Johannesburg - The International Monetary Fund (IMF) has released its latest Article IV Statement and warned South Africa that its economic position is now extremely precarious and suggested much deeper cuts in government expenditure than those currently proposed by SA’s treasury.
The statement, which followed the regular IMF staff visit to SA, also touched on now-familiar issues of huge problems with state-owned enterprises and low economic growth.
“A more decisive approach to reform is urgently needed. Impediments to growth have to be removed, vulnerabilities addressed, and policy buffers rebuilt. Expediting structural reform implementation is the only way to sustainably boost private investment and inclusion,” said the IMF.
The IMF says the country's medium-term budget policy statement (MTBPS), candidly confirmed the fragile fiscal and debt situation amid weak tax revenue, rigid spending, and persistent operational and financial difficulties at Eskom and other SOEs.
The problems outlined by the IMF include persistently weak economic growth, deteriorating fiscal and government debt and major difficulties in the operations of state-owned enterprises (SOEs).
Economist Lindie Paro told The Southern Times that the IMF's message to the government was a clear indication of the level of frustration in the country's fiscus position.
"The IMF is simply telling the powers above to change course. It is evident enough that reliance on government spending to boost growth has not delivered the anticipated results as the supply-side nature of the growth constraints has not been addressed.
“Moreover, government financing of SOE's current spending is not growth-enhancing and has increased debt service costs that are now the fastest-growing expenditure item, crowding out other forms of public spending. Thus, the economy has been left with high and rising debt, low growth, and limited fiscal space to respond to shocks,” she said.
However, controversially the IMF set out a numerical target when it called for fiscal consolidation that’s net less spending to ordinary people – of about 3% of GDP over the next four years.
By contrast, treasury has proposed a five percentage point reduction in government expenditure over the next three years which the IMF says is too little.
That would amount to about a one percentage point reduction of GDP, only a third of what the IMF is looking for.
In contrast to the IMF’s proposals, the SA treasury is proposing savings that would effectively hold SA’s fiscal deficit more or less at the 4.5% level it has been in the recent past.
The question is where would those savings come from? But according to the IMF they would be mainly expenditure-based with support by tax administration improvements, and that would only be possible if growth-enhancing structural reforms were adopted in addition.
Some analysts, however, say if SA is to take this approach, it would arrest further debt build-up, reduce the interest bill and provide space for higher infrastructure investment, as the IMF calls for the government to be specific about its debt target to supplement the nominal expenditure ceiling.
Although this all seems very depressing the IMF does point out some silver linings to the dark clouds. The SA government does have a window of opportunity to advance policy and reform initiatives. This is mainly because very low-interest rates around the world have meant SA has not struggled to service its debt.
But the risk is if this situation breeds a kind of complacency. Low global interest rates could change quickly, and then SA might be in a different position.