The IMF has suggested that SA should formalise 4.5% as its inflation target, and has urged it to embark on stronger fiscal consolidation as part of a push to stabilise and grow the economy in a volatile global environment.
In its annual article IV report on SA the IMF warns that SA is at risk of a recession this year if it goes backwards on economic reforms, or if global economic growth and financial stability prove worse than expected. In a downside scenario the economy could contract 1.8% and unemployment rise to 37%, warns the fund, which now expects growth of just 0.1% for 2023.
But though the report says SA’s economic and social challenges are building up, it argues the near-term priority is to safeguard macrofinancial stability, urging monetary and fiscal policymakers to refine and strengthen efforts to achieve this.
The IMF’s call for changes to the inflation target provides support for Reserve Bank governor Lesetja Kganyago, who since 2017 has made it clear the Bank targets the 4.5% midpoint of the inflation target range, rather than the 6% upper bound. He has also called for the target to be reduced over time to 3%, most recently at an April lecture in Washington, DC, where he said a lower target would help to dampen exchange rate volatility and sovereign risk, as well as lower debt service costs.
The IMF’s economists say in the report that the pace and size of monetary tightening have been appropriate and SA’s inflation targeting framework is credible. But they point out inflation expectations still persistently hover at the top of the target range, and they recommend that SA change to a point target rather than a range, to anchor expectations better.
They also agree with the Bank’s plan to lower the target “at an opportune time” to enhance competitiveness and economic growth. This could have benefits and would be consistent with other emerging markets, the fund’s economists say. But they “stress the need to carefully choose the timing of such a move” saying the Bank could lose credibility if this went ahead while inflation was still outside the target range.
Their comments on SA’s public finances are even more forthright. They warn that “stronger fiscal consolidation efforts are urgently needed to put public debt on a declining path”. The fund projects that on current trends, the government is not going to deliver on its commitment to stabilise the public debt. It warns that the government has little space to respond to adverse shocks or social spending needs, and is exposed to increasing borrowing costs, which also put SA’s financial system at risk.
The IMF now projects the fiscal deficit will widen to 6.3% of GDP in the current year — not the 4% the Treasury projected in February — and that the fiscal position will deteriorate in the medium term on weaker economic growth and higher spending pressures.
It sees the debt to GDP ratio climbing to 85% by 2028/29. And it urges the government to reduce spending in order to bring debt back towards the 60%-70% range.
Specifically, the report calls for the government to implement additional consolidation measures of 3 percentage points of GDP. This should be evenly spread over three years and focused on cutting spending, though in a way that protects productive investment and “well-targeted social spending”.
It calls for the government to put in place an explicit debt ceiling. It urges it to use the new procurement legislation to reduce inefficiency and enhance growth and development outcomes. And it warns that reforms to state-owned enterprises (SOEs) need to advance “with urgency”.
Stronger private participation is needed in network industries dominated by large SOEs such as Eskom and Transnet “to achieve energy security, finance the green transition, create jobs and reduce poverty and inequality”, the report says.
“With investors focusing closely on macroeconomic fundamentals during episodes of heightened global uncertainty, failure to reduce debt vulnerabilities could expose SA to sharp capital outflows, which could result in even more aggressive tightening of fiscal policy with attendant adverse effects on growth, employment and social cohesion,” says the report.
If the government makes the social relief of distress grant permanent, as has been suggested, the IMF says funding should come from improved public spending efficiency and spending cuts rather than tax hikes.
The Washington-based fund publishes an article IV report on every one of its member countries each year, drawing on extensive research by its own economists as well as on meetings with public and private sector leaders in the country concerned. The Treasury said on Tuesday the IMF’s report followed meetings with the government, the Bank, SOEs, parliament, business, labour and academia.
Responding to the IMF report, the Treasury said it appreciated the productive engagement with the fund. It was aware of the downside risks to economic growth and the government was working on further measures in this regard, it said.
SA’s economy faced significant risks. “We are navigating this difficult environment with policies that support faster growth and addressing fiscal risks through ensuring a stable macroeconomic framework, implementing growth enhancing reforms and strengthening [state capacity for] quality public services, invest in infrastructure and fight crime and corruption,” the Treasury said.
The Eskom debt relief programme and unbundling provided a clear path for the utility’s financial future. The government had stepped up efforts to increase private participation in network industries and was considering recommendations to rationalise public entities, the Treasury said.
The government continued to prioritise the implementation of structural reforms to lift the potential growth rate of the economy, it said.
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