Johannesburg – A severe drought in southern Africa has triggered a surge in food prices, preventing central banks from loosening monetary policy to spur economic growth.
Central banks in South Africa, Zambia and Mozambique have been forced to raise interest rates to rein in inflation after the El Nino-induced drought crippled the production of the staple maize and other crops, pushing up food prices, despite dismal economic growth prospects.
South Africa’s central bank forecasts Africa’s most industrialised economy to grow by 0.6 percent this year, after expanding 1.3 percent in 2015, partly hobbled by the drought and low commodity prices.
The bank has hiked rates by a cumulative 200 basis points since January 2014 to bring inflation within its target band of between 3 and 6 percent.
Sanlam economic advisor Jac Laubscher said by leaving the benchmark rate at 7 percent at its policy meeting last month, the bank was trying to strike a balance between fighting inflation and not depressing already weak economic growth.
“This time around they opted for growth, while at the same time making it clear that the decision to keep the repo rate unchanged should be viewed as a mere pause,” Laubscher said.
Inflation stood at 6.2 percent in April, but food inflation rose to 11.3 percent compared with 5 percent in the same period last year. The central bank sees food inflation peaking at 12 percent in the final quarter of 2016.
“This tightened monetary policy stance unfortunately comes at a time of very lacklustre economic growth,” said Hanns Spangenberg, an economist at NKC African Economics. “However, the central bank cannot let expectations for inflation anchor at levels above the upper range of its target range.”
Also of concern was a weaker rand, which has depreciated 26 percent to the dollar since January 2015. The currency is vulnerable to possible downgrades to South Africa’s credit rating and higher US interest rates.
In Zambia, Africa’s no.2 copper producer, the benchmark lending rate is at a record 15.5 percent as the central bank fights higher inflation, which stood at 21.3 percent in May compared with 6.9 percent in May 2015.
“The cost of maize has gone up significantly and that is fuelling inflation,” Zambia’s Deputy Finance Minister Christopher Mvunga said. “Unless we are food sufficient, central banks will struggle.”
Zambia’s central bank expects inflation to average 8.7 percent in the fourth quarter of 2016, but analysts say the target was too ambitious.
“It is very difficult to attain single digit inflation because our currency has been depreciating and most of the goods that we consume are imported,” said Lubinda Habazoka, an economist at the Copperbelt University.
Weaker copper prices have put pressure on Zambia’s currency and the economy. The government expects the economy to grow by 3.7 percent this year against 3.5 percent last year.
Higher food prices have also pushed up annual inflation in Mozambique, which faces an imminent sovereign debt default.
Inflation stood at 17.29 percent in April after prices rose by 1.98 percent in April 2015.
The central bank lifted its benchmark lending rate by 200 basis points to 12.75 percent in April, saying it was concerned about pronounced inflation risks caused by the drought and the sharp depreciation of the currency.
South African food prices are expected to shoot up as the country faces the worst drought in two decades, and the rand loses strength against the dollar.
This is according to a report by Bloomberg, citing forecasts from Stanlib Asset Management and Macquarie Group.
The financial groups have predicted that food inflation in the country is set to move above 10% by the middle of 2016 – which is double the current pace.
South Africa’s food prices face pressure on three fronts: global food pressures, local currency weakness, and the domestic drought. This will ultimately be forced onto consumers, Stanlib said.
Early on 26 November, the rand was trading at R14.21 to the dollar. The last time South Africa’s food price inflation was around 10% was in 2011 and 2012, during another drought. At the time, the rand was trading at R8.08 to the dollar.
The drought in the country has put maize crops in danger, forcing South Africa to import corn. Corn is both a staple food for South African citizens, and is used for livestock feed. Corn prices have increased by more than 50% this year.
Higher food prices will have a massive negative impact on the poor, who spend a bigger portion of their total income on food products.
According to data from the South Africa Institute of Race Relations, poor households spend a third (33.5%) of their income on food, compared to wealthier households which spend over a tenth (10.8%).
Overall, South Africans spend about a quarter (25.3%) of their total income on food.
Economist Mike Shussler said that the ongoing drought, the pressures on the rand, low commodity prices, and visa restrictions could shift the country into a recession by early next year.
South Africa’s economy grew marginally by 0.7% in the third quarter of 2015, according to data from Statistics SA – narrowly avoiding a technical recession – following a 1.3% contraction in the second quarter.
Johannesburg – South Africa should brace itself for a rapid rise in staple food prices as the worst drought in 23 years leaves farm land barren.
Although food inflation in the country has remained relatively low, the drought and the weak rand could change the equation as the country has to rely on imports to augment the shortage in the local market.
The latest statistics show maize, wheat, soya beans, sunflower and ground nut harvests have fallen by almost 30 percent year on year.
In the meantime, sugar cane production came down by almost 23 percent. In some sugar cane areas of KwaZulu-Natal, production fell by as much as 53 percent.
Agricultural experts this week warned that the people who would feel the biggest impact of the drought would be the poorest of the poor, who depend on staple foods such as maize, bread, cereal and beans.
Farmer representative body Grain SA this week warned of tough times ahead for consumers as living costs would rise and disposable income drop.
Grain SA economist Wandile Sihlobo said poor people would have to dig deeper into their disposable income to buy maize, which at the current exchange rate cost almost double the normal price.
“The cost of importing maize has increased by at least 80 percent in the past days alone,” Sihlobo said.
“The drought has had quite a significant impact that it has caused but what I think what is closer to our tables is maize where the harvest has actually decreased by 31 percent on a year-on-year basis so the impact is quite significant.”
During a good harvest, South Africa is able to provide enough maize for its own consumption, netting the agricultural industry at least R6.5 billion in revenue.
But this week, with the rand dipping to R14, its weakest level yet against the dollar, Grain SA forecast that South Africa would import 700 000 tons of yellow maize and 50 000 tons of white maize in the coming maize marketing year.
The provinces hardest hit by the drought are KwaZulu-Natal, North West, Free State and Mpumalanga.
In KwaZulu-Natal, the sugar cane industry warned that it would take at least 10 years to recover the billions of rands it has lost through the drought.
South African Cane Growers Association managing director Nhlanhla Gumede said the industry faced a “double whammy” because farmers made a return on their investments over a time period of eight to 10 years and a break in the cycle could push them into further despair.
“If the good conditions prevail then the crop will be able to recover relatively quickly – not enough for this year but certainly for next year,” Gumede said.
“Our focus at present is to work with as many stakeholders as possible to provide a basket of solutions for farmers and workers.”
Agri SA agricultural economist Thabi Nkosi said farmers were scaling back on production, which could leave millions without jobs as the industry was labour intensive.
Nkosi said the drought could cost farmers R10bn as input costs surpassed profits, raising worries about the short-term sustainability of the industry.
“Farmers are holding back and do not want to invest in an industry that is looking bleak,” Nkosi said.
“Some of them are already talking insolvency so they will not be looking at employing more people instead they would retrench those already in employment to lower their costs,” Nkosi added.