Macroeconomic Analyses of South Africa

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Executive Summary
By enacting a stability package to boost GDP, encourage investment, and assist job creation, the
South African government hopes to reduce unemployment and pull the country out of a recession.
How the South African Reserve Bank (SARB) reacts with monetary policy will have a significant
impact on the impact and efficacy of South Africa's expansionary fiscal policy. To encourage
investment and prevent crowding out, the SARB has launched a complementary expansionary
monetary policy with the effect of lowering interest rates. Increased interest rates have been found
to be counterproductive in the long run for South Africa, and greater expansionary monetary policy
outcomes are needed in response to expansionary fiscal policy.
Introduction
The government of South Africa (SA) is responsible for reducing unemployment, while the SARB is
responsible for maintaining or achieving the desired level of inflation. This analysis takes into
account the trade-offs and policy conundrums that arise as a result of these seemingly counter-
intuitive factors. The goal is to prevent further economic instability in South Africa as a result of the
COVID-19 outbreak.
It is easier to observe the effects of fiscal response policies than those of monetary measures since
the circulation of currency is more immediate. There appears to be unusually rapid implementation
of many countries' fiscal response plans in the face of the pandemic, with bipartisan backing helping
to speed things along. This article also demonstrates that interest rate-based fiscal policy is
preferable than taxation-based fiscal policy due to its larger multiplier effect on influencing GDP
(GDP).
Government implementation of an expansionary fiscal policy package comes with the consequence
of a crowding out effect that discourages investment. Given this policy conundrum, this document
will lay out the policy options and drawbacks associated with that situation, evaluate the costs and
benefits of different options available to address an economic recovery, and make recommendations
for ways to address the policy conundrum, including more to ensure interest rates come down much
lower.
Overview of the Economic Climate
South Africa's GDP fell for three straight quarters between the third quarter of 2019 and first quarter
of 2020 before the COVID-19 impact, and the country's official unemployment rate had already risen
to over 30 percent by 2021. According to the South African government's supplementary budget, the
economy fell by 7.2% in 2020 and recovered by 19.12% in 2021, and R300 billion in tax income is
predicted to be lost that year. In 2021, the ratio of debt to GDP is projected to increase above 60%,
and the budget deficit is projected to exceed 15% of GDP.

Source: Bis Oxford Economics data
Gross Domestic Product (GDP)
Economic output is expected to increase by 1.8% in 2022 and 1.3% in 2023, following a robust
rebound in 2021. The majority of economic expansion will come from individual spending and
investment. The continuation of the COVID-relief grant is helpful to household income. An increase
in exports can be expected as a result of rising commodity prices. Capital expenditures are expected
to increase across the forecast period.
Unemployment
The 10.4 million people in South Africa who are currently without jobs is one sign of the
government's policy failures even before the COVID-19 pandemic. As a result of the pandemic's
impact on the economy, the unemployment rate in Q12020 rose to 30.1%. In addition, real GDP
growth of about 7.0% per year is expected to be necessary, according to the SA government, for
unemployment to considerably fall. Unless there is a substantial rise in income that can be
maintained, South Africa will continue to have a high unemployment rate. As a result of the supply
shock induced by COVID-19, the South African economy has decreased in demand for labour and
unemployment has risen.
Inflation
Considering 4.1% in 2019 and 3.2% in 2020, inflation is projected to be comfortably within the
SARB's 3.0-6.0% target range over the 2020/21 forecast period. Despite the reduction in demand-