South Africa Needs Big Fiscal Effort to Stabilize Debt, IMF Says

(Bloomberg) -- South Africa requires a growth friendly yet sizable fiscal effort to stabilize and lower its debt burden, reduce country-risk premiums and improve investor confidence, according to the International Monetary Fund.

The Covid-19 pandemic exacerbated South Africa’s existing vulnerabilities which means “tackling long-standing fiscal and structural challenges is more critical than ever to set the stage for a robust recovery and pursue strong, durable, and inclusive growth,” the Washington-based lender said Wednesday in a statement posted on its website after a virtual staff visit.

South Africa’s economy probably contracted the most in nine decades last year as a lockdown to curb the spread of the virus weighed on output. Even before the virus restrictions, the country was stuck in the longest downward business cycle since World War II, with power shortages and bailouts for loss-making state-owned companies contributing to a rapid deterioration in public finances.

The IMF on Tuesday trimmed its forecast for South Africa’s 2021 economic growth to 2.8% from 3% and sees expansion at only 1.4% next year. The country took out a $4.3 billion loan from the lender in 2020, its first yet from the organization at a sovereign level.

Read more: South African Economy Heads for Decade of Growth Below 3%: Chart

The National Treasury said in October it plans to reduce spending by about 300 billion rand ($19.7 billion) over the next three fiscal years as it targets a primary budget surplus in 2026, when debt is expected to peak at 95.3% of gross domestic product. However Finance Minister Tito Mboweni’s efforts to reduce a government salary bill that’s surged by 51% since 2008 have been met with a backlash from politically influential labor groups.

Performance Targets

“Reining in large fiscal deficits and debt will require containing the wage bill and avoiding ill-targeted subsidies and transfers to inefficient state-owned enterprises,” the IMF said. While phasing out virus outlays when the pandemic subsides, the government should also make transfers to state companies conditional on meeting “ambitious but realistic performance targets,” it said.

There should also be special focus on improving the efficiency of state-owned companies and the quality of their services, taking a harder line on their finances and undertaking well-defined strategic equity partnerships, particularly in the energy sector, the lender said.

The National Treasury said in a statement the country remains committed to reduce its budget deficit, stabilize debt over the next five years and to return the public finances to a sustainable position.

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