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Picture: MARTIN RHODES
Picture: MARTIN RHODES

Considering how slowly the wheels of government generally move, it might well be reasonable for South Africans to react to government proposals to shield them from the impact of higher oil prices with a dose of scepticism.

In these volatile times — with Brent crude moving in a range between $97 and $114 in the first three days of the week — the latest crisis may have passed before the politicians come up with solutions. Among those touted by the department of mineral resources & energy and the Treasury is a possible change in the methodology that determines regulated retailer margins, which could reduce the price for motorists by 85.82c/l.

While nothing to be sniffed at, prices will still be near record levels above R20/l. Depending on how soon that comes, it might do very little to change the overall inflation picture, which might see the economy hit with steeper interest rate increases. SA will need to be wary of short-term solutions that might eventually cause greater harm.

There is no such thing as a free lunch and whatever is forfeited due to measures such as the suspension of the fuel levy, from which the government is projected to receive about 6% of total revenue in 2022/2023, will have to be made up elsewhere. And actions today need to be measured against the country's long-term decarbonisation strategy.

As tempting as it may be, SA and others may well find that the costs outweigh the benefits in the long term as they seek headline-grabbing “solutions”. Bloomberg reported that other nations such as Japan, South Korea, Brazil and India have also announced measures to mitigate the effect of higher oil prices. In terms of “fiscal space”, SA is just not in the league of the richer of those countries.

Therefore, it needs to proceed with caution, lest it squander the gains from its unexpected revenue boom from commodities. Revenue for 2021/2022 will come in R182bn above the Treasury’s initial forecast, with PwC saying the eventual outcome may be even better to the tune of another R40bn. Coincidentally, that would be almost enough to offset the one-year extension of special Covid-19 grants.

While it may look like SA is swimming in money and that any problem that arises can be solved by tapping into that bonanza, this would be a bad habit to get into and will almost ensure that, just like when Covid-19 hit in March 2020, SA will face the next crisis with no buffers.

Ultimately for consumers and businesses, the more lasting impact is likely to be driven by central banks rather than fiscal tweaking by the government. Even before Russia invaded Ukraine, central banks faced a dilemma of how much inflation they should tolerate in the wake of “supply shocks” as economies opened up after lockdowns.

That “transitory” versus “permanent” debate is a thing of the past now and some central banks, especially the Federal Reserve, found themselves facing charges that they were behind the curve, with inflation at 40-year highs in the US and record levels for the eurozone. The conflict in Ukraine has introduced a different element: the risks of a new global disruption in commodity markets and recession.

There is an argument that central banks should ride the storm and not react to events that monetary policy cannot control. But these institutions live and die on their credibility, and investors, let alone consumers, might then start to shift their expectations for future price increases higher, creating a self-fulfilling prophecy that leads to even more punishing interest rates later. 

On this score, the Reserve Bank is no different. It is likely to increase its own forecasts for inflation next week — following in the Treasury’s footsteps — having said in January that it expected an average 4.9% in 2022 and 4.5% in 2023, the midpoint of the 3%-6% target.

Since the outbreak of Covid-19, policymakers have shown sensitivity to the need to support an economy that is still struggling to recover from the 2020 slump, and their instinct will probably be to keep rate increases at a modest 25 basis points.

That would be the correct move, and probably something that will be more closely watched than the government tinkering with fuel prices.

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