Tariff hike: impact on inflation will be significant

The relentless pressure on South African taxpayers continues. Although the tariff increases announced by NERSA today are below the initially requested 45%, later "moderated" to 35%, the increases at 24.8%, 25.8% and 25.9% respectively over the next three years introduce a series of significant shocks to the economy, with serious implications.

The fact is that every South African got poorer today, because government permitted Eskom's mismanagement to the point of its collapse and now bailout by the public.

Inflation makes everyone poorer, especially those who are already poor, and because electricity is a basic ingredient in much of our economic activity and a key part of the price of output, the inflationary effects of an electricity tariff hike are likely to be significant. There is no doubt that the increase will impact immediately on inflation, at a magnitude that could reach 1%, with the second round effects only working their way into the economy over time. 

In his recent letter to the Governor of the Reserve Bank, the Minister of Finance confirmed that the Bank should continue to pursue a target of 3 to 6 percent for headline CPI inflation, within a flexible inflation targeting framework. This means that the Bank will not necessarily react by hiking interest rates right away, to counter the impact of the shock to the economy that this increase will bring. This shock will, however, not be once off - it will happen next year and the year after that. Our economy, therefore, needs to brace for three consecutive hits where the primary effect is largely known (i.e. upward pressure on prices at a factor of the increase) given that the tariff increase will be passed on to end-consumers.

What we do not know, and herein lies significant risk, is what the second round effects will be. The Reserve Bank confirmed that even its own sophisticated models have difficulty in predicting the magnitude, especially of a continual shock over the next three years. At the NERSA hearings, the case was simply put that our economy cannot withstand an increase at the rate of 35%. 24.8% does not make the pill any easier to swallow. It will go down, but at the opportunity cost of slower growth and unquantified second round effects. The Reserve Bank forecast GDP growth at 2% for 2010/11 and National Treasury forecast 2.3%, presumably having factored in the tariff increase - but we cannot be sure.

What we can be sure about is that our economic growth will be constrained by a failed parastatal within an economic model that can't work.

Statement issued by Dion George, MP, Democratic Alliance shadow minister of finance, February 24 2010

Click here to sign up to receive our free daily headline email newsletter