IMF staff to govt: Cut irrelevant, underperforming SOEs - and no more backing without reforms

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SA suffered one of the largest output contractions among emerging market economies in 2020, states the preliminary report.
SA suffered one of the largest output contractions among emerging market economies in 2020, states the preliminary report.
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  • IMF staff have released their preliminary findings after consulting with the SA government.
  • They also consulted with the SA Reserve Bank, Eskom, business, organised labour and academia.
  • Among other critiques, the report suggests SOEs that are not commercially viable must be divested from by government or liquidated. 

The South African government should take a full inventory of state-owned enterprises (SOEs) and divest or liquidate those that are no longer relevant – or which are failing to meet their objectives.

This is according to preliminary findings by staff of the International Monetary Fund (IMF) who consulted virtually with government, the SA Reserve Bank, Eskom, business, organised labour and academia in November.

The Washington, DC-based lender also said any support to SOEs should be made on condition that concrete and measurable actions are rolled out to improve their performance and viability.

According to IMF staff, there has been little progress in the SA government's implementation of structural reforms at SOEs, leaving continued weaknesses.

"SOEs carrying out predominantly government business should have their functions merged into a related government department or an agency," the preliminary report suggests.

The IMF staff consultations form part of the IMF's surveillance function. The report stresses, however, that the preliminary views of the IMF staff do not necessarily represent the views of the IMF's executive board.  

The consultations aim to conduct economic and financial assessments of government policies and give policy recommendations. Discussions focused on policy measures and reforms needed to create a lasting, job-creating, inclusive, and green recovery for SA's economy.

A final report will be submitted to the IMF board in February next year.

In preliminary findings, IMF staff recommend that "structural rigidities" be tackled immediately to increase the SA economy’s productivity and competitiveness and reduce poverty and inequality.

Growth-friendly fiscal consolidation must focus on reversing the expansion of expenditure while broadening the tax base, the report adds.

"The Covid-19 pandemic hit South Africa at a time when its economic vulnerabilities had already been aggravated by a prolonged period of depressed investment, subdued growth, and high and rising public debt. In this context, the country suffered one of the largest output contractions among emerging market economies in 2020," it states.

"Social conditions, already strained by stubbornly high poverty, unemployment and inequality, worsened further - the education system suffered, and job losses disproportionally affected the youth, women, and the poor. A significant loss of jobs has been recorded, taking the unemployment rate to record high levels."

The report also flags that what little economic recovery there has been, failed to make a dent in unemployment or improve business confidence.

This was exacerbated by the unrest in KwaZulu-Natal and parts of Gauteng in July.

Additionally, there has not been much private sector investment.

"Without decisive action to address obstacles to investment and reduce the government's need to borrow, growth and employment will not pick up.

"Declining private investment and productivity, which have been a hinderance to economic growth, need to be urgently reversed so that the country can produce goods and services of higher quality at lower costs that can compete in global markets," states the preliminary report.

"Structural rigidities are depressing private investment and hindering inclusive growth and job creation. These rigidities need to be tackled immediately to increase the economy's productivity and competitiveness and reduce poverty and inequality."

Recommendations include increasing labour market flexibility to boost job opportunities and addressing weak governance and corruption.

The report further recommends SA should step up its response to climate change, especially decarbonising the energy sector, while ensuring energy security, as well as speeding up vaccination rollout.  

In response to the IMF staff's preliminary findings, National Treasury said in a statement on Wednesday that, in general, it believes the concerns highlighted in the report are aligned with government's response programme to stimulate economic growth.

"In the 2021 Medium-term Budget Policy Statement (MTBPS), the government underscored its commitment to fiscal sustainability, enabling long-term growth through narrowing the budget deficit and stabilising debt," states Treasury. 

It expects GDP growth to recover to 5.1% in 2021 and average 1.7% over the next three years.

The preliminary report, however, projects a lacklustre medium-term outlook for the country, with growth averaging 1.4% per annum. 

According to Treasury, positive developments include tax collections exceeding expectations in the short term.

Treasury also noted that government has implemented structural reforms including raising the licensing threshold for embedded generation to 100 MW, in a bid to drive private sector investment in electricity generation.

It also cited the "corporatising" of the Transnet National Ports Authority as an independent subsidiary with its own board.

It said work is also advancing on reforms including the restructuring of Eskom; streamlining water-use licence applications and preparing to establish a a National Water Resources Infrastructure Agency; developing an e-visa system to be rolled out in 2022; resolving issues blocking the release of high demand spectrum and making affordable data available; reviewing laws governing skilled migration; accelerating infrastructure investment projects; and transitioning to a low-carbon economy.

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