Weekly Shots: Guinea Coup, Skills Shortage in the UK, Inflation Targeting in SA, Bitcoin
Aluminium Price Surges Amidst Guinea Coup
A unit of the military-led by Colonel Mamady Doumbouya, a former French Legionnaire seized power and suspended the constitution in Guinea on Sunday. Condé, 83, who ran for a third term in office in 2020 following changes in the new constitution passed in the controversial constitutional referendum, was the first freely elected president of Guinea in 2010. He facilitated the country’s transition into the world’s 5th major producer of bauxite, attracting billions of dollars in investment from China and Russia. The growth in the bauxite industry in Guinea, which is used to make aluminium, was largely due to the ban of exports of unprocessed minerals in Indonesia in 2014 as well as the rising markets for electric cars and renewable energy.
The people of Guinea celebrated the coup as the benefits accruing from the minerals are enjoyed by the elite while 43.7% of the population continues to live below the national poverty line. The commodities market also reacted to the coup with the price of aluminium rising to its highest level since 2008 out of fear of supply disruption despite Doumbouya’s assurance that mining operations would continue and ports would remain open. Per Bloomberg, aluminium rallied as much as 1.8% in London and is now up by approximately 90% from April.
When Skills Shortage Leads to Inflation- A case of the UK
A recent survey conducted by the Recruitment and Employment Confederation (REC) in the United Kingdom revealed that employers are facing the most severe skills and candidate shortages in the history of the country’s labour market. This may be attributed to the following reasons:
1. Brexit: Fewer European Union workers.
2. Covid-19: Worker reluctance to change jobs due to the pandemic.
3. Skills Shortage: With many pre-Covid 19 businesses closed, there is a need to re-skill workers so they can be reabsorbed in the post-Covid 19 business setup.
This shortage has seen employers increase remuneration at unprecedented rates. The Bank of England is still to analyze the short-medium term impact of these increases but expects this to have an upward- pressure on inflation due to the increased liquidity in the economy.
A change in Inflation Targeting on the Cards for SA?
This week, the South African Reserve Bank Governor stated that South Africa should consider moving away from the current inflation target band of 3% - 6% to adopting a point target of 3% or 4%.
Beyond bringing SA in line with other emerging market economies, point inflation targeting would result in the following positive effects for the economy:
1. Less Volatile Inflation
The current target band of 3%- 6% reduces the stability of prices as inflation is allowed to range anywhere within the band. The adoption of a point target would allow prices to be relatively more stable, with a small margin of error on either side of the chosen target. This would also help with anchoring expectations for future inflation.
2. Low Interest Rates
The relatively low proposed inflation target point would play a vital role in achieving low nominal interest rates, which help stimulate and drive economic activity. Moreover, the stable inflation point would help anchor expectations of future interest rates.
For this to be possible, however, the governor further stated that this would require the cooperation of administered price setters for water and electricity, as data from Statssa indicates that other inflation drivers are already on the path of stable inflation.
Bitcoin Officially A Legal Tender in El Salvador
El Salvador made history on Tuesday as the first country in the world to adopt Bitcoin as a legal tender through the Bitcoin Law which was passed by the Legislative Assembly on the 8th of June 2021. The government’s Bitcoin e-wallet, Chivo, can be used for purchases in Bitcoin or U.S. dollars. To encourage its adoption, the government gave Salvadorans $30 each of Bitcoin and plans to spend $225 million in the rollout. The government says Bitcoin will save the country $400m a year in transaction fees on funds sent from abroad but the BBC calculated the value as being closer to $170m using World Bank Data.
The decision was however not met with open arms as approximately 1000 protesters gathered outside the supreme court due to the potential financial instability that could arise from the adoption as well as the potential for illicit financial transactions. According to Reuters, 67.9% of people in a poll by the Universidad Centroamericana disagreed with the decision to make Bitcoin a legal tender and many of the respondents said they did not know how to use the cryptocurrency. The historic day was also marred with technological hiccups and a plummet in the Bitcoin value, the lowest in nearly a month. The fall in value is said to have caused the country to lose $3m. On the bright side, some companies have welcomed the decision with Starbucks and McDonald’s accepting Bitcoin payments. The introduction of Bitcoin is also expected to encourage investment and help Salvadorans who don’t have access to “traditional financial services”.