President Cyril Ramaphosa’s long awaited economic reconstruction and recovery plan will face its first test in the upcoming medium-term budget policy statement (MTBPS) where the government will outline how it will weigh up consolidating its battered finances with efforts to support growth and recovery.
Though Ramaphosa said the plan will balance the need to restore fiscal sustainability with economic growth, economists and analysts said that proof of implementation and a clearer picture of what it means for the country’s fiscal position were needed to cement its credibility.
Ramaphosa announced the plan — which hinges on an expanded public employment programme, a R1-trillion infrastructure effort mostly leveraged from the private sector, a pledge to accelerate energy generation, and a raft of structural economic reforms — in a joint sitting in parliament on Thursday.
According to modelling by the Treasury, the plan’s implementation can raise growth to about 3% on average over the next 10 years.
The plan committed to delivering on long promised reforms — such as policy reform in the mining sector and the overhaul of rail, road and port networks to reduce the cost of business — but did include some surprises, namely the decision to extend the Covid special grant for a further three months, which will have immediate ramifications for an already stretched fiscus.
It will now be left to finance minister Tito Mboweni to flesh out how the government will deliver on Ramaphosa’s promise to balance restoring fiscal sustainability with economic growth
“The MTBPS now has to square the circle in terms of being able to put those priorities in place while ensuring that we stick to a fiscal consolidation path,” said BNP Paribas economist Jeff Schultz.
The “surprise” decision to extend the Covid-19 relief grant, along with any possible decision to extend the Covid-19 related top ups to existing grants, would add R20bn to R25bn to government spending in the 2020/21 fiscal year, he said, roughly 0.4% of GDP, according to Schultz, and is likely to have to come from spending reprioritisation.
“The MTBPS is going to be very important in terms of where these spending reprioritisations are likely to come from and [implementing them] in as fiscally neutral a fashion as possible to avoid further slippage in debt metrics,” he said.
But Ramaphosa said that in reducing its spending, the government would direct funds towards poverty alleviation, infrastructure investment and support for economic development; as well as reduce state-owned enterprises’ (SOEs) reliance on the fiscus.
Mboweni is set to deliver the MTBPS later this month after requesting a postponement to October 28, in part to grapple with the implications of the recovery plan for the budget process.
In the supplementary budget in June Mboweni had already warned that SA risked a sovereign debt crisis if it was unable to right its finances, with government debt levels expected to hit almost 82% of GDP by the end of the fiscal year.
The plan is likely to face some scepticism, said Momentum Investments economist Sanisha Packirisamy, adding that “the crux of this is going to be whether we see implementation rather than just another economic plan”.
To ensure delivery on the plan Ramaphosa said a number of oversight bodies will be established starting with a National Economic Recovery Council made up of relevant members of the cabinet that “will provide political oversight and enable rapid decision-making”.
In addition to fast-track economic reforms, a joint initiative between the presidency and Treasury has been established — under the Operation Vulindlela banner.
But Packirisamy said the government will need to transparently report on its progress and put accountability measures in place should state departments fail to deliver on the targets set out in the plan.
Packirisamy argued that the growth target set in the plan may be difficult to achieve particularly as the timelines for certain elements of the plan appeared “tight to achieve”.
For instance, as part of the package Ramaphosa said the Risk Mitigation Power Procurement Programme — intended to secure emergency power for a constrained grid — would contribute 2,000MW of emergency supply within 12 months.
Though the infrastructure drive — which aims to unlock R1-trillion in funding from the private sector — was to be lauded, without remedying SA’s dire business confidence levels by delivering on long overdue structural reforms, the private sector was unlikely “to meaningfully participate in the infrastructure projects”, said Packirisamy.
As a means to finance the “huge infrastructure drive” the government will structure “innovative financing mechanisms” and make these available to the market, according to the presidency.
It will also amend regulation 28 under the Pension Funds Act to “enable better access to long-term finance for development” and allow pension funds to invest in “profitable, well-prepared and bankable projects while protecting the integrity of pension funds themselves”.
CLARIFICATION: October 19 2020
This story has been updated to clarify that the three month extension of the special Covid-19 grant, as well as any possible decision to extend the other Covid-19 related top up grants, will add roughly R20bn to R25bn government spending in the 2020/21 financial year. The president, however, only announced the extension of the special Covid-19 grant in his address, but made no clear or overt mention of extensions to any other grant top ups. We regret any confusion this may have caused.
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