IMF Says S. Africa Has No Fiscal Space, Must Push Reforms

(Bloomberg) --

South Africa has no fiscal space left and must implement strong budget consolidation and state-owned company reforms to ensure its debt sustainability, the International Monetary Fund said.

The October medium-term budget policy statement showed gross government debt would surge to 80.9% of gross domestic product in the 2028 fiscal year unless urgent action is taken. That trajectory is almost 20 percentage points higher than forecast in the February budget and showed no sign of stabilizing. The fiscal shortfall will widen to the most in 11 years in 2020-21.

High deficits have not materially boosted economic growth as intended; instead they drastically lifted the debt-to-GDP ratio “and left South Africa with no fiscal space,” the Washington-based lender said in an emailed statement after a staff visit to South Africa.

While the state plans to reduce spending by a total of 50 billion rand ($3.4 billion) by 2022, it should protect pro-poor social programs and make education and health delivery more efficient, the IMF said. It also backed Finance Minister Tito Mboweni’s proposal to reduce the public-sector wage bill, which comprises 35.4% of national spending and said the government should reduce the contingent liabilities from state-owned companies.

Eskom’s Challenges

Power utility Eskom Holdings SOC Ltd., which is seen as the biggest threat to the South African economy and fiscus, is the biggest recipient of government guarantees. The company, with 450 billion rand ($31 billion) of debt, resumed controlled blackouts on Thursday.

The IMF said tackling Eskom’s challenges would not only reduce fiscal deficits and debt, but would also boost business confidence, encourage private investment, including in green energy, improve macroeconomic policy credibility, and convey a genuine ambition by the authorities to address the legacy of corruption that allegedly happened under the previous president.

The lender also repeated a 2018 call for South Africa to introduce a debt anchor in its budget, which could complement the expenditure ceiling, to guide debt stabilization.

South Africa’s National Treasury said in a statement it’s committed to “implementing prudent fiscal policy to achieve a low primary balance, excluding Eskom provisions, by 2022-23 in order to ensure a stabilization of debt by 2025-26.”

The IMF cut its 2020 GDP growth forecast for South Africa to 0.8% from 1.1% last week.

©2020 Bloomberg L.P.

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