The biggest problem facing South Africa’s economy right now – that isn’t load shedding

 ·5 Oct 2022

Out-of-control inflation is taking its toll on South Africa and other Sub-Saharan countries – but there is not enough fiscal space to respond, says the World Bank.

In its latest Africa Pulse report, the World Bank noted that the upward trend of inflation following the pandemic period had been exacerbated by the war in Ukraine – soaring to record highs in many countries.

According to the bank, only four of 33 countries in Sub-Saharan Africa recorded inflation below 5% in July. South Africa was not one of these, with consumer inflation reaching a peak at 7.8%.

Despite aggressive monetary policy used in several countries, inflation has remained stubbornly high, said the World Bank. This has forced consumers in South Africa to tighten their belts as not only food, but fuel prices have become unbearable.

Food inflation accelerated to 11.5% in August, with fuel inflation sitting at 43.2%.

The South African Reserve Bank’s Monetary Policy Committee (MPC) hiked interest rates by another 75 basis points in September, taking the repo rate to 6.25% per annum. This returned fiscal policy to pre-pandemic levels in an attempt to curb inflation.

The World Bank reported that after a biannual analysis of the near-term regional macroeconomic outlook, economic growth in Sub-Saharan Africa (SSA) is set to decelerate from 4.1% in 2021 to 3.3% in 2022, a downward revision of 0.3 percentage points since its report in April.

South Africa’s GDP growth outlook is far below the regional outlook, with the SARB projecting growth of 1.9% for 2022 – down from 2.0% in the July meeting.

The Reserve Bank is expected to continue to hike interest rates despite inflation being at headline levels – over concern that global inflation will persist, said economists from Momentum Investments in the latest Economic Outlook for October.

The group forecasts headline inflation of below 7% this year but closer to 5% in 2023.

No money to fix it

“The fiscal space to mount effective responses today is gone because of high levels of debt across Sub-Saharan African countries, rising borrowing costs, and depleted public savings,” said the World Bank.

Countries frontloaded support to the most vulnerable segments of the population during the pandemic – expanding the region’s primary deficit.

“As a result, debt, which was already rising since 2011, jumped further and is projected to remain elevated at 59.5 % of GDP in 2022. The consolidation efforts to bring down debt are projected to lower the primary deficit slightly to 4.8% of GDP on average in the region.”

According to Momentum, growth in South Africa specifically is set to slow to roughly 2% this year and decelerate further to 1.5% in 2023.

Due to elevated debt levels and pressure on domestic currencies, servicing debt in the region has become increasingly hard. The World Bank said that there is no sign of significant improvement in the reduction of debt levels and/or vulnerabilities.

The World Bank has subsequently called on the South African government to urgently restore macroeconomic stability and protect, especially the poor, in slow growth and a high inflationary market.

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