Reserve Bank explains how load shedding is ruining the economy

Load shedding adds materially to inflation, and it will likely continue to do so, says the South African Reserve Bank (SARB).

When looking at the effects of rolling blackouts in 2022, which were tamer compared to this year so far, the SARB estimated that approximately 14% of business hours were lost in the industrial sector, while the commercial and agricultural sectors varied between 11% and 12%.

“With load-shedding expected to increase from 157 days in 2022 to 250 days in 2023, the loss in business hours is expected to rise,” said the central bank.

SARB has estimated a 0.5 percentage point inflationary impact on inflation because of load shedding.

In an attempt to circumvent the downtime caused by load-shedding, businesses are using expensive alternative energy sources like solar power and backup generators.

SARB said that backup generators have variable fuel costs, which are likely to be passed on to consumers and contribute to inflation.

To come up with a 0.5 percentage point effect on inflation estimation, the SARB has a two-step approach:

• Firstly, the additional electricity costs from generating power off-grid are calculated.

• Secondly, the impact of the additional electricity costs on consumer price index inflation is assessed.

Regarding the additional costs that load shedding brings, the SARB has made the following assumptions:

• Load-shedding takes place at various stages (stages 1 to 6) to account for the intensity and variability in productive business hours across the sectors

• Generators only run during the business hours of the respective sectors

• In total, 67% of firms use diesel generators during load-shedding

• The cost of power from running a generator is 133% higher than that of power provided by the municipal grid

• The share of electricity costs to total costs varies across each sector

• In total, 90% of the additional generating costs are passed on to the final prices

SARB said that based on top of the aforementioned assumptions and with load shedding forcing producers to pass on 90% of the additional energy costs to final consumer prices – load shedding raised CPI by 0.6% in 2022.

On 22 March, StatsSA reported that annual consumer price inflation was 7.0% in February 2023 – up from 6.9% the month before.

Stats SA reports that the primary factors behind the 7.0% yearly inflation rate were housing and utilities, transport, food and non-alcoholic beverages, as well as miscellaneous goods and services.

The central bank went on to state that load shedding will further raise inflation by 1.1% in 2023.

“This further implies an inflation rate impact of 0.5 percentage points (i.e. 1.1% – 0.6%) in 2023 from load-shedding,” said SARB.

Ultimately, there will be significant upward pressure on headline inflation, which will impede the current process of disinflation, noted the bank.

This could be made worse by unexpected supply chain disruptions and shortages, particularly in the food industry.

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