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South African Economy - Essay Example

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South African Economy

4Governor Tito Mboweni signaled repeatedly in the past month that lending rates were set to rise again as underlying inflation become "more generalized", while stricter lending rules had so far failed to dent robust consumer spending and credit demand. 5 For the current business cycle, however, the hikes that were made to the country's interest rates recently are generally being considered to be the last.
The causes of high inflation in South Africa primarily are two external causes; "The current price drivers are rising oil and international food prices, simply because demand outstrips supply in the international market for these products. The two are linked because the immediate effect of increased fuel prices is that it becomes more expensive to produce food, but this on its own does not necessarily lead to a general price rise." 6 Besides the policies of the South African government are not above contempt, and in fact these populist policies to appease some sections of the countrymen without concern or acknowledging the external causes in plunging the economy into despair. "Increased interest rates will have a direct effect on tax collections and therefore a direct effect on subsidizing the poor. This will lead to a rapid depletion of budget surplus, and to fill this gap the government has no option but to print money to fill in the gap." 7 This is leading South Africa towards hyperinflation.
Impact of high oil prices on South African economy
The high oil prices have severely affected oil importing countries like South Africa, whose capacity to generate electricity has been affected and which has "forced them to ration electricity". 8 Adding further, "The high price of oil impacts directly on firms, consumers and the government. First, it increases the domestic price of petroleum products, raises the cost of many immediate inputs, and as a result leads to higher production costs. Consequently firms may reduce their labor demand, investment and output. Second, as the short-run demand for oil is highly inelastic, consumers are forced to reduce their consumption of other goods and services to pay for higher energy bills." 9
Moreover, the rising oil prices will also affect South Africa's balance of payments, as exchange rates will work against them in international trade, this will reduce their level of economic activity since the amount of affordable oil that South Africa will be able to purchase shall be dramatically reduced under present conditions. "Consumers and firms could decide to reduce their oil consumption but since the demand for oil is highly inelastic in the short-term, they may be compelled to reduce their consumption of other imported goods. Doing so could undermine economic growth especially if capital goods imports are affected." 10.
Poverty is another issue facing the South African economy, since the current policy will lead to more widespread poverty as lack of adequate fuel will drive up the cost, with the cost of transportation of goods and ...Show more

Summary

The South African central bank governor, Tito Mboweni, has hiked the interest rates when inflation is already high "to tighten monetary policy in an effort to stem rising inflation". 1 Since the cost of petrol is unceasingly increasing, it is creating additional pressure on food prices and adding to the current domestic inflation and bringing corresponding changes to the exchange rate, though the governor claimed that they were primary but not the only factors for the trend…
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