Business Macroeconomics For Global Financial Downfall: The Case Of South Africa

Effectiveness of the Fiscal Policy

Describe about the Business Macroeconomics for Global Financial Downfall.

When most of the world was staggering behind because of the start of the global financial downfall during the end of the first decade of the millennium, the only country that managed to stay steady was South Africa. This is solely because of its robust monetary and fiscal policies. In order to provide an overview of the economy of South Africa, it is necessary to get acquainted about its socio political situations as well as the socioeconomic structures (Asongu 2014). The country is very stable in terms of politics and possesses a well-capitalized banking system. The country is also rich in terms of natural resources and the regulatory systems of the country are quite efficient. The research and developments sector is very advanced and strong with wide development capabilities along with a sound base of manufacturing sector. The World Bank ranked South Africa as the second largest economy in Africa after Nigeria in the segment of Upper Middle Class Economy in the year 2014. As per the empirics provided by the World Bank the GDP or Gross Domestic Product of the country was estimated to be $ 350.1 billion and the population of the country was estimated to be 54 million (Berg et al. 2015). According to the World Economic Forum the per capita GDP of South Africa is $ 6483. The country because of its rich nature was incorporated in the BRICS countries in the year 2011. Now the effectiveness of the monetary and fiscal policies adopted by the governing body of South Africa will be evaluated.

In the preceding months the global landscape had been dominated by the United Kingdom’s decision of leaving the European Union. The situation of the global economy is becoming more uncertain with the passage of time because of the assessments of these developments (Inchauste et al. 2015). However, there is a lack of proper clarity of the particular process going forward and this has had significant impact over the growth and rate of interest. The South African financial market have been overflowed specifically by the exchange rate, therefore the direct impact of over the growth rate of South Africa along with the trade are very likely to be restricted (Debrun and Masson 2013). On the downside domestic growth has surprised again while the outlook was constrained.

The Consumer Price Index (CPI) measure of inflation were found out to be 6.1 percent in the month of May and afterwards I  the month of June it increased to 6.3 percent. However, in the month of April the food price inflation was measured to be 11.3 percent and after that in June it fell slightly and became 11 percent. Goods price inflation increased to 6.7 percent while it was 6.6 percent in May (Combes et al. 2014). The core inflation as measured by bank that excludes electricity, fuel and food was increased to 5.6 percent from 5.5 percent.

Again the producer price inflation measured for the finally produced goods depicted a continuous downward trend it declined from 7.0 percent in June to nearly 6.5 percent in May. This is mainly because of the moderations made in the price inflation of foods, beverages and tobacco products. The rising prices of the crops especially cereals and other crops depicted that the effect of drought is still there (Habib 2013). The price of the live animals was also showing an upward rising trend. Presently the inflation forecast as stated by the bank portrayed a marginal improvement when compared with the previous forecasts. However, the rate of inflation is still expected to rise in this year also and is expected to reach its target level of 3-6 percent by the end of the third quarter of 2017. In the year 2016 the rate of inflation is expected to maintain an average of 6.6 percent, while in 2017 it is expected to maintain an average of 6.0 percent (Ndikumana 2014). The outcome of the referendum of United Kingdom affected the situation of the global economy as a whole. There was a high degree of volatility evident in the financial markets; however, it was stabilized to some extent at a later stage. Although, the long term real impacts of this referendum are expected to be negative in the context of global growth and that too particularly in the United Kingdom and in Europe. This is because the investments decisions were pending while there was the transition period (Kawai 2015).

During the four months since the government of South Africa presented the Medium Term Budget policy Statement of 2015, the economic environment of the country started to deteriorate significantly, by bringing down the GDP growth and the revenue projection of South Africa. There was a remarkable increase in the bond yield while the rand exchange rate fell 14 percent in exchange of the US dollar (Hajj et al. 2013). This downturn was partly because of the weakening of the global outlook. The prices of the commodity decreased, while risk aversion along with the rate of interest increased significantly in the developed countries. This have leaded to an outflow of substantial amount of capital and thereby resulting into currency depreciation in the developing countries.

