Drought, the Reason of Weakening Rand And The Cause of Food Inflation

South Africa is going through a rough economic state as the Rand becomes weak against the dollars. Drought, the actual reason behind the weakening rand made imports expensive.

As the lack of rain persists in major crop-growing regions, food inflation will occur soon. Reserve Bank is also aware of the fact that seller might have to surge prices due to weak demand worldwide.

According to Herald LIVE report, consumers will have to dig deep to keep afloat after an increase of 25 basis points in the interest rate that was announced yesterday and the 6.25% is the new lending rate of Reserve Bank for commercial institutions with the prime lending rate as generally charged by banks rising to 9.75%. However, most of the economists were shocked by this sudden increase.

Immediately after this announcement of RBI, a warning of price hike among a wide range of items has spread over the market. As per industry experts, food inflation might strike as high as 10%.

Actually, Neil Roets, CEO of a prime debt management company has spread the alert in advance. Roets explained that the drought in food-cultivating area results in interest rate hike which in return cause rand weakening and it will cost heavily for the poor.

As per Bloomberg news, Brink van Wyka trader at BVG (Pty) Ltd., stated through e-mail "Large parts of the Free State, which is the biggest maize-producing province in South Africa, have received little or no rain," and he also grumbled that the worst part is the forecasts do not really indicate any rain there soon. In fact, he said that the 23% decline in the rand against the dollar in last one year is the sole reason for impending inflation.

South Africa is one of the largest crop producing countries all over the world. The country is suffering from worst drought situation after 1992 that damaged the harvest completely.

In March, SA compelled to import grains for the first time in 11 months. On Wednesday, South African Grain Information Service mentioned in their website that the 17 percent decline in local yellow-corn stock level happened a month earlier from 2.32 million tons in October.

As per ZA Economist, the rand's performance is largely beyond the influence of short-term interest rates in SA and, therefore, the Reserve Bank can in practice only hope to influence the level of demand in SA, which it does consistently by raising or lowering interest rates.

The Reserve Bank is actually trying to rely on a theory that inflation in SA could become self-fulfilling followed by higher interest rates demand. Undoubtedly, by following this theory, it is only hampering the economy globally.

As per weather report, no rain is expected throughout Western Cape Province. Along with the drought, the sudden price hike will cause a major squeeze.

People will be left with minimal money to be spent on essential goods like food, education, transport etc. The chain reaction of draught, weakening rand and food inflation becomes obvious. However, on a better note, the government has started taking strong steps through a complete analysis of drought, it's likely effects and how to deal with it.