RENOSI MOKATE & KENNETH CREAMER | Fuel levy cut offers short-term relief amid global crisis

There is uncertainty as to how long the Middle East war will continue. If the recently announced time-limited ceasefire holds, the war’s direct impact on South Africa and the global economy may be limited to a few months. However, if the ceasefire does not hold and the war is protracted, or if there are to be ongoing clashes and standoffs, this will reinforce the region as a geopolitical chokepoint.

Such an outcome would have a structural impact on global trade and energy markets, and if sufficiently disruptive may yet trigger global recessionary or stagflationary conditions, with negative implications for the South African economy.

The government’s response to the crisis so far, announced on April 1, was designed to shield households and firms from significant price increases by reducing the general fuel levy on petrol and diesel by R3 per litre for a month.

However, it is concerning that no support was given to reduce the price of paraffin, which is used mostly by the poorest households. The estimated cost of the fuel levy intervention will be a tax loss of R6bn per month. It will be difficult for the fiscus to sustain this support in the medium to long run, especially in recessionary conditions.

Moving forward, the ministerial task team set up in response to the crisis will have to track daily developments in oil and gas prices, exchange rates, shipping flows, insurance costs, fertiliser supply and domestic fuel stocks, monitor the impact of the conflict on the cost of living and assess the likelihood of fuel and other shortages due to supply chain disruptions.

It will also have to:

• develop appropriate response packages to short-term, medium-term and severe shock scenarios for the South African economy;
• co-ordinate operational responses across departments and state entities;
• trigger pre-agreed interventions when thresholds are breached; and
• provide the basis for ongoing, fact-based government communications during the crisis.

The government should treat this shock not only as a crisis to manage but as a signal to reshape future investment choices

As part of its overall strategic response, government should avoid broad, open-ended subsidies. It should instead combine targeted support, disciplined macroeconomic management, stronger public communication and faster reform in energy and logistics.

In essence, a two-track approach should be adopted:

• Provide targeted relief to shield vulnerable households, commuters and critical sectors from acute fuel, food and logistics shocks.
• Accelerate resilience measures to reduce South Africa’s structural exposure to imported fuel, imported fertiliser, freight disruptions and external capital market volatility.

On the first track, in addition to the temporary cut in the fuel levy that has been announced, government should consider:

• additional time-bound interventions, such as targeted support for public transport commuters;
• targeted measures to cushion the impact on the most vulnerable households for whom higher food and fuel costs feed directly into food insecurity; and
• developing an appropriate response to unilateral surcharges that have begun to be levied by certain fuel suppliers in a manner that the government response does not unintentionally trigger fuel supply shortages and is also effective at ruling out price gouging conduct by suppliers.

On the second track, government should emphasise improved energy security as a centrepiece of its response to the crisis and should lead movement on unresolved energy policy questions:

• finalise and operationalise an integrated energy plan, including reduced reliance on imported fuel;
• devise and accelerate an electric vehicle strategy, including necessary infrastructure and incentives, to reduce oil dependency for the transport sector, targeted at public transport (buses and taxis) and privately-owned vehicles;
• accelerate investment in renewable energy projects, batteries and peaking capacity, as gas and diesel electricity peaking plants rely on imported fuel, and consider repurposing coal plants to provide supplementary peaking support to the electricity system as the contribution from renewable energy sources rises;
• reduce dependence on imported fossil fuels over time as current events may alter the economics of alternative fuel sources such as green hydrogen and green ammonia, for the production of which South Africa enjoys competitive advantages; and
• create conditions for effective exploration for domestic sources of gas and oil and critical minerals.

The government should treat this shock not only as a crisis to manage but as a signal to reshape future investment choices. The crisis should trigger an acceleration of government’s structural reform agenda as co-ordinated by Operation Vulindlela. Reforms and interventions designed to stimulate growth and local investment should accelerate.

Policymakers cannot ignore exchange rate pressure as further rand weakness would feed directly into imported fuel prices and imported inflation, which in turn would put upward pressure on interest rates

Interventions to increase investment in rail, ports and electricity infrastructure should not be delayed by the crisis in any way. For example, the restructuring of Eskom and the establishment of an asset-backed transmission system operator should be implemented timeously to serve as the publicly owned backbone of a competitive electricity market, designed to achieve competitive electricity prices and increased investment.

Energy planning should be designed to achieve three strategic objectives:

• a lower energy price path;
• increased energy security; and
• decarbonisation of the overall energy system.

South Africa’s fiscal and monetary authorities should respond to the current crisis with discipline and credibility to contribute to the maintenance of macroeconomic stability.

Fiscal policy should be calibrated to provide targeted, temporary support in response to elevated fuel and other prices, while taking offsetting actions to avoid rising national debt. If debt service costs can be contained, together with improved spending controls and greater tax compliance, this will increase the scope for the prioritisation of infrastructure spending, with the related benefits for employment and service delivery.

Monetary policy should respond appropriately in line with the Reserve Bank’s mandate to maintain price stability in the interest of balanced and sustainable growth. It is early days in the crisis and the situation is very fluid but unlike at the start of the Russia-Ukraine war in 2022, inflation is currently lower and more stable. This, together with the possibility that a number of other central banks around the world may initially take some time before raising interest rates, may allow for more flexibility in the response to inflation.

At the same time, policymakers cannot ignore exchange rate pressure as further rand weakness would feed directly into imported fuel prices and imported inflation, which in turn would put upward pressure on interest rates. The government should also monitor the African capital markets dimension more closely. The shock could alter investor risk appetite across emerging and frontier markets, affect capital flows and widen financing spreads even where domestic fundamentals remain broadly stable.

The central policy test is not whether South Africa can prevent the war’s external shock, which it cannot, but whether the country can respond in such a manner that the shock does not trigger a domestic crisis or derail ongoing reforms aimed at accelerating growth, investment and job creation.

• Dr Mokate and Dr Creamer are members of South Africa’s Presidential Economic Advisory Council.