In short, this is the same old South African story, or at least one that has taken hold over the past decade or so – rising fiscal and debt levels with little to show for it. The interest paid on the debt is a burden, SOE bailouts typically kick the can down the road, and the public sector wage bill is hardly reflected in the efficient delivery of public services. Squandering money that you need to borrow is hardly a recipe for prosperity.

“Staff projects the fiscal deficit to continue to narrow from pandemic-related levels but remain significantly larger than before the pandemic in the medium term,” the Washington-based lender said.

Its baseline scenario sees the budget deficit narrowing to 7.5% of gross domestic product (GDP) in 2022, from 8.4% in 2021. But the International Monetary Fund (IMF) expects the deficit will remain elevated at over 7% of GDP until 2025. Overall public debt is seen climbing from 74.5% of GDP in 2022 to 84.3% in 2025 “without stabilising”, the Fund said.

In the November Medium-Term Budget Policy Statement (MTBPS), Finance Minister Enoch Godongwana saw debt peaking at 78% of GDP by 2025/26 – a sharp divergence from the IMF’s view.

“The authorities are somewhat more optimistic than staff on the medium-term growth and fiscal outlook but agree that the economy is subject to significant risks,” the IMF diplomatically said.

The IMF went on to say that the “main risks to the baseline scenario relate to the pace of adjustment and reform and to evolving global liquidity conditions.” On the domestic front, it sees the slow pace of economic reforms and new Covid-19 outbreaks amid a sluggish vaccination uptake as serious risks.

“Bailouts of SOEs, wage bill overruns and pressures to increase grants could also lead to higher budget deficits, raising the country’s risk premium,” the fund noted. “The deepening bank-sovereign nexus could amplify a shock to the financial system and the real economy. On the upside, faster reform implementation would lift confidence, accelerate private investment and boost growth.”

On the external stage, the fund sees the pandemic remaining a threat to South Africa’s status as an investment and tourism destination. And a weak economic performance in key trading partners would also constrain South Africa’s already fragile economic recovery. The IMF estimates the economy expanded 4.6% in 2021 after contracting 6.4% in 2020, with growth slowing to 1.9% in 2022 and then to a truly pathetic 1.4% over the following three years.

Pointedly, the fund sees social unrest as a material risk to the economy.

“In July 2021, during the third Covid-19 infection wave, severe and unprecedented civil unrest erupted. Close to 350 lives were lost, and economic damages have reportedly reached almost 1% of GDP. The unrest was prompted by political tensions but also likely reflected the population’s discontent with the worsening economic and social situation. The underemployment created by the pandemic disproportionately affected disadvantaged groups, including the youth. Recent indicators point to a pandemic-related deterioration of poverty and inequality from already high levels,” it said. “More incidents of social unrest would further damage confidence.”

There is a vicious cycle at work here as the economy’s failure to grow and create jobs – against the backdrop of public money gushing down the drain – exacerbates unemployment, poverty and inequality, another terrible trifecta. That in turn creates more of the misery that social unrest thrives on. And another social explosion on the scale of the July 2021 riots would shatter what confidence is left in the economy and constrain growth even further, depriving the Treasury of revenue and raising South Africa’s risk premium, which would see its tarnished credit rating descend deeper into junk status, raising the costs of borrowing further.

In response, National Treasury in a statement repeated its usual mantra about reforms.

“Government recognises the need to address deep-rooted socioeconomic challenges, including unemployment and poverty while stabilising government debt. To this end, they remain committed to a growth-friendly fiscal consolidation, while prioritizing structural reforms critical to foster strong, sustainable, inclusive, and green growth that will improve the lives of South Africans,” it said.

South Africans have heard all of this before. But it comes in the wake of President Cyril Ramaphosa’s 2022 Sona address that has raised cautious optimism that crucial reforms such as cutting red tape and policies to secure stable power supplies may finally be making some headway. Read here.

And not a moment too soon as the clock – or time bomb – is ticking. DM/BM

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