Energy News

Load Shedding Crisis: South Africa’s Economic Nightmare Deepens

Published by
WIlliam Dube
  1. The South African Reserve Bank has raised interest rates by 50 basis points, citing high inflation and slow economic growth, with load shedding identified as a major contributing factor.
  2. Load shedding has cut growth prospects for 2023 by two percentage points and has made it difficult for the central bank to forecast and manage inflation, potentially adding 0.5% to overall inflation.
  3. The Reserve Bank’s decisions are influenced by both global and domestic factors, and while global banks signal a slowdown in rate hikes, domestic pressures like load shedding may still impact South Africa’s monetary policy.

In an alarming development for South Africa’s economic landscape, Reserve Bank Governor Lesetja Kganyago has described the escalating impact of load shedding on the country’s economy and monetary policy as a “nightmare.” Kganyago highlighted the difficulty in forecasting the effects of load shedding, which have now become more pronounced than ever before.

On Thursday, 30th March, the Reserve Bank announced a surprising 50 basis points rate hike, contrary to market expectations of a 25 basis points increase. The move was prompted by the country’s persistently high inflation environment amidst an incredibly sluggish economic growth.

During his announcement, Kganyago identified load shedding as one of the primary factors slashing two percentage points from the growth prospects for 2023. The ongoing power outages have also driven up prices across all sectors, raising the cost of doing business and burdening households even further.

Consequently, inflation remains at the higher end, with the Reserve Bank revising its 2023 forecast to an average of 6.0%. The bank anticipates that headline inflation will only reliably fall back into the target range of 3%-6% in the fourth quarter of 2024.

While many economists had predicted Thursday’s rate hike to be the final one in the current cycle, the Reserve Bank’s uncertain outlook for the coming years has cast doubts on this prediction. When questioned about how close South Africa is to the peak of the rate cycle, Kganyago was unable to provide a clear answer.

He emphasized the myriad factors influencing rate determination, including foreign interest rates, imported foreign inflation, South Africa’s unique inflation dynamics, financial market volatility, and financial instability in the regional banks of the US.

Kganyago explained that making policy decisions is based on the best judgment using the best available information, which now includes the impact of load shedding on growth. The South African Reserve Bank (SARB) is currently attempting to assess how much load shedding is affecting inflation. Although the central bank has only recently tried to quantify this effect, it has proved to be a challenging task.

At this early stage, Kganyago estimates that load shedding might have added 0.5% to overall inflation. However, this figure is merely an “informed guesstimate.” Forecasting the future impact of load shedding is further complicated by the varying intensity, stage, and duration of power outages.

Deputy Governor Rashad Cassim addressed the SARB’s decision to raise rates while global banks, such as the US Federal Reserve, have signaled a slowdown or pause. He clarified that the SARB’s decisions are far from straightforward and are influenced by the source of inflation. If global banks’ rate pause leads to reduced inflationary pressure from imports, which South Africa heavily relies on, this would be factored into the SARB’s decision-making process.

However, Cassim stressed that local conditions, such as load shedding, also play a significant role. If inflation continues to stem from domestic pressures, the SARB may not necessarily follow global trends. Ultimately, the decision will depend on the inflation drivers and the extent to which they are influenced by global or domestic factors.

WIlliam Dube

William Dube is a finance and economic news expert with over 10 years of experience in economic anaylsis, financial product assessment and market analysis. With a numerous certificates from prestigious universities including but not limited to Yale University and the University of Pennyslivenia. William specializes in providing insightful news developments in South Africa and commentary on investment strategies, risk management, and global economic trends. You can contact him on william@rateweb.co.za

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Published by
WIlliam Dube

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