‘Tunisia Days’ ahead as inflation exerts political pressure

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In the space of three weeks, as many world leaders have quit.

First, scandal-prone Boris Johnson was forced off a ledge by his colleagues in the United Kingdom’s Conservative Party. A week later Sri Lanka’s Gotabaya Rajapaksa threw in the towel after having to flee anti-government protesters. And, most recently, Mario Draghi resigned as Italy’s prime minister after facing a confidence vote.

The countries previously piloted by these leaders have one thing in common. Scarred by past economic missteps, each is now staring down the barrel of a cost of living crisis. 

Inflation and recessions can be political poison, serving to make or break governments. With high prices continuing to bear down on consumers the world over, leaders who fail to bring inflation to heel could face a reckoning.

“What we are seeing in a number of countries is a symptom of societies that are feeling increasing pressure because of the rising costs,” Alexander Forbes chief economist Isaah Mhlanga said.

Pointing to Draghi’s resignation, Mhlanga noted: “In Italy, it is a symptom of the dissatisfaction with the sitting government as far as they are handling the economy. And it is not different here in South Africa. The July riots of last year was a litmus test of what can be. It just needs a spark. You already hear calls of national shutdowns. Those are indications of the risk that we face.”

Litmus test 

The recent examples of political upheaval amid elevated inflation are not out of step with history. “We have definitely seen it before,” said Hugo Pienaar, the chief economist at the Bureau for Economic Research.

A food-supply crisis triggered a chain reaction that resulted in the Russian Revolution in 1917. When winter fell on Russia, the tsarist government was faced with being toppled by protesters riled by inflation and food shortages in the capital.

Rising food prices also played a key role in the 2011 Arab Spring uprisings, which started in Tunisia. Food price inflation and declining living standards — exacerbated by repeated global food price fluctuations in 2008 and 2010 — inflamed outrage against Zine el-Abidine Ben Ali’s regime, which had been in power for 23 years. Ben Ali fled Tunisia in January 2011.

Rajapaksa, who, like Ben Ali, fled his country in the wake of mass revolt, offers a more recent example of the political cost of economic collapse. Sri Lanka’s economy, which is teetering on the brink of recession, is reeling from record-high inflation. The country’s economic crisis is viewed as the harshest it has seen since its independence in 1948.

In June, Sri Lanka’s inflation touched 54.6% year-on-year, a number never seen in the island country’s history. Food inflation accelerated to 80.1%. In response to surging prices, which has been accompanied by devastating food and fuel shortages, Sri Lanka’s central bank raised its borrowing rate by 100 basis points. 

Similarly aggressive hikes are being considered by central banks elsewhere, as inflation — driven by Russia-related supply chokeholds — exerts intolerable pressure on consumers. 

Last month, the UK’s annual inflation rate rose to a 40-year high, hitting 9.4% in June. The annual inflation rate in Italy rose 8% year-on-year in June, the highest since January 1986. Cost of living protests have sprung up in both countries.

‘Suffocate’

Closer to home, data last week showed that South Africa’s inflation rose 7.4% year-on-year, marking the quickest acceleration in consumer prices since 2009 and indicating that the domestic economy may be following its peers by entering a period of ultra-high inflation.

The South African Reserve Bank (Sarb) surprised some analysts by raising the repo rate by 75 basis points, bringing the prime lending rate to 9%. The last time the Reserve Bank raised the repo rate by such an aggressive increment was in September 2002.

The move has sparked criticism from various corners, including from labour federation Cosatu, which said the hike would “bleed workers and suffocate the economy further”. Cosatu’s rival, the South African Federation of Trade Unions, echoed this sentiment, noting that inflation is being pushed by supply-side pressures, rather than from any growth in consumer demand.

Mhlanga said the Reserve Bank is in a tight spot when it comes to controlling inflation. “Monetary policymakers are going to be blamed whether they control inflation by hiking rates or sit back and do nothing,” he said.

“Not doing anything means that social grants are not going to buy people anything. But hiking rates, on the other hand, means that the cost of debt could rise beyond what the middle class can afford. So they are blamed anyway. But it would be a mistake for the Sarb not to respond to inflation.”

But Mhlanga and Pienaar agreed that reining in inflation cannot only rest with the central bank. The state also has a role to play, considering that administered prices (such as electricity tariffs) have historically driven prices up more than the overall consumer inflation basket.

‘Tunisia Day’

The country’s economic predicament was at the centre of the unrest in July last year. Earlier this month, Finance Minister Enoch Godongwana said in a speech that the rioters — who raged through parts of KwaZulu-Natal and Gauteng — “found fertile ground in the desperate economic situation faced by many of our people” and warned of future instability”.

“Here at home and around the world, we have seen the violent results of economic distress, mainly in the form of protests and demonstrations, many of them peaceful, some of them tragically violent.”

Last week, in an address at ANC stalwart Jessie Duarte’s memorial service, former president Thabo Mbeki warned that South Africa is doomed to experience its own Arab Spring. 

“My fear is that one of these days, it is going to happen to us. Because you can’t have so many people unemployed, so many people poor … faced with a leadership in which they see ANC people, one after another being called corrupt. One day it is going to explode.”

A decade ago, the former president’s brother, Moeletsi Mbeki, predicted that South Africa would have its own “Tunisia Day” in about 2020. 

In South Africa, citizens are able to cast their ballots, setting the country apart from autocratic Tunisia, Pienaar noted. “Perhaps that mitigates against something like that, because you can show your anger at the ballot box, to an extent. And, I mean, we have seen the ANC lose support over many years. But the next election is in 2024, so we don’t have that mechanism right now.”

He added that simmering social tensions in the lead up to the election will make it difficult for the government to stop offering additional relief to the poor through the R350 grant that was introduced during the Covid-19 pandemic.

“In order to prevent something like the Arab Spring, the government is certainly not going to take away the support to poor households …. But we saw in July last year that these things can happen in South Africa,” Pienaar said. 

“All the time, we see pockets of protests throughout the country. And given our massive unemployment problem and inequality problem, South Africa is very ripe for something like that to happen.”

For this reason, Pienaar said, “it is so crucial to have an independent central bank with the primary purpose of ensuring price stability, so that these prices don’t run away with us”.