The slowdown of the economy also reflected a lack of confidence among the consumers and the investors of South Africa. The expected growth rate was further fallen because of the energy constraints. Moreover, the recent drought conditions have reduced the agricultural output and thereby increased the prices of the food products. Investors responded negatively to the changes proposed in the financial framework on 9^th December in the last year (Lundahl and Petersson 2013). This has raised questions about the robust fiscal management of South Africa and thereby increased the premium of government debt.

During the end of the year 2015, rating agencies cited the poor prospects of economic growth and other concerns, either adversely affected the sovereign credit ratings of South Africa for foreign currency debt or damaged the outlook of the country (Guzman et al. 2014). The impact of an event like this, even if it were going to take place were very difficult to predict. Moreover, this downgrading would lead to a spike in the rate of interest and   will weaken the rand exchange rate further. In other words it will reverse the capital flow and will definitely trigger a recession. In a situation like this a well-equipped fiscal measure is necessary to restore the situation of the public finance to a sustainable level (Leubolt et al. 2014).

Since 2012, the government of South Africa has efficiently maintained infrastructure and social programs. Although the sluggish rate of economic growth has affected the revenue collection putting constraints over the particular resource to mitigate the budget deficit.  These are the considerations that compelled the government of South Africa to design and implement additional measures regarding revenue and expenditure over the medium turn (Fritz and Prates 2014).

The budget proposals of 2016 were aimed at reinforcing the commitment of the government towards a robust and sustainable fiscal trajectory and react efficiently towards the redesigned circumstances that has aroused since the implementation of the MTBPS of 2015. In the next three years the government has proposed to lower the ceiling of expenditure, bolster the tax revenue, effectively manage the fiscal risk resulting from the state owned enterprises and also strictly restrict the growth of compensation budget (Gossel and Biekpe 2013).

After the implementation of this framework it is expected that the budget deficit will be eliminated more rapidly as compared to the time that was announced during the time of MTBPS of 2015. In the financial year 2016-17 the government of South Africa will definitely achieve a primary consolidated surplus and revenue will exceed over the non interest spending (Calderón et al. 2016). The budget deficit will come down from 3.2 percent in 2016-17 to 2.8 percent in the financial year 2017-18 and furthermore in the upcoming years.

Now in order to achieve these fiscal goals the government of South Africa has proposed the following,

It will raise the revenue with the help of an efficient tax policy measure that will raise the revenue to R 18.1 billion and further R 15 billion in the next two subsequent years.

It will lower the ceiling of expenditure by R 10 billion in the year 2017-18 and R 15 million in the year 2018-19 by curtailing the compensation budgets, along with the efficient framework to restrict hiring.

Reprioritizing an amount of R 31.8 billion in the next three years in order to mitigate the new needs of spending without raising the envelop of total expenditure.

In relation to the projections stated in the MTBPS of 2015, these measures will give rise to an additional fiscal consolidation of R 18 billion in the financial year 2016-17 along with R 25 billion and  R30 billion in the financial years 2017-18 and 2018-19 respectively (Calderón and Nguyen 2016).

The government of South Africa is committed towards eradicating its medium term budget deficits and will evidently take additional steps for achieving its commitments. The proposition of further budget may interchange the combination of revenue and expenditure measures without disturbing the overall size of the alliance.

The budget of 2016 proposes that the tax will increase R 48 billion during the next three financial years compared to the MTBPS 2015 estimates. In the financial year 2016-17 an additional amount of R 7.6 billion revenue will be increased by constraining the relief for the effect of inflation on personal income tax (Svensson 2015). Rise in the fuel levy along with the specific duties of excise will sum up to an amount of R 9.5 billion while on the other hand, adjustments in the capital gains tax and the transfer duties will amount to R 2 billion.

