Business Maverick

Business Maverick

Get your act together now, IMF tells SA

Finance minister Tito Mboweni (Photo: Brenton Geach/Gallo Images)
By Tim Cohen
26 Nov 2019 0

There is no missing the new urgency. The International Monetary Fund (IMF) has released its latest Article IV statement, which adds to a chorus of warnings that SA’s economic position is now extremely precarious and suggesting much deeper cuts in government expenditure than those currently proposed by the Treasury.

The IMF Article IV statement, which follows the regular IMF staff visit to SA, touches on now-familiar issues of huge problems with state-owned enterprises and low economic growth. But the tone is different: urgent, imperative and dire.

Some SA economists are for a “Keyensian solution” of increased government spending to solve SA’s economic problems and they argue passionately against an “austerity government”. The IMF is having none of it.

In its Article IV statement following its regular, typically annual, consultations with government, the organisation says:

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.”

There is no missing the new urgency, particularly following the government’s medium-term budget policy statement (MTBPS), which the organisation says 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 the IMF outline are nothing new: persistently weak economic growth, deteriorating fiscal and government debt and major difficulties in the operations of state-owned enterprises (SOEs).

But, says Stanlib chief economist Kevin Lings, the language has noticeably got stronger, and the focus on the levels of government debt is much more intense. Effectively they are saying, “You have to change course,” he says.

The IMF puts it this way: “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.

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.”

Talk about cold showers.

Controversially, the IMF sets out a numerical target. It calls 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. Too little, says the IMF. 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, Lings says 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 IMF wants more.

And where would those savings come from? The IMF says they would be “mainly expenditure-based” with support by tax administration improvements, but that would only be possible if “growth-enhancing structural reforms” were adopted in addition.

If SA did take this approach, it would arrest further debt build-up, reduce the interest bill and provide space for higher infrastructure investment. And the IMF calls for the government to be specific about its debt target to supplement the nominal expenditure ceiling.

This all seems very depressing, but 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 this situation breeds a kind of complacency. Low global interest rates could change quickly, and then SA might be in a different position.

Consequently, time is of the essence, the IMF says.

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 concludes. BM