SOUTH AFRICA ECONOMY, POLITICAL ENVIRONMENT AND ENTREPRENEURSHIP
B- BBEE Evolution
3.23 Unstable currency and Inflation
South Africa rand has witnessed a lot of movements in the last couple of years. Instability is caused more recently by the government’s inability to settle the minimum wage dispute among different trade unions and their employers, causing many disruptions on the foreign exchange earnings, therefore, putting pressure on rand. Another factor is the seemingly uncertainty surrounding the political atmosphere in the country and most recently, the issue of Brexit. A year-on year analysis of the value of rand from January 2015 to January 2016 showed rand had a poor performance in 2016 (Trading Economics, 2016). However, in July 2016 rand witnessed a slight appreciation in value as against May 2016. This might be traced to uncertainty surrounding Brexit. As rand weakens, interest rate will continue to rise, hurting entrepreneurs, small businesses and indebted citizens, as more rand will be needed to settle debt. Also, weak rand will make imports more expensive (Trading Economics, 2016).
Another possible attributable factor to rand instability is the general sell-off of risky assets due to global economic outlook (Kiat, 2010; Jonsson, 2001).
77 Figure 3.17: South African Rand instability
Source: www.tradingeconomics.com / OTC INTERBANK (2016) 3.24 Inflation
Inflation is the broad upward price movement of goods and services in an economy at a specific period of time; often caused by increase in the supply of money, usually as measured by the consumer price index and producer price index. Inflation makes money lose its value and the purchasing power of the consumer is reduced by the level of inflation. The word inflation is believed not to have emanated from economics rather but ideas from political and popular use; therefore theoretically speaking the term inflation is an ambiguous concept.
(Mises, 2012). South Africa witnessed inflation rate swing at various periods with an antecedent cause effect on the economy. As at May 2016, the inflation rate in the country stood at 6.1%, a five-year low rate, easing from 6.2% in April. A year-on-year comparison revealed that prices increased at a slower rate for food and non-alcoholic beverages, driven mainly by unprocessed food. An annual core inflation rate which excludes prices of food, non-alcoholic beverages, petrol and energy was recorded at 5.5% (Stats SA, 2016).
There are different types of inflation with each having unique effect on the economy, most prominent among all are:
a. Demand-pull inflation: typical inflation caused by excess aggregate demand over aggregate supply. Increase in demand will force up prices of commodities thereby causing over-valuation of the prices of goods and services driven by excess demand.
Demand-pull inflation mostly occurs in the era of economic boom, usually when the
78
economy out-performed projections. This type of inflation is flamed by excess liquidity and sudden economic prosperity.
Figure 3.18 Demand-pull inflation curves Source: www.economicshelp.com (2016)
The diagram depicts the effect of increase in demand with the antecedent increase in price of supply and demand exceed supply, businesses cash-in to maximise their gain occasioned by the artificial scarcity.
b. Cost push inflation: is derived by the increase in cost of factors of production (labour, capital, entrepreneurship and land). It is a situation where cost of production increases thereby forcing producers to produce less quantity in relation procurement ability of raw materials or other factors of production. Cost push inflation is more visible in South Africa, forcing up prices of commodities and reducing the purchasing powers of consumers.
79 Figure 3.19 Cost push inflation
Source: www.economicshelp.com (2016)
A year-on-year comparison of South African core inflation rate, symbolized by figure 2.21 below:
Figure 3.20: South Africa inflation rate Source: www.tradingeconomics.com (2016).
There are many schools of thoughts advocating methods and systems that can be used to control inflation, two methods will be discussed.
80 3.24.1 Pure Inflation
Pure inflation is a condition where all incomes and all prices rise at the same pace. This may be a good thing as it allows value of money to fall until excess liquidity in the system is mopped up at higher prices (Government bonds) and higher income be allowed until conditions stabilise. A pure inflation condition might not change the spending pattern and wealth distribution in the economy, only inflation will be tackled with the mop-up. However it is expected that interest rate will rise (higher prices paid on bond) in the process of mop-up which may affect the economy through higher burden on government spending. Another factor that needed to be considered in trying to control inflation is that some organisations might increase salaries of their employee to lessen the effect of inflation, but this might not be the case for all organisations, therefore, some people will get pay rise before others, and also prices of commodities might not rise at the same time. This will definitely cause distortion in pure inflation tactics, so it is a bit difficult for pure inflation to stabilise the value of rand.
3.24.2 Wealth bond
Wealth bond is an investment bond that is interconnected to either GDP or average revenue (Shiller, 2016). A wealth bond can be explained, as savings account that is used to protect the wealth of an investor, this is possible, because it prevents inflation from altering the cost of borrowed fund, only the interest top-up might be affected. Wealth bond would take most interest rate and cost risk out of government borrowings, which will boost government borrowing ability as well as credit ratings, while setting the economy up with momentous financial stability. Financial stability is derived from the effects created by wealth bond, which stabilises value of savings and loans without major intervention. Ingram (2015) posited that stability is also achieved, because wealth bond is index-linked to average income/GDP, therefore, the volatility of rand is cushioned as the movement is measured against average income. It can also be used to reduce the arrears rate for businesses as it stabilise the cost of borrowing and lending. Wealth bond create a liquidity pool linked to income as well as pensions contributions, which gives a buffer zone for controlled movement of rand to curtail inflation (Shiller, 2016).
It is important to mention that rand depreciation has its benefits. As export becomes cheaper, rand being a commodity currency, gives small business owners the necessary impetus to gain market share in the local market as big establishment will find export more attractive.
81
Strategies deployed in curbing rand volatility and checking inflation is not limited to wealth- bond as there are other softer measures that the government can employ among which are: (a) Employment of capable and qualified persons into delicate government positions. (b) Cut down on re-current expenditure, and increase in capital expenditure to promote investment.
(c) Timely resolutions to labour-related grievances and exigency plans. (d) Separation of politics from economic decisions. (e) Transparency and zero tolerance to corruption.