IMF warns of South African debt spiral

The International Monetary Fund’s (IMF) Gita Gopinath has warned that the interest owed on South Africa’s government debt could increase exponentially, placing the country in a debt spiral. 

Gopinath spoke at the South African Reserve Bank’s biennial conference last week. She was the IMF’s chief economist until 2022, after which she was appointed the fund’s second-in-command.

The IMF projects that the interest bill on the government’s debt could skyrocket to triple the size of its health budget within five years. 

This would result in interest payments on debt consuming 27% of the country’s entire budget, up from 19%. 

South Africa’s current debt-to-gross domestic product (GDP) ratio is 73%. In nominal terms, the country owes around R5 trillion.

The situation is set to become much worse as the country’s fiscal deficit this year will be around 6% of GDP.

Fiscal deficit is the term used to describe a shortfall in the government’s income compared to its spending.

In South Africa, the state is spending far more than it gets in, which means it has a growing fiscal deficit and needs to borrow money to make ends meet.

The National Treasury revealed that South Africa recorded its largest budget deficit since at least 2004, sending the rand crashing and lowering demand for government bonds.

Data released by the National Treasury on Wednesday showed that the budget moved to a deficit of R143.8 billion for July.

This is the largest deficit since 2004 and wider than the R115.5 billion forecast by economists. There was a surplus of R36.7 billion in June.

The IMF called on the government to do more to stabilise the country’s debt by cutting expenditures. However, this is politically unpalatable and unlikely to happen. 

Gopinath said the rising debt trajectory reflects weak economic growth in the medium term, lower government revenues, and considerable spending pressure.

She said the government must take a two-pronged approach to reducing its deficit – by implementing structural reforms to drive growth and cutting government spending. 

“I think there is some low-hanging fruit, which is if you can get electricity supply up and get rid of load-shedding, that will be positive for growth and help with the fiscal deficit. Logistics is another area where action can be taken,” she said. 

Reducing crime and corruption may take longer, but “it is politically a winning strategy if you can reduce corruption in the country”.

The IMF expects South Africa to grow only 0.3% in 2023, mainly because of energy and logistics constraints. It sees the economy growing at just 1.4% in the medium term.