How SA’s dire economic situation can be fixed

Finance Minister Tito Mboweni
In June, Finance Minister Tito Mboweni said the country’s economic performance was the worst it had been since the Great Depression, with Treasury projecting a GDP contraction of 7.2%. South Africa’s 2020 recession followed almost a decade of modest growth. Picture: waldo swiegers / getty images


According to the OECD’s latest economic survey, South Africa’s dire economic situation – including unemployment and public debt – can only be corrected by implementing urgent and widespread structural reform

Fiscal sustainability and structural reforms are key to stabilising and growing South Africa’s fragile economy, which has been worsened by the Covid-19 pandemic.

These are the sentiments of the Organisation for Economic Cooperation and Development (OECD), which on Friday released its latest economic survey for South Africa.

The survey looked at the impact of the Covid-19 pandemic on the country’s economy and also discussed how South Africa could strengthen its response to the crisis, surmount fiscal challenges and achieve stronger and more inclusive growth.

Speaking to journalists on Friday, Alvaro Pereira, the OECD’s economic department’s director of country studies, said that, even though government had reacted quickly to the coronavirus outbreak by imposing a nationwide lockdown and mobilising R500 billion (10% of GDP) for new spending, reprioritisation, tax relief and loan guarantees, the OECD believed the economy could fall even further into the abyss unless it implemented certain reforms.

According to the OECD, GDP could shrink by 7.5% this year before picking up progressively with growth of 2.5% next year.

However, if a second wave of Covid-19 cases hit the country and its main trading partners curtailed exports, this would deepen the recession to 8.2% this year, limiting the recovery next year to a GDP growth rate of 0.6%.

Pereira said fiscal policy also faced severe challenges. The crisis followed a sharp deterioration in fiscal accounts over the past three years.

The government deficit was projected to reach 15% of GDP this year and public debt, which had been increasing in the past decade, was projected to exceed 80% of GDP by this year.

Remuneration of public civil servants
Remuneration of public civil servants

The Covid-19 crisis struck when the fiscus was already stretched to its limits.

In June, Finance Minister Tito Mboweni said the country’s economic performance was the worst it had been since the Great Depression, with Treasury projecting a GDP contraction of 7.2%. South Africa’s 2020 recession followed almost a decade of modest growth.

Persistent electricity blackouts, rising government debt and policy uncertainty continued to deter investment and underscore low growth.

According to OECD economist Falilou Fall, the survey forecast that public debt would exceed 100% of GDP in 2022, raising sustainability risks in a context of low growth and high government borrowing costs.

He advised that, for South Africa to cope with the impact of Covid-19 and support the economy, it needed to adopt reforms to restore debt sustainability and spur growth in the medium term.

National Treasury director-general Dondo Mogajane, who was part of the OECD survey panel, said South Africa’s future was dependent on how public resources were spent: “If you can’t afford it, don’t do it.”

Mogajane said National Treasury welcomed the recommendations made by the OECD. He said the survey would help identify solutions needed for the country.

Fall said one of the major ways to ensure public debt did not spiral out of control was to have a proper plan for the public sector wage bill and state-owned enterprise (SOE) financing.

Inflation slowed down
Inflation slowed down

“The general government wage bill, at 12% of GDP, is one of the highest among OECD and partner countries. Public sector wage increases are the main drivers of government spending, rather than increases in employment,” said Fall.

Pereira said public sector wage negotiations had systematically granted above-inflation increases. He recommended that, in addition to freezing public sector recruitment, government should seek new measures to limit its wage bill growth.

“In the 2020 budget, government announced its intention to cut the wage bill by R160 billion over three years, mainly through a combination of modifications to cost-of-living adjustments [wage increases], pay progression and other benefits.

“Government could consider indexing public sector wages below inflation for three years. An inflation minus two percentage points increase in the public service wages could generate about R30 billion in savings over three years,” said Pereira.

The OECD report also stated that regulatory restrictions were still relatively high.

“To boost growth, competition is key,” said Pereira.

“South Africa’s regulatory framework needs to be relaxed regarding barriers to domestic and foreign entry, complex rules for licences and permits, and protection of existing businesses from competition, for instance, in legal services and network industries.

“South Africa would benefit from greater integration in global value chains.”

He added that there should be a reduction in red tape and regulatory burdens for entrepreneurs and small enterprises, as these fostered employment.

The OECD applauded the SA Reserve Bank’s cutting of interest rates. The report said the Reserve Bank mobilised monetary policy instruments in a way that helped restore fiscal policy.

GDP forecast
GDP forecast

The Reserve Bank had reduced the repurchasing rate from 6.25% to 3.5% between March and last month, allowing inflation to recede and holding core inflation stable, according to the report.

City Press spoke to economist Duma Gqubule about the recommendations made by the OECD to privatise SOEs and reduce the public wage bill.

Gqubule said the recommendations were a copy-and-paste of each other’s policy.

“They’re advocating untested policies that won’t take us out of this crisis. Structural reforms will have a negative impact on the economy in the short term. When you privatise these SOEs, they lead to job losses in the short term. We can’t entertain anything that will lead to job losses,” he said.

The unemployment numbers captured not only the devastating impact of the lockdown, but the crisis before the crisis, said Gqubule.

There are now 10.8 million unemployed people in South Africa, an increase of about 400 000 during the first quarter.

The number of unemployed had increased by 4.9 million people since December 2008. The unemployment rate for black African men was 44% and 48% for black African women, while the unemployment rate in the Eastern Cape was 49%.

“After the economic devastation of Covid-19, we will have more than 50%,” said Gqubule.

He said the OECD and Treasury were happy with the Reserve Bank’s reduction of interested rates, but there was still significant scope for it to enter into unconventional policy implementation.

“There are many other policy tools the bank can use to stimulate the economy. It can finance government, SOEs, development finance institutions and even municipalities, as has happened in the US and China.

“If you understand the policy tools, most of the stimulus funds don’t have to be spent by government. There’s no reason the Reserve Bank can’t cut rates to zero. By definition, there can’t be an inflationary spiral during a depression,” said Gqubule.


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