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South Africa May Give In to IMF by Introducing Debt Ceiling

South Africa May Give In to IMF By Introducing Debt Ceiling

South Africa may introduce a debt limit in its budget, bowing to a suggestion proposed by the International Monetary Fund almost two years ago.

The government is “open to introducing a debt ceiling in addition to the nominal spending ceiling currently in place,” Finance Minister Tito Mboweni and Reserve Bank Governor Lesetja Kganyago said in a letter to the lender, in which it asked for an emergency loan to fight the coronavirus pandemic. The IMF has agreed to provide South Africa with $4.3 billion.

An increase in virus-related spending, including a 500 billion-rand ($30.2 billion) stimulus package, is set to add pressure to an already strained fiscus. Government debt is projected to peak at close to 90% of gross domestic product by 2023-24, if the government takes active steps to manage its finances. Failing that, the debt trajectory will keep rising, topping 140% by the end of the decade.

South Africa May Give In to IMF by Introducing Debt Ceiling

Mboweni has warned that the country could slump into a sovereign-debt crisis unless it reins in borrowing. Once the impact of the pandemic subsides, authorities will take action to “reverse the upward trajectory of the public debt-to GDP ratio,” Mboweni and Kganyago said in the letter of intent. Steps will be introduced in the fiscal year through March 2022 and beyond, they said.

The nation’s debt sustainability “critically hinges on sustained implementation of policies to address underlying fiscal and structural weaknesses,” IMF staff said in a report prepared for its executive board to consider when reviewing the loan request.

The Washington-based lender said in November 2018, after a staff visit to South Africa, the country should consider introducing a debt anchor in its budget. Public debt was reaching uncomfortable levels and a ceiling on that would signal the government’s commitment to reduce its obligations and help tighten fiscal policy, it said at the time.

©2020 Bloomberg L.P.