IMF slams South African government’s optimistic GDP forecasts 

National Treasury has consistently overestimated South Africa’s economic growth in its budget forecasts over the past decade, inhibiting the government’s ability to adequately tackle its rising debt-to-GDP ratio. 

This criticism comes from the International Monetary Fund’s (IMF’s) Fiscal Transparency Evaluation Report for South Africa.

The IMF praised the Treasury for its comprehensive, relevant, timely, and reliable overview of the government’s financial position and performance. 

Coupled with the South African Reserve Bank (SARB), there is a broad coverage of financial statistics and the government’s debt levels. 

The report also found that the Auditor General has remained independent and ensures that the government and its entities produce financial statements in accordance with international standards. 

However, the IMF also analysed various risks to the country’s financial health and focused on the country’s rising debt and stagnant economy. 

South Africa’s government debt is over R5 trillion, while the consolidated public sector debt, including that of state-run companies, is around R8 trillion. 

Government debt is 73.9% of GDP, which raises concerns about a potential debt spiral as the burden becomes increasingly unsustainable and unaffordable.

One of the ways out of this problem is to grow the economy at a faster rate than the debt pile growing, thereby reducing it as a share of GDP. 

This is more favourable than the alternatives of cutting government spending, which reduces its ability to provide basic services or raising taxes to increase government revenue to pay off the debt. 

The government’s deteriorating finances are shown in the graphs below, revealing repeated budget deficits and a growing debt burden.

The government has tried to implement this strategy of growing the economy while keeping a lid on spending to reduce its debt burden.

However, it has consistently overestimated the amount of economic growth South Africa will experience, and its optimistic forecasts have failed to materialise. 

The IMF said this results in a lack of accountability to clear fiscal objectives, making it difficult to track the progress the government is making in reducing government debt as a share of GDP. 

“While South Africa has a strong record of delivering credible aggregate expenditure against medium-term plans, these plans have been predicated on returning to higher levels of economic growth, and in turn, stronger revenues,” the IMF said. 

“As the government’s Medium-Term Expenditure Frameworks have relied on optimistic growth projections which have consistently failed to materialise, plans to narrow the fiscal deficit have been derailed.”

“This has led to debt rising almost every year since 2009, in contradiction to the long-standing fiscal objective to stabilise debt,” the report read. 

The repeatedly over-optimistic growth projections are shown in the graph below, alongside the average forecasting error as a percentage of GDP. 

The IMF said GDP forecasts have been persistently and substantially optimistic over the past decade. 

Forecasts of GDP growth for the budget year are, on average, 0.5 percentage points higher than the real result for the past ten years.

This error rate has risen to 1.6 and 2.3 percentage points in the second and third years of the government’s current expenditure framework. 

While this may reflect a lengthy and unexpected economic slowdown since 2010, the persistent optimism has had significant implications for the Medium-Term Budget Framework. 

The government’s fiscal plans have relied on optimistic growth projections, which have consistently failed to materialise, resulting in plans to narrow the fiscal deficit being derailed. 

Expenditure plans have been predicated on returning to higher levels of economic growth and, in turn, stronger revenues. 

The IMF suggested that undertaking ex-post analysis of forecast errors and comparisons with independent forecasts would help strengthen the credibility and performance of economic forecasts. 


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