Rikus Grobler | Oct 18, 2017 | 0
Inflation vs growth vs employment
It is part of the official dogma that we need a persistent real annual growth rate of 5% or more to reach the targets captured and defined in the fourth National Development Plan (NDP4). This is indeed a noble target, and it can certainly be attained, but there are a number of unforeseen consequences, of which inflation is perhaps top of the list.
The current National Development Plan singles out four specific sectors for preferential treatment through implementation of a host of policies and strategies. These are fondly called interventions by people not realising that an intervention is a short-term, drastic measure to change the outcome of a targeted development reality. Neither the intervention nor its effects, usually last very long, and unless the policymakers are prepared to intervene continually, the economic systems reverts back to its inherent capacity and growth ability. But the one effect of so-called interventions that outlasts all the others, and that causes the biggest damage to the ordinary citizen, is inflation.
Namibian inflation closely tracks that of South Africa, usually one and a half to two percent higher, for what I have previously called transport inflation. The fact that roughly 84% of everything we need comes from South Africa, furnishes local inflation with a measurable, definable structural rigidity. In short, so little of what we consume, or require for further fixed capital formation, is produced by ourselves, that local inflation is basically of no consequence in the bigger picture. Our inflation is structurally tied to South African inflation and it is only the physical distance between their markets and ours, that account for the slightly higher local inflation.
But when one embarks on a policy of interventions, one after the other, and these become a standard feature of the national budget, it means these interventions have to be financed from some source. That source is the local capital market which, although still lacking in depth, provides the budget process with an almost limitless source of funds to paper over the massive stimulation required to reach a 5% real growth.
Growing at 5% with average annual inflation around 6%, axiomatically indicates that nominal growth must exceed 11%. This is indeed the case and one only needs to analyse projected GDP growth figures, to notice that expected (anticipated) nominal growth is slated at just below 12%. But to achieve this lofty target, government debt is growing at an annualised rate of 18%. Again, this can be calculated relatively easy by analysing the published figures, and by comparing these to actual growth in the local bond market. Basically, we are pumping up liquidity to the tune of 18% with the strong hope that it will translate to 12% nominal growth, with even stronger hope that the outcome will be the magical 5%.
We can call it intervention, or stimulation, or growing liquidity, or whatever, but there are certain clearly researched risks to stoking the economic fire. There are many empirical studies confirming and analysing these risks and from them we derive a list of possible impediments to our growth model, but none of these impediments come close to the risk posed by inflation.
It is the current economic vogue to make a distinction, in some measures of inflation, between so-called core, and headline inflation. Core inflation measure inflation across a set basket of products and services, ignoring the impact of energy and food, since these components are typically viewed as volatile, and not structural. Headline inflation is the real inflation the man in the street is exposed to. This is a somewhat artificial distinction which has value only to academics, and it is frequently attacked by policymakers who have to deal with the real world. Nevertheless, specifically for these two components, our domestic liquidity has zero impact on them because we do not produce any oil, and only a fraction of our own food. But when an economy grows at a 12% nominal rate, the additional inflation must appear somewhere. In our case it is not that easy to find that somewhere. As I explained, inflation is mostly structural and mostly beyond our influence.
I am often asked about property prices and why they are exploding all the time. I have come to the conclusion that despite all the reason cited for high property prices, like under-delivery etc, the main reason is the massive liquidity we are creating, and the opportunity the shortfall in available housing is creating for investors. The sad part is that people with money are seeing good returns on property investments, while young people and low-income earners are sidelined more and more.
There are other growth models than the rather disruptive stimulus model we are following and it is my intention to discuss these in future pieces.