One of the most senior IMF officials has warned that the interest bill on SA’s growing public debt burden could balloon to more than twice the size of its health budget in the next five years, but said SA’s institutional strengths reduce its risk of debt distress.
The IMF projects that the cost of government debt could rise from its current 19% to 27% by 2028, the fund’s first deputy MD, Gita Gopinath, said in Cape Town on Friday. However, the fund assesses SA’s risk of debt distress as “moderate”, because of SA’s deep financial markets and long-maturity debt, as well as its strong monetary policy.
The IMF sounded the alarm on SA’s rapidly rising public debt in its annual report on SA earlier in 2023, calling for the government to do more to stabilise the debt than the budget pencilled in, in particular through restraints on spending.
Economists such as Wits University’s Michael Sachs have argued that the fund’s proposals would mean an unprecedented level of cuts, which would be politically implausible.
Gopinath said the rising debt trajectory reflects weak economic growth in the medium term as well as lower government revenues and considerable spending pressure.
“We have a two-pronged approach to getting the 3% deficit reduction. The first is through structural reforms to raise growth. And then the second is through fiscal consolidation, through greater spending efficiency. We are recommending a decline in three years and it’s a combination of measures you could do through the wage bill and also, for example, transfers to state-owned enterprises [SOEs] and other kinds of subsidies — those provided to tertiary education, for instance,” she told Business Day in an interview.
She noted that estimates are that fiscal multipliers have been negative or zero in recent years, “which means it’s a situation where fiscal consolidation can actually help to raise output”.
Gopinath, former IMF chief economist who was appointed the fund’s second-in-command at the beginning of 2022, spoke after delivering the keynote address at the Reserve Bank macroeconomic conference in Cape Town, which brought together international and local policymakers and economists.
Her comments chimed with those of Treasury budget office head Edgar Sishi, who said at the conference that more government spending did not raise SA’s growth rate in recent years. He warned that the medium-term budget in October would not be a happy one for government spenders. Asked about the 2024 general election, Gopinath acknowledged it is hard for any country to take tough fiscal decisions in the run-up to an election, but there is a political incentive to effect reforms.
Electricity and logistics
“I think there is some low-hanging fruit, which is if you can get electricity supply up and get rid of load-shedding that will be positive for growth and will help with the fiscal deficit. Logistics is another area where action can be taken,” she said. Reducing crime and corruption may take longer, but “it is politically a winning strategy if you can reduce corruption in the country”.
The IMF estimates the government spent a cumulative 9% of GDP to support ailing SOEs in the past 15 years. Gopinath said the government has taken steps to liberalise the electricity market and allow private sector participation but it is important to liberalise further and reform Eskom to reduce its financial and operational risk. The logistics and energy sectors need to be liberalised in the same way.
The IMF expects SA to grow only 0.3% in 2023, mainly because of energy and logistics constraints. It sees the economy growing at just 1.4% in the medium term.
After the conference she said advanced economies may need to learn from emerging-market economies, which are used to dealing with the kind of shocks now becoming more common.
Climate change and geo-economic fragmentation will affect advanced economies. They will have to work with volatility and supply shocks that emerging markets have had to deal with for a while. “Advanced economies may need to learn a few things here,” she said. All the evidence is that emerging markets with their macroeconomic house in order can stay resilient despite shocks.
Emerging markets face a daunting external landscape, she said in her keynote address. Global financial conditions are tougher, with global interest rates expected to remain high for quite some time and reasons to think rates may never return to the “low for long” era.
Geo-economic fragmentation is rising, leaving the world more vulnerable to shocks and countries with fewer trading partners. Climate change is inflicting growing costs. Emerging markets have shown resilience but they will need to rebuild fiscal buffers to help pay for development priorities and strengthen resilience to shocks.
Correction: September 4 2023
This article has been corrected to make the following changes: the interest bill will be more than twice the health budget; and the government has spent 9% of GDP on Eskom in the past 15 years.
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