roodt said.

“In the meantime, the SARB must continue to maintain high interest rates to prevent inflation from getting out of hand. The result can only be weak economic growth until something gives. And that something is likely going to be even more inflation.

“As long as we have a government that is corrupt and incompetent, inflation will remain high and may even morph into hyperinflation.

“The SARB is doing a splendid job in trying to combat inflation, but a marginally restrictive monetary policy is no match for a hugely expansionary fiscal policy. The SARB is simply overwhelmed,” he said.

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