Research on World Agricultural Economy

Dynamic Modelling of the Impact of Fiscal and Exchange Rate Policy on Agriculture and Welfare Applied to South Africa

Prof Ramos E. Mabugu

Sol Plaatje University and Partnership for Economic Policy

Dr

Ministry of Economy and Finance, Government of Guinea

Prof Margaret Chitiga-Mabugu

Faculty of Economic and Management Sciences, University of Pretoria

DOI: https://doi.org/10.36956/rwae.v7i2.2535

Received: 25 July 2025; Published: 8 April 2026

Abstract

This study examines the effects of macroeconomic policies on growth and equity in South Africa, focusing on agriculture's links to the broader economy. We extend existing work by employing a dynamic agriculture-centred computable general equilibrium model to quantify the impacts. The focus is on fiscal and exchange rate policies and assessing how these policies affect agriculture and the nation's welfare. Findings indicate that expansionary fiscal policies impede agricultural expansion, regardless of how the fiscal expansion is financed. Positive effects on rural consumption only arise if budget deficits are managed through taxes on household income, which minimises adverse effects on agriculture and rural growth more than on urban sectors. A depreciated exchange rate enhances sectors driven by exports, such as agriculture and mining, but slightly detracts from the economy by affecting private services industries that constitute a large share of the economy, less tradable, and sensitive to income changes. The overall impact on consumption income is neutral but is marginally challenging for urban dwellers. These findings have two main policy implication. To be suitable for the agricultural sector and the broader economy, the orientation and framework of the current macroeconomic policy need adjustment to sustain fiscal balance and prevent exchange rate overvaluation. In the policymaking, two key considerations are: first, quantifying how macroeconomic policies interact with the agricultural sector, structural factors, and broader equilibrium effects, as these can significantly alter policy outcomes. Second, recognising the distributive impacts of policies, especially on agriculture and rural markets, and integrating agriculture's role in income distribution and political economy consequences into policymaking.

Keywords: Agriculture; Applied Economics; Welfare; Fiscal Policy; Exchange Rate Policy; South Africa

References