The International Monetary Fund (IMF) urged SA to pursue an “ambitious” fiscal consolidation to cut debt, as it warned that the economy remains vulnerable with key metrics having deteriorated despite a bigger-than-forecast rebound in 2021.
Coming a day after President Cyril Ramaphosa announced a one-year extension of the special Covid-19 social relief grant for the unemployed at an estimated cost of R50bn, the Washington-based lender, which completed a so-called Article IV consultation with SA in December, said in a statement on Friday that the country also needed to ensure protection for “the most vulnerable”.
The IMF’s executive board, which received the staff report on Monday, said SA should use the budget, due to be unveiled by finance minister Enoch Godongwana on February 23, as an “opportunity to define concrete measures, including containing public-sector compensation, rationalising transfers to state-owned enterprises (SOEs), streamlining tax expenditures, and better targeting education subsidies.”
The lender said it expected SA’s economy to have rebounded by 4.6% in 2021 — after a slide of 6.4% in 2020 that was the worst in a century — but that that was unlikely to be maintained. It expects the pace of growth to slow dramatically to 1.9% in 2022, and then just 1.4% in the “medium term”, which is more pessimistic than the Treasury and Reserve Bank predictions. It called for an acceleration of reforms to boost the economy and policy certainty.
“The rapid pace of recovery, despite the earlier surge in infections amid low vaccination rates and international travel bans brought by the Omicron variant, could be a source of optimism,” the IMF said. However, the recovery was deemed “fragile” as it was accompanied by worsening unemployment, bank lending and private-sector investment, while poverty and inequality “did not show signs of improvement”.
The “macroeconomic fundamentals have weakened” and the economy is more vulnerable.
“The fiscal position deteriorated following the introduction of Covid-19-related measures and the transfers to SOEs, whose operational and financial performance deteriorated further,” the IMF said. While the situation was helped by a surge in the value of commodity exports, debt as a percentage of GDP is estimated to have reached almost 70% in 2021.
The budget deficit will continue to narrow from almost 10% in 2020 as revenue beats estimates and the government withdraws some of the special spending measures instituted to help the economy and society cope with the effects of Covid-19 and lockdowns. But the country's interest bill will keep growing over time and that, together with “demands from SOEs and public servants”, will keep it high above 7%.
In its response, the Treasury, which is under heavy political pressure to find a way to finance a permanent expansion of the country’s welfare grant system, said it was committed to ensuring that the country’s fiscal position and debt were sustainable.
“The government recognises the need to address deep-rooted socioeconomic challenges, including unemployment and poverty while stabilising government debt,” it said in a statement. “To this end, they remain committed to a growth-friendly fiscal consolidation, while prioritising structural reforms critical to foster strong, sustainable, inclusive and green growth that will improve the lives of South Africans.”
The Article IV consultation, held virtually in 2022, is held annually between the IMF and member countries to assess their economic performance and policies.
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