The International Monetary Fund (IMF) has cautioned South Africa against its large fiscal deficit and its massive debt burden.
In a statement released this week, the IMF said improvements to the country’s fiscus will require containing the country’s excessive wage bill as well as avoiding “ill-targeted subsidies and transfers” to inefficient State-Owned Enterprises (SOEs).
The IMF held a virtual meeting with the country’s authorities this month.
The monetary fund’s division chief for the southern Africa region, Ana Lucía Coronel, said in order to reignite growth and job creation, South Africa needs to advance reforms that address Eskom and other SOEs’ difficulties, strengthen competition and governance, and increase labour market flexibility.
“Fiscal consolidation needs to be accompanied by a decisive reform package that removes constraints to growth and job creation,” said Coronel.
The Covid-19 pandemic in South Africa came when the fiscus was already stretched to its limits.
In June last year, Finance Minister Tito Mboweni said the country is in its worst economic performance since the Great Depression with Treasury projecting a GDP contraction of 7.2%.
In September, Statistics South Africa reported the country’s GDP contracted by a record 16.4% (or by 51% on a quarter-on-quarter seasonally adjusted and annualised rate) in the second quarter of 2020, extending SA’s technical recession to four consecutive quarters of negative economic growth.
The country’s unemployment rate jumped to 30.8% in the third quarter of 2020 from 23.3% in the second quarter.
The expanded definition of unemployment suggests an even worse picture. Statistics South Africa placed the expanded definition of unemployment at 43.1% from 42% the previous quarter, a 1.1-percentage point increase.
Coronel said: “Output contracted sharply, and employment losses were significant, despite the authorities’ timely actions to support the most vulnerable groups and affected businesses.
“Public finances also suffered severely, with the budget deficit and public debt increasing significantly amid the recession and pandemic-related expenses.
“The resurgence of infections and the protracted vaccination procurement and distribution processes, as elsewhere, will likely weigh on the economic recovery this year, notwithstanding improved external condition,” she said.
Coronel added that the pandemic has further exposed vulnerabilities of the South African economy.
She said this is why tackling long-standing fiscal and structural challenges is more critical than ever to set the stage for a robust recovery and pursue strong, durable, and inclusive growth.
“As per our previous advice, creating conditions to boost private investment, redefining the role of the public sector in network industries to facilitate competition, and tightening fiscal policy to rein in rapidly increasing debt are imperative,” she said.
In response to the IMF, the National Treasury said South Africa remains committed to reduce its fiscal deficit and to stabilise debt over the next five years and return the public finances to a sustainable position. The Treasury also said the country was committed to implementing structural reforms.
“We have confirmed that government’s medium-term policy priorities are economic recovery, fiscal consolidation and that reductions to the wage bill will assist in narrowing the budget,” said the treasury in a statement.
National Treasury added that in December 2020, the Labour Court dismissed the application by public sector unions “seeking to force government to implement salary increases for this year as part of the 2018 wage agreement”.
A decision the treasury found “encouraging in the context of a constrained fiscal framework”.
The National Treasury reiterated its commitment to the president’s Economic Reconstruction and Recovery Plan in order to accelerate growth, secure fiscal sustainability and create jobs.
The statement adds that the Budget Speech in February 2021 will also provide further details on government’s plan in supporting inclusive economic growth.