SA has told the IMF that it will seek consensus within the government to introduce a "debt ceiling", which will set a self-imposed limitation on how much the government can borrow in the future.
SA’s public finances are in the grip of runaway debt with one projection stating that government debt will reach 100% of GDP in the next three years if nothing is done.
The objective of a "debt ceiling" — also known as a fiscal rule — would be to reverse this trajectory and contain debt at 87.4% of GDP by 2023/2024.
On Monday, the IMF board approved its first loan to SA yet, a $4.3bn (R70bn) facility with an interest rate of 1.1%, repayable in instalments over the next 13 to 20 quarters.
The loan does not come with conditions but countries make voluntary commitments in the form of a letter of intent to support the loan and provide comfort that it will be repaid.
The commitment from SA authorities to investigate a fiscal rule comes as a surprise as the Treasury has previously turned down the suggestion. Many in the ANC and its allies would be likely to oppose such a suggestion, which would imply lower government spending on public services.
In its letter of intent to the IMF, which is signed by finance minister Tito Mboweni and Reserve Bank governor Lesetja Kganyago, SA says that to facilitate getting debt under control "we are open to a debt ceiling in addition to the nominal spending ceiling already in place".
The Treasury put an expenditure ceiling in place seven years ago to contain government spending. While noninterest spending has for the most part been contained within the ceiling, debt servicing costs have grown more strongly than any other budget item, crowding out investment spending.
The DA, which has campaigned for a fiscal rule to no avail, already has a Fiscal Responsibility Bill tabled in parliament. "We look forward to the minister’s support for our bill," DA shadow minister for finance Geordin Hill-Lewis said on Tuesday.
Among the commitments made in the letter are that the government will take further steps towards "fiscal consolidation" when it tables the medium-term budget policy statement (MTBPS) in October and the 2021 budget, to ensure that public debt peaks at 87.4% in 2023/2024 and declines thereafter.
This commitment was made in the supplementary budget in June. It was, however, met with widespread scepticism from analysts and ratings agencies, which have said it would be difficult to achieve.
The letter of intent also states that the government will introduce zero-based budgeting — a process in which all expenditure must be justified afresh rather than building on previous budgets — into national and provincial budgets.
The government will also take measures to reduce the size of the public sector wage bill and rationalise transfers to state-owned enterprises, it says.
"Support to state-owned enterprises will be conditional on meeting key performance indicators to improve their operational and financial health so as to reduce its need over time. This process has been initiated with Eskom and will be extended to all state-owned companies," says the letter.
The measures outlined in the letter echo those made in the budget. They also closely mirror the commitments the government has made to structural economic reforms, but have been slow to implement.
"The reform package seeks to place expenditure levels on a more sustainable footing while improving its composition.
"On the revenue side, we intend to help revenue recover by strengthening enforcement to enhance tax compliance, alongside other revenue measures,"it reads.
In its staff report, the IMF mirrors the commitments SA has made in its recommendations to policymakers. However, it does warn of substantial downside risks to achieving the debt consolidation and fiscal targets in the letter.
These include: a bigger Covid-19 epidemic than expected; failure by the government to reach consensus on the fiscal adjustments and reforms; higher domestic borrowing costs than anticipated; and the materialisation of the contingent risk of state-owned enterprises.
The IMF also makes clear what its next landmark will be, urging the government to make further consolidation commitments in the MTBPS. "In particular, specific and well-defined fiscal consolidation and reform commitments in the MTBPS will be a critical first step to establishing the credibility of reform efforts, followed by steadfast implementation," says the report.
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