South Africa: Treasury undertakes to clean up public finances despite IMF concerns
The National Treasury underlined its commitment to ensuring fiscal and debt sustainability through growth-friendly fiscal consolidation to put public debt on a declining path.
Reacting to the International Monetary Fund’s outcome of its Article IV consultation with South Africa, held November 17-December 7, 2021 and released last week, the Treasury said fiscal policy should balance support economic recovery with the reconstruction of public finances.
IMF staff held virtual meetings with the South African government, the South African Reserve Bank, Eskom, businesses, unions and universities.
In its findings, the IMF acknowledged that South Africa had faced “formidable challenges” created by the COVID-19 pandemic and that more recently the Omicron variant had caused additional health and economic distress in a context relatively low vaccination rates.
“The IMF outlook for South Africa points to some recovery in growth in the near term and poor performance in the medium term. It indicates that economic output is capped by structural constraints, low confidence and l ‘less favorable exchange,’ Treasury said.
The IMF estimates South Africa’s economic growth at 4.6% in 2021 and projects growth of 1.9% in 2022, with an average of 1.4% over the medium term. Inflation was expected to converge towards the midpoint of the 3-6% target range.
The IMF highlights key downside risks such as slow progress in implementing structural reforms, deteriorating health and travel conditions from potential waves of COVID-19, tighter global liquidity conditions and Eskom’s operational and debt issues which raise macro-critical challenges.
On the positive side, the IMF noted that key economic forces acted as mitigating factors, including a flexible exchange rate regime, a strong inflation targeting framework backed by strong central bank credibility, markets deep national financiers and healthy banks.
However, the Treasury said the Fund recommends the SARB to continue to unwind the accommodative monetary policy stance.
“The IMF considers efforts to mitigate the impact of the pandemic, including accelerating immunization, to be a key priority. In addition, the IMF recommends urgently advancing long-standing reforms to revive the growth.
“The IMF adds that the country needs to address governance and corruption vulnerabilities to foster private investment to improve the productivity and competitiveness of the economy,” the Treasury said in a statement.
In addition, the IMF argues that ambitious, growth-friendly fiscal consolidation over the next three years is needed to reverse the risky upward trend in the debt ratio and reduce high financing costs, while protecting well-targeted social spending and investment.
The IMF noted the urgent need to reduce transfers to public entities.
In its response, the Treasury acknowledged the difficult times South Africa found itself in, saying the concerns were aligned with the government’s response program to boost economic growth.
The response program is guided by South Africa’s Economic Reconstruction and Recovery Plan (ERRP), which aims to transform the economy through reindustrialisation, accelerating economic reforms, improving competitiveness, reducing the high cost of doing business and shrinking the public sector balance sheet.
“The ERRP also aims to unlock private sector investment and green growth in line with the National Vision 2030 Development Plan,” the Treasury said.
The Treasury said it was more optimistic than the IMF on medium-term growth and fiscal prospects, expecting medium-term growth to be driven by a gradual recovery in confidence and private investment. However, he agrees that the economy is subject to significant downside risks.
The government remains committed to accelerating structural reforms. These, the Treasury said, will be undertaken as part of Operation Vulindlela, which aims to foster employment-led growth, placing great emphasis on addressing long-term structural constraints and reducing scars from the effects of the pandemic.
The ministry said progress had been made in advancing structural reforms to support economic growth, including increasing the license threshold for integrated production, corporatizing the National Ports Authority of Transnet, restructuring of Eskom and the development of the electronic visa system.
He also noted progress in revising the legal regime governing skilled migration, addressing issues blocking the release of high-demand spectrum, accelerating infrastructure investment and securing grants to support the just transition of South Africa towards a low-carbon, climate-resilient future.
“Given the importance of energy security, work is underway to restructure Eskom with the establishment of the transmission company as a subsidiary, which was registered by the Companies and Intellectual Property Commission as of December 31 2021.
“Eskom has also applied to South Africa’s national energy regulator for the transmission license for the transmission company. The legal separation of the generation and distribution subsidiaries is expected to be completed by December 31, 2022,” said he declared.
The Treasury said the government recognizes the need to address deep-rooted socio-economic challenges, including unemployment and poverty, while stabilizing public debt.
“To that end, they remain committed to growth-friendly fiscal consolidation, while prioritizing key structural reforms to foster strong, sustainable, inclusive and green growth that will improve the lives of South Africans. monetary policy remains data dependent and the authorities stand ready to take the necessary steps to preserve price stability and financial stability.”