Reduced repo rate, inflation and petrol spell good news

The Reserve Bank yesterday reduced the repo rate by 0,25%, while the annual consumer price inflation decreased by 4,4% in August. Additionally, citizens have enjoyed consistent petrol-price cuts over the last few months and can look forward to the possibility of a further R1 reduction in petrol and diesel in October.

These price cuts could well symbolise the first green shoots of a strained South African economy and are sure to alleviate economic burdens on households.

Executive Director Mohammad Cajee at the Auwal Socioeconomic Research Institute (ASRI) discussed the possibility of a further rate cut in November.

“The expectation is that we are going to expect another rate cut in November. Some economists are predicting that it could be as a deeper cut, as much as 0,5%, so 50 basis points,” Cajee said.

The strengthening of the rand to the US Dollar is mainly responsible for decreased petrol prices, which in turn have driven down inflation.

“Transport costs go down in terms of goods and services, and that gives us lower inflation expectations going forward,” Cajee explained.

The American Federal Reserve Bank’s reduction of 0,5% in rates this week may have affected the reduction in South Africa, as the country generally follows trends in the largest global economies while maintaining a differential between the rates to avoid a “flood of hot money” from leaving the country, Cajee noted.

The potential effect of proposed Eskom tariff increases on inflation could be significant. The approved tariff increases are at 25%, which might be untenable and difficult to implement according to government reports.

Projected additional interest rate cuts over time will further relieve the strain on the country’s economy, which is estimated to see a 2% growth- a significant improvement from previous years.

“For this economy and this country to actually see some sort of reduction in poverty rates, reduction in inequality and so on, the only solution is to grow out of trouble. Because our GDP has been growing so low over the past 10 years, largely because of the impact of corruption and political risk,” Cajee observed.

Medium-term budget policy statement in October expected to be more disciplined

The change in context- from a single-party majority to a coalition government- is largely responsible for the expectation that the statement will be more regimented.

“I’m expecting a more disciplined budget, perhaps less populist in nature, and giving more confidence to business and civil society as well as citizens around where we’re heading for the next three years,” Cajee said.

The projected growth in economy and tax collections are likely to give a clearer picture of the budget deficit and pulls South Africa off the edge of the fiscal cliff that it was teetering on towards the end of the Zuma administration.

Reflecting on Gordhan’s legacy as the architect of SA’s modern tax administration system

Cajee emphasised Gordhan’s major contribution to the country by transforming SARS into a “formidable machine” and the impact that it continues to have on the lived experiences of South Africans.

“None of the expectations of us as citizens would ultimately be delivered by a government if [it] isn’t able to collect the taxations to fund the administration of those services,” Cajee said.

Gordhan paved the way for South Africa’s outstanding welfare system and inflation improvements. Together with Thabo Mbeki and Trevor Manuel, Gordhan laid core foundational stones for growth in the country’s economy. The institution of the tax administration during that time enabled a reduction in the debt-to-GDP rate to 25% and to run a budget surplus in 2006.

Cajee highlighted Gordhan’s role in establishing South Africa’s social welfare system.

“The biggest achievement of government during that time was raising sufficient money from taxation to be able to implement social grants, which is the largest transfers of cash from a government into a citizenry in the world,” Cajee said, adding that those tax transformations mean that 16 million South Africans receive social grants today.

Gordhan also contributed significantly to the roll out of anti-retroviral drugs in the fight against AIDS.

Listen to the ASRI Report on Sabaahul Muslim with Moulana Sulaimaan Ravat.