Exchange rate pass-through to food prices in South Africa

Abstract

This study examines the pass-through effect of exchange rate depreciation on food prices in South Africa, based on monthly data observed between 2002 and 2024. Results from a Vector Error Correction Model (VECM) show that a 1% depreciation of Rand leads to a 0.29% long-run increase in overall food prices, indicating a moderate and incomplete pass-through effect. When decomposed into subcategories, the highest pass-through effects were observed for oils and fats (0.38%) and bread and cereals (0.34%), possibly reflecting the high dependence of these goods on imported intermediates. On the contrary, locally produced goods such as meat and vegetables exhibit a lower pass-through effect of 0.12% and 0.20%, respectively. These results are robust to the use of an alternative estimator, the dynamic ordinary lest squares method. The study further explores the time-varying nature of the pass-through effect and finds a decline post-2008-Global Financial Crisis and COVID-19. The findings suggest that, while exchange rate depreciation continues to influence food prices, the impact has diminished in recent years. We attribute this to increased supply chain resilience, improved monetary policy credibility, government support systems, and better supply chain management in the wake of recurring global crises. Policy recommendations include the continued strengthening of local production, targeted fiscal subsidies and supply chain resilience to mitigate the impact of exchange rates on food price.