The IMF has urged SA to adopt a more ambitious fiscal consolidation plan and consider a debt ceiling to stabilise its economy and ensure sustainable growth.
In its 2024 Article IV consultation — a regular economic and policy assessment by the IMF to its member countries — the lender of last resort said there was a need for bolder action to address the country’s rising public debt and fiscal deficits.
“Under the IMF baseline, public spending is projected to decline more gradually given ongoing support to state-owned enterprises (SOEs) and insufficiently well-specified consolidation measures in the MTBPS (medium-term budget policy statement).
“As a result, absent additional reforms, public debt is expected to continue to rise over the medium run,” the IMF said in the report after meetings with economic authorities and other counterparts in the public and private sectors held from November 11-25.
“A more ambitious-than-envisaged fiscal consolidation is necessary to place public debt on a sustained downward path. The mission recommends a consolidation effort of 1% of GDP per year over the next three years to achieve a primary surplus sufficient to lower debt to around 60%-70% in the next five to 10 years.”
The IMF’s call for a more aggressive fiscal strategy comes as finance minister Enoch Godongwana grapples with spending pressures that threaten to knock his efforts to stabilise SA finances off course.
In his medium-term budget policy framework last month, Godongwana forecast a 5% budget deficit, or R22.3bn shortfall, for the 2025 fiscal year compared with a year earlier but still projected the deficit to fall gradually to as low as 3.2% in the 2028 fiscal year.
The lower tax revenue, due mainly to a falling fuel levy and import VAT collections, has also raised the debt-to-GDP ratio — a crucial metric for credit ratings agencies — to 75%, up from 74% in 2024, with a peak of 76% in 2026.
Fiscal rule
The IMF also advised SA to set a debt ceiling and fiscal rule, a move, if taken on board, that would limit how much debt the government can take on, saying without such guidelines the government would need to make bigger and quicker spending cuts to maintain credibility.
“The mission recommends an enhanced fiscal framework including a long-term prudent debt anchor (of about 60% of GDP, in line with that of peers), a credible fiscal rule (building on the existing expenditure ceiling), and an independent body to assess compliance,” it said.
The Treasury’s response to the IMF consultation acknowledges the need for fiscal consolidation but fell short of the ambitious targets set by the IMF. The Treasury projects growth of 1.1% this year and 1.7% next year, slightly higher than the IMF’s projections, and aims to achieve primary surpluses — a scenario where income exceeds expenses — in 2025 and over the medium term.
“Despite fiscal risks, the balanced fiscal strategy first outlined in the 2023 MTBPS is registering progress. Higher economic growth, if sustained, will improve the fiscal position,” the Treasury said. “Though there are significant external and domestic risks to the fiscal strategy, government is determined to maintain a prudent, disciplined approach to ensure sustainable public finances.”
The Treasury also held up Operation Vulindlela as a success story putting the economy on a robust growth path after the joint initiative between President Cyril Ramaphosa’s office and the Treasury pushed through reforms in various sectors before setting its sights on improving local government.
Other recommendations from the IMF include cutting inefficient public spending, curtailing transfers to SOEs, improving procurement processes and cutting the public sector wage bill.
The fund commended the country’s monetary policy, saying the inflation targeting framework has served well but SA could benefit more if it shifted to a lower target point at an appropriate time to lower inflation expectations.
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