The economy is approaching a critical crossroads as a record fuel-price shock coincides with high interest rates, rising inflation risks, soaring unemployment and weak growth, threatening to deepen the cost-of-living crisis and derail the country’s fragile recovery.
With households cutting spending, businesses facing higher operating costs and economists warning of increasing pressure on jobs and growth, government has proposed a R10-billion fuel-relief package to cushion consumers from the fallout of the Middle East conflict.
The intervention comes as the South African Reserve Bank warns that the fuel-driven inflation shock could force interest rates to remain higher for longer or rise further.
This week, the standing committee on appropriations adopted a report on the Second Special Appropriation Bill, tabled by Finance Minister Enoch Godongwana on July 31, which proposes withdrawing R10bn from the National Revenue Fund. The funds would be transferred to the Department of Mineral and Petroleum Resources to help stabilise fuel prices.
Several economists say broad fuel-tax relief could become expensive and difficult to maintain, suggesting that assistance should instead be directed towards the most vulnerable households.
Appearing before Parliament this week, Cosatu warned that rising fuel prices were contributing to retrenchments.
Between February and October last year, the price of Inland 95 unleaded petrol surged from R20.10 a litre to R30.25 a litre this month, while diesel prices, which affect transport, mining and agriculture, have climbed from about R17.92 a litre to more than R34.
An ANC parliamentary study group on minerals and petroleum resources has called on National Treasury to urgently reconsider fuel levies and taxes, including the General Fuel Levy and Road Accident Fund Levy.
“This is not just a cost-of-living crisis. South Africans will pay more to get to work, food will cost more and poor households that rely on paraffin will be hit hardest,” the study group concluded.
The fuel shock is also complicating the inflation outlook after the Reserve Bank raised the repo rate by a cumulative 50 basis points between April and this month, bringing it to 7.25%.
Speaking at the Monetary Policy Review this week, Reserve Bank governor Lesetja Kganyago said high-frequency indicators suggested the economy returned to growth during the third quarter.
“We don’t expect the third quarter to contract,” he said, adding, however, that monetary policy might need to remain restrictive and additional rate hikes could become necessary if fuel-price increases continued.
He identified several risks, including a prolonged Middle East conflict, elevated refinery margins, stronger global food prices, a severe El Niño weather event, a weaker rand and tighter monetary policy in advanced economies.
If the economy slipped into a technical recession while inflation accelerated, the central bank would raise interest rates further to protect price stability, he said.
The deteriorating labour market is adding to concerns. South Africa’s official unemployment rate climbed to 33.6% in the second quarter of this year, while the economy contracted by 0.2%.
Sanisha Packirisamy, the chief economist at Momentum, said lower-income workers who relied on public transport were particularly vulnerable because fuel costs filtered into fares and the prices of essential goods.
She warned that fuel-tax relief came at a cost to the fiscus.
While short-term relief might be necessary, she cautioned against creating an expectation that government would always intervene whenever global energy prices surge. Packirisamy said policymakers should focus on targeted support for vulnerable households and ensure assistance reaches intended beneficiaries quickly. She said that as transport and logistics costs rose, businesses faced higher expenses that were often passed on to consumers through increased food and retail prices.
The AA has called on Treasury to cut fuel taxes by a further R3 a litre before next month’s adjustment. In an open letter to Godongwana, AA chief executive Bobby Ramagwede said spending cuts, rather than additional borrowing, should fund relief measures.
The AA warned that fuel prices had reached record levels and preliminary Central Energy Fund data pointed to the possibility of another substantial increase next month – 95-octane petrol could rise by R4.58 a litre and diesel by between R2.56 and R2.91.
Ramagwede said the general fuel levy could be reduced, noting that fuel taxes accounted for about a quarter of the pump price. He warned that sustained fuel increases could push inflation above 5% and delay interest-rate relief.
He said low-income workers carried the greatest burden, with some spending up to 40% of their wages commuting to and from work.
Unisa economist Eliphas Ndou said rising costs were eroding household purchasing power and forcing consumers to change spending habits. Households were prioritising essentials. Many were expected to abandon premium brands in favour of cheaper alternatives, hunt for discounts and postpone large purchases.
Ndou said lower- and middle-income households would be hardest hit because they spent a larger proportion of their income on necessities.
Some families might delay replacing vehicles, scale back holidays and entertainment, cancel subscriptions and reconsider medical-aid cover. First-time homebuyers could also struggle to save for deposits.
The pressure could intensify as higher diesel costs ripple through the wider economy.
The Road Freight Association has warned that transport operators might have to increase freight rates. Higher transport costs are expected to filter through supply chains and into retail prices because more than 80% of land freight moved by road.
- The economy is approaching a critical crossroads as a record fuel-price shock coincides with high interest rates, rising inflation risks, soaring unemployment and weak growth, threatening to deepen the cost-of-living crisis and derail the country’s fragile recovery.
- With households cutting spending, businesses facing higher operating costs and economists warning of increasing pressure on jobs and growth, government has proposed a R10-billion fuel-relief package to cushion consumers from the fallout of the Middle East conflict.
- The intervention comes as the South African Reserve Bank warns that the fuel-driven inflation shock could force interest rates to remain higher for longer or rise further.
- This week, the standing committee on appropriations adopted a report on the Second Special Appropriation Bill, tabled by Finance Minister Enoch Godongwana on July 31, which proposes withdrawing R10bn from the National Revenue Fund.
- The funds would be transferred to the Department of Mineral and Petroleum Resources to help stabilise fuel prices.