The budget proposals of 2016 have proposed to reduce the baseline expenditure growth by R 25 billion over the period of MTEF as compared with the estimates of MTBPS of 2015. This reduction of R 10 billion and R 15 billion in 2017-18 and 2018-19 respectively will be implemented to the compensation budgets of provincial and national departments (Ali et al 2014).

This measure in order to be effective the appointments for the purpose of filling up the administrative as well as the managerial vacancies will be blocked on the payroll system of the government. National treasury which is working along with the provincial treasury coupled with the Department of Public Service and Administration will only authorize appointments only when the concerned department has presented a clear plan of human resource that is aligned with the reduced compensated budget and better efficiency.

The government of South Africa has also responded to the new spending needs except from compromising with the expenditure limits. In order to avoid reduction in budget that may negatively affect the delivery of services to the poor of South Africa, it has been dealt with additional care.

The budget of 2016 proposes to reprioritize the spending which is nearly R 31.8 billion compared to the MTEF period for supporting higher education and Contribution of South Africa for the New Development Bank. Moreover, in addition to this another R 3.5 billion will be added to this amount in the contingency reserves in 2016/17 for the purpose of mitigating the macroeconomic risks (Ali et al 2014).

These are briefly the steps taken by the government of South Africa to protect the country from the global downfall. Therefore, this is precisely the effectiveness of the fiscal policy framework. Now, the study will focus on the effectiveness of the monetary policy adopted by the government of South Africa.

The monetary policy adopted by the government of a country is generally a combination of processes that helps the monetary authority of that country to control the supply of money. It sometimes uses the inflation rate or the interest rate in order to ensure stable price and enhance the trust in currency.

The evolution of monetary policy in South Africa has been quite significant. The monetary authority of South Africa has adopted three types of monetary policy at the first stage that is during 1970 the monetary policy was of “Direct Control Regime” then came the “Liquidity ratio asset based system afterwards it has adopted a new monetary policy in 2000 it was the “ Inflation targeting framework”. The monetary policy system of South Africa has been able to face the development and economic challenges effectively and efficient in both the domestic as well as the foreign countries (Isaacs 2014). The inflation targeting policy in which the central bank announces a targeted interest rate and policies are designed in accordance with that to achieve that target interest rate.

It has been observed that the unanticipated contractionary monetary policy of South Africa affected the output of South Africa and it has also been observed that it lowers the level of output. Therefore, it also suggests that the unanticipated monetary policy has nominal effects as well that left the price level at a lower level. In accordance with the relationship between inflation and output the reserve bank of the country were able to maintain the Friedman’s hypothesis. The hypothesis states that an increase in the level of inflation reduces the functional information of price movements along with hindering the contracting in the long run.

In South Africa a contractionary monetary policy also affected the consumption expenditure. An increase in the rate of interest lowers the level of consumption by reducing the level of disposable income. Disposable income is that income which is available to the households after paying the taxes and mortgage payments. Tightening the monetary policy will impact on both the household wealth and credits (Isaacs 2014).

As per the reserve bank of South Africa the country has reached a current account deficit amounting to 216202 million ZAR during the financial year 2013. At the same time the deficit in trade balance reached 14205 million ZAR. The trade balance of South Africa as a percentage of Gross Domestic Output has increased since the year 2003 (Isaacs 2014). These deficits in the trade balance is best explained by the lowering of exports of commodities taken together with high imports of fuel and value added goods. The effects of contractionary monetary policy and the exchange rate appreciation measure on the balance of trade in South Africa are compared. It is found that the exchange rate appreciation measure worsens the trade balance of the country when compared with the contractionary monetary policy. The government of the country also focused on some other aspects of the economy in order to boost up the growth rate (Martorano et al. 2014). It has started using the public resources for boosting the economic activity by giving priority to the actions that directly affects the economy as a whole. Therefore, the fiscal policy of the South African government can also be regarded as a efficient one, but not as efficient as the fiscal policy.

