South Africa’s fractured society is not in any shape to cope with fallouts from the attack on Iran by the US and Israel. As I write, there is no end to the war in sight. This rocket and bomb war has spread to Lebanon, Iraq and all the Gulf States. Escalation is on the cards, with ground troops on the way. The Israeli government wants that, and Trump’s government cannot back off unless it admits that the US did not win.
So everything is pointing to huge price increases in South Africa: on petrol and diesel, and therefore on all transport, whether public taxi, road freight or air tickets. Price increases on food and everything else will follow, but mass unemployment, poverty and even hunger are already breaking our social fabric.
Strong in economic warfare
The Iranian regime had prepared for the attack by also planning for economic warfare. Besides hitting US Gulf state military bases and Israel with rockets, oil facilities were attacked within hours of the bombing of Tehran.
The regime then declared the Strait of Hormuz closed to Israel, the US and any of their supporters in the war. At the end of March, over 20 oil tankers had been attacked with drones. The world’s biggest oil terminal, in Saudi Arabia, and the gas terminal in Qatar are shut down. As a result, gas prices in Europe increased by 50% in March.
20% of all oil production is shipped through the Strait of Hormuz. After two weeks, many countries in the North, including the US, released their strategic oil reserves to avoid shortages and mitigate the price hikes. In March, however, the world market price of crude oil is hovering around $100, from $60-65 a barrel before the war, and it could go up much higher. It all depends on the war.
The outbreak of war also hit the value of the rand: speculators sold their financial investments in South Africa and immediately exchanged the rand they received for dollars. That huge rand sell-off tanked the rand’s value.
In line with the country’s general deindustrialisation, South Africa is largely importing already refined oil and finished petrol and diesel. Our private sector has been closing oil refineries. The now more expensive petroleum products must be paid for in dollars. This, along with the falling value of the rand, will increase petrol prices by around R5 or more per litre at the end of March; diesel is expected to increase by R12 per litre.
Right now, everything indicates that the Iranian military will stick to its strategy of simply “not losing”. If the US and Israeli regimes refuse to back down and continue, no matter the cost in lives and to their economies and to the world economy, the price increases in March will be only the beginning. They will hit all countries, but they will be more harmful to the Global South.
Not only oil prices
As if this were not enough, price increases in fertilisers will also raise food prices, directly at the site of agricultural production.
One-third of the world’s fertilisers are exported from the Gulf states through the Strait of Hormuz, which is currently blocked. 80% of South Africa’s fertiliser is imported, and fertiliser accounts for between one-third and half of all production costs in industrial agriculture. In the middle of March, world market prices for fertilisers had increased by 40%.
The rule of the highest bidder
As with oil, fertilisers are imported on the world market. It doesn’t matter that South Africa isn’t importing all its fertiliser from the Gulf States. When there is a shortage of an essential input product on the world market, those who can pay bid up the prices to get enough for their own production. And the seller prefers to get the highest price. Capitalist world trade is not governed by charity or human rights rebates.
This ‘Free Market Rule of the Highest Bidder’ is at the heart of neoliberal capitalism. While not participating in the war, countries in the Global South, and their working-class and poor majority, can be expected to suffer more economically from it than countries in the Global North, even if it is the North that has come out in support of the attack on Iran (Spain being the exception).
Breaking ‘the rule of the rich’
Breaking this ‘rule of the rich’ will be essential when handling the price crisis in this country, the most unequal in the world.
Firstly, important decisions made by Parliament about the Budget, which was adopted in March, must be reversed. Some of the decisions in March stick out more than others and should be the easiest to change in this dire situation:
If fuel prices skyrocket, the increase in the fuel tax must be withdrawn. It is also a ‘regressive’ tax—less burdensome for the rich consumer, just like VAT.
The tax bracket relief to the middle class and the rich that all political parties applauded must be reversed. The poor cannot afford it. The unemployed and the country need useful public works programmes for paid employment.
Neither can the working class and the poor afford the private medical aid grant to the minority, better-paid part of the population, at a cost of R30 billion. In a food price shock, that money can be reallocated to increase the R370 SRD grant.
At a certain point, depending on whether petrol and diesel prices climb above R30 per litre, the government must consider keeping the prices down and rationing the consumption of fuel. Otherwise, only the wealthy will be able to afford it.
In addition to reducing the country’s fuel costs, national speed limits can be reduced in increments of 10km/h. This reform would also have positive side effects. It would reduce the number of dead and injured in traffic accidents from the current 11,000-12,000 dead and 200,000 injured, at an estimated cost of over R200 billion per year.
Interest hikes and imported war inflation
SARB’s inflation goal has just been changed to “3% average price increases per 12 months…plus or minus one percentage point”. SARB Governor Lesetja Kganyago got what he has been advocating for over a year.
Today, SARB has only one mandate—to focus on inflation, i.e. to keep price increases down. And the new goal is much lower. The SARB does this by controlling interest rates. When the interest on loans is higher, people have less to spend and therefore spend less on credit. The demand for goods and services declines. Shops and businesses then become reluctant to increase prices.
But such a decline in demand and higher costs for borrowing money also make companies less willing to hire workers, more willing to retrench people when sales are declining, and less willing to borrow money to invest and expand their operations.
Disciplining an unhinged SARB
The present war shock on prices can have a devastating effect on employment, because our independent SARB doesn’t have to care about unemployment when it takes its interest rate decisions. The SARB Governor argues that a central bank cannot do much to improve employment. The problem, however, is that a central bank can do a lot to make unemployment worse.
The present war shock on prices can have a devastating effect on employment, because our independent SARB doesn’t have to care about unemployment when it takes its interest rate decisions. The SARB Governor argues that a central bank cannot do much to improve employment. The problem is, however, that a central bank can do a lot to make unemployment worse.
If the rate of inflation were to reach 6-8% per year, as a result of an oil price shock from the outside, like the war in the Middle East, SARB’s single mandate is to bring down inflation. With the new inflation goal of 3%, and with no consideration at all for the effect on employment, the SARB will reach for the sledgehammer.
And the sledgehammer has to be a big one. The inflation rate in South Africa is largely driven by imports. Aside from Eskom’s price hikes, which a central bank’s interest rate levels can do nothing about, price development in South Africa is largely driven by the prices of imported goods: inflation in South Africa is supply-driven, not demand-driven! So curbing demand, which is what increasing interest rates is designed to do, is, quite simply, the wrong treatment for the sickness. If you hit the wrong problem with a sledgehammer, you have a very large one to have any effect at all.
Many other countries with much lower unemployment than South Africa have a dual central bank mandate. That would mean that the SARB cannot manage interest rate levels without considering their effect on employment in the country.
The present war in the Middle East and the chaotic international situation created by the neo-fascist Trump administration also call for a structural reform of our neoliberal central bank legislation, the “SARB Act”. The longer a devastating and expanding war abroad continues to create imported price shocks, the stronger will be the argument to finally change the mandate of the South African Reserve Bank (SARB).
Dick Forslund is an economist at AIDC and a member of Zabalaza for Socialism.
