Mbabane: The Southern African Research Foundation for Economic Development (SARFED) has voiced out that the fuel hike was not the best decision, for now, stating that rationing would have been better
SARFED made the observation through its weekly Economic and Business Commentary, Vol. 5, issue 24 of August 2021.
SARFED said the government’s decision to increase the fuel prices might not be the best decision for now. SARFED said this is due to the fact that the country was still going through a recessionary recovery stage after the socioeconomic challenge characterized by the persistent spread of COVID-19, and the just-ended socio unrest which saw the closure and frustration of both the supply and demand side of the economy.
SARFED noted that the economy of Eswatini’s performance is under the estimated 1.4 percent growth for the year 2020/2021. This has been due to both internal and external forces that were exerted on the economy of Eswatini.
The country had a significant backdrop in its fiscal space which saw an increase in fiscal deficit from about 5 percent to about 8 percent in 2020. More to that the level of production is further expected to reduce due to massive closure and downsizing of many companies, especially those in the labor-intensive sectors such as manufacturing, construction, and hospitality industries in particular.
The result of which will see the formation of a vibrant informal sector as most laid-off employees would seek alternative self-help initiatives, mainly characterized with informality.
Implications
SARFED said the increase in fuel prices by the government is likely to impact the economy in both the short and long term in arrears which includes;
- An increase in prices of basic goods and services: This is due to the fact that fuel either petrol or diesel plays as a factor input in the circular flow of income. Through cost-push inflationary factors, most suppliers would respond by hiking the price, hence creating a supply shock which will, in turn, affect household consumption and have a ripple effect on demand. As demand falls, the economy will experience a slowdown in its economic activities on both a medium and long-term basis.
- Sectorial mismatch and distraction of the SME sector: this means that the increase in fuel is likely to destroy the middle class or emergent industrial sector which was mainly characterized by Small and Medium Enterprises (SME) as they were mainly involved in mobile-related businesses such as cross border trading among others. It must be known that during the economic recovery stage, all factors of production would need to be at an equilibrium level to promote stronger institutional integration in various sectors of the economy.
- Reduction in household disposable income
Disposable income is expected to reduce in the long run due to shifts in consumer spending pertains. This would be practiced as means of ensuring precautionary spending pertains to the consumers of fuel.
- Increase in the cost of doing business
Eswatini has been lagging behind with regard to the trends of doing business. According to World Bank and International Monetary Fund(IMF) comparative analysis of 190 countries, Eswatini was ranked as 59.5 percent as of the year 2020 with the total performance ranking of 121 out of 190 economies. This would then reduce the country’s competitiveness for attracting Foreign Direct Investors (FDIs).
- Increase in cost of living and poverty levels
Currently, due to the COVID-19 pandemic which has contributed to the scarcity of certain goods and services due to global supply chain backlogs, there has been a limited supply of essential goods and services which later stimulated the demand side of the economy, increasing the cost of living. This would work against the country’s quest to reduce poverty levels which were currently at about 58.9 percent of people living below the nationally defined poverty line in addition to the 20.1 percent living in extreme poverty; COVID-19 is potentially going to exacerbate food insecurity in the country.
6. Increase in inflation
One of the long-term effects of such developments would be related to an increase in the inflation levels of the country. Currently, Eswatini’s inflation has been on the rise with about 1 percent between the period of 2020 and 2021. If this trend continues, then the country will undergo a prolonged period of stagnation (which is a prolonged period of less economic improvement).
Discussion about this post