A warning to South Africa from the IMF

A team from the International Monetary Fund (IMF) held virtual meetings with the South African government this week to discuss recent economic developments and the outlook of the economy.

While the meeting primarily focused on the Covid-19 pandemic and its impact, the IMF also drew attention to the same issues that have dogged the country for years, including the problems at state-owned enterprises and a lack of economic growth.

“South Africa has been hit very hard by the Covid-19 pandemic. In 2020, output contracted sharply, and employment losses were significant, despite the authorities’ timely actions to support the most vulnerable groups and affected businesses,” the IMF said.

It noted that public finances also suffered severely, with the budget deficit and public debt increasing significantly amid the recession and pandemic-related expenses.

“The resurgence of infections and the protracted vaccination procurement and distribution processes, as elsewhere, will likely weigh on the economic recovery this year, notwithstanding improved external conditions.”

Same old problems

The IMF said that the government is rightly prioritising the response to the pandemic.

At the same time, and considering the challenging fiscal situation, reducing the pressure on the budget from inefficient outlays is crucial, it said.

“The pandemic has further exposed vulnerabilities of the South African economy. Thus, 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.

“As per our previous advice, creating conditions to boost private investment, redefining the role of the public sector in network industries to facilitate competition, and tightening fiscal policy to rein in rapidly increasing debt are imperative.”

The IMF said that a growth-friendly but sizable fiscal consolidation effort over the coming years will be required to stabilise debt and put it on a declining path, thus reducing country risk premia and improving investor confidence.

“While phasing out Covid-19 outlays once the pandemic subsides, we encourage the government to make transfers to SOEs conditional on meeting ambitious but realistic performance targets; rationalise compensation; dismantle ill-targeted subsidies; and improve enforcement of tax compliance.

“This would reduce sovereign borrowing needs while preserving fiscal space for well-targeted outlays for infrastructure, health, education, and social protection.”

Reforms

The IMF said that fiscal consolidation needs to be accompanied by a decisive reform package that removes constraints to growth and job creation.

“Attracting investment and promoting competition to modernize network industries is a key component of this package. Facilitating private-sector participation in all sectors will reduce the vulnerabilities and inefficiencies from relying on a few large players.

“This will require sustained efforts to promote a business-friendly and competitive environment; accelerate governance reforms; and inject firm-level flexibility into collective bargaining while simplifying employment protection legislation.”

Eskom

The IMF said that special attention should be given to improving the efficiency of state-owned enterprises (SOEs) and the quality of their services by hardening their budget constraints and undertaking well-defined strategic equity partnerships, particularly in the energy sector.

“Recurring power outages in the midst of a deep recession underscore the need for bold action to redefine Eskom’s business model so that it becomes self-sustaining.

“In the absence of fundamental reforms, Eskom’s problems will continue to weigh on public finances and constrain economic growth prospects,” it said.


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A warning to South Africa from the IMF