South Africa is likely to benefit more from implementing structural reforms to boost economic growth, revive business confidence and stabilise debt than fiscal consolidation, the International Monetary Fund said.
“The payoff from growth is much more than the payoff from fiscal consolidation,” said Montfort Mlachila, the Washington-based lender’s senior resident representative in South Africa.
“Fiscal consolidation is needed, but it is definitely not sufficient and too much fiscal consolidation undermines growth.”
The government should take steps to boost productivity and growth in network industries especially in electricity, telecommunications and ports and railways, Mchalia said in a webinar organized by asset manager Ninety One.
It should also improve the predictability of the regulatory framework in sectors such as mining, the general business climate and ease of doing business indicators, he said.
South Africa’s economy is facing its biggest economic contraction in nine decades because of a lockdown to curb the spread of Covid-19.
Increased government spending, including a R500 billion ($28.8 billion) stimulus package, is set to weigh on an already strained the budget, with state debt projected to peak at close to 90% of gross domestic product by 2023-24.
Reforms proposed in the National Development Plan, adopted by the cabinet in 2012, and a 2019 National Treasury policy paper that could lift economic growth by two to three percentage points and create more than 1 million jobs over a decade, have remained dormant.
Even before the lockdown, Africa’s most-industrialized economy was stuck in the longest downward cycle since World War II. It was in a recession for three quarters and business confidence was languishing near record lows.
The lender last month approved a $4.3-billion facility for South Africa to assist in fighting the virus.
The money came days after President Cyril Ramaphosa said the government would crackdown on corruption linked to its virus response and ordered a probe into the misuse of public funds.
While the emergency loan comes without the structural adjustment conditions typical of other IMF programs, the government committed to transparency and good governance in a letter of intent, in which it asked for support.
The lender expects the government to provide it with periodic information on the roll-out of its interventions, a quarterly report on virus spending and an ex-post audit by the country’s auditor-general, he said.