A big warning to South Africa from the IMF

The International Monetary Fund (IMF) has concluded its recent visit to South Africa, projecting that the country’s economic growth will remain sluggish in 2020.

In a statement published on Monday (25 November), the group said that South Africa faces low growth and low job creation prospects and that the increasing labour force is projected to exacerbate unemployment pressures, poverty, and inequality.

It added that the economy currently faces three immediate challenges:

• Persistently weak economic growth – Subdued growth is largely attributable to stagnant private investment and exports and declining productivity, mainly due to the slow pace of reform to address weaknesses in the business climate, including regulatory constraints, labour market rigidities, and inefficient infrastructure. Unreliable electricity supply has exacerbated the growth constraints. Small and medium-sized enterprises (SMEs) are especially disadvantaged in this environment.

• Deteriorating fiscal and government debt –  Weak revenue and increased current expenditure have worsened the budget composition, and raised deficits and borrowing requirements, undermining the sustainability of public finances. This fiscal trajectory has also lifted financing costs across the economy.

• Major difficulties in the operations of state-owned enterprises (SOEs) – Inefficiencies in SOEs operating in network industries such as electricity and transport, translate into costly inputs for businesses, and repeatedly require financial support from the fiscus.

“In sum, the 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,” it said.

“Moreover, government financing of SOE 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.”

Reinvigorating economic performance

The IMF said that 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,” it said.

Despite these issues, the IMF said that authorities have a window of opportunity to advance policy and reform initiatives.

“The FY20/21 budget to be presented in February should articulate measures to address fiscal and SOE challenges and stabilise government debt.

“Moreover, the Integrated Resource Plan and Eskom Roadmap should move to the implementation stage through coordinated action among all stakeholders to deliver an efficient energy sector that would ensure reliable electricity generation, remove pricing uncertainty, and provide private investment opportunities,” it said.

Time is of the essence

The IMF said that the vulnerable outlook emphasises the urgency of rebuilding policy buffers and implementing reforms to put the economy on a sustainable and inclusive growth path.

“Failure to implement the needed adjustment in government and SOE spending and efficiency will worsen debt dynamics, erode financial stability, and further raise the country risk premium.

“With delays in structural reforms, growth and social conditions will worsen.

“Implementing the reforms now will benefit from the benign financing conditions in international markets and prevent disruption from an abrupt adjustment in future,” it said.

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