Reference List:

Ali, M., Fjeldstad, O.H. and Sjursen, I.H., 2014. To pay or not to pay? Citizens’ attitudes toward taxation in Kenya, Tanzania, Uganda, and South Africa. World Development, 64, pp.828-842.

Asongu, S., 2014. Are proposed African monetary unions optimal currency areas? Real, monetary and fiscal policy convergence analysis. African Journal of Economic and Management Studies, 5(1), pp.9-29.

Berg, A., O’Connell, S., Pattillo, C., Portillo, R. and Unsal, F., 2015. Monetary policy issues in sub-Saharan Africa. The Oxford Handbook of Africa and Economics: Volume 2: Policies and Practices, p.62.

Calderón, C. and Nguyen, H., 2016. The Cyclical Nature of Fiscal Policy in Sub-Saharan Africa. Journal of African Economies.

Calderón, C., Duncan, R. and Schmidtâ€ÂHebbel, K., 2016. Do Good Institutions Promote Countercyclical Macroeconomic Policies?. Oxford Bulletin of Economics and Statistics.

Combes, J.L., Debrun, X., Minea, A. and Tapsoba, R., 2014. Inflation Targeting and Fiscal Rules: Do Interactions and Sequencing Matter?.

Debrun, X. and Masson, P.R., 2013. Modelling monetary union in Southern Africa: Welfare evaluation for the CMA and SADC. South African Journal of Economics, 81(2), pp.275-291.

Fritz, B. and Prates, D., 2014. The new IMF approach to capital account management and its blind spots: lessons from Brazil and South Korea.International Review of Applied Economics, 28(2), pp.210-239.

Gossel, S.J. and Biekpe, N., 2013. The Cyclical Relationships Between South Africa’s Net Capital Inflows and Fiscal and Monetary Policies.Emerging Markets Finance and Trade, 49(2), pp.64-83.

Guzman, M., Ocampo, A. and Stiglitz, J., 2014. Real Exchange Rate Policies for Economic Development. Department of Trade and Industry, Pretoria, South Africa.

Habib, A., 2013. South Africa’s suspended revolution: Hopes and prospects. Ohio University Press.

Hajj, F.A., Dufrénot, G., Sugimoto, K. and Wolf, R., 2013. Reactions to Shocks and Monetary Policy Regimes: Inflation Targeting Versus Flexible Currency Board in Ghana, South Africa and the WAEMU.

Inchauste, G., Lustig, N., Maboshe, M., Purfield, C. and Woolard, I., 2015. The distributional impact of fiscal policy in South Africa. Policy Research working paper, 7194.

Isaacs, G., 2014. The myth of “neutrality” and the rhetoric of “stability”: macroeconomic policy in democratic South Africa.

Kawai, M., 2015. International Spillovers of Monetary Policy: US Federal Reserve’s Quantitative Easing and Bank of Japan’s Quantitative and Qualitative Easing.

Leubolt, B., Fischer, K. and Saha, D., 2014. Are targeting and universalism complementary or competing paradigms in social policy? Insights from Brazil India and South Africa. International Journal of Labour Research, 6(1), p.75.

Lundahl, M. and Petersson, L., 2013. Post-apartheid South Africa: an economic success story?. Achieving Development Success: Strategies and Lessons from the Developing World, p.232.

Martorano, B., Cornia, G.A. and Stewart, F., 2014. Human Development and Fiscal Policy. Towards Human Development: New approaches to macroeconomics and inequality, p.221.

Ndikumana, L., 2014. Implications of monetary policy for credit and investment in sub-Saharan African countries (No. 356). PERI Working Paper.

Svensson, L.E., 2015, October. Monetary Policy and Macroprudential Policy: Different and Separate. In Federal Reserve Bank of Boston Conference “Macroprudential Monetary Policy.