IMF warns South Africa is not doing enough

South Africa’s plans to reduce the fiscal deficit and stabilise public debt put the country on the right track, but this is not enough to sustainably reduce the country’s significant debt pile.

This is according to the International Monetary Fund (IMF) in its 2024 Article IV consultation with South Africa, which took place in the last week of November.

“The mission welcomes the GNU’s commitment to reducing fiscal deficits and stabilising public debt, as indicated in its October 2024 Medium-Term Budget Policy Statement (MTBPS),” the organisation said. 

“The MTBPS aims to arrest the increase in public debt by containing public spending growth while safeguarding growth-enhancing public infrastructure investment.” 

The MTBPS in October revealed that tax collection for 2024/25 is expected to be R22.3 billion lower than what the Treasury estimated in February this year.

Over the next two years, the main budget revenue estimate has also been lowered by R31.2 billion.

In addition, the National Treasury anticipates that government debt will reach more than R6.05 trillion, or 75.5% of GDP, in 2025/26.

“In the absence of faster growth and in the face of external risks, tax revenue will remain under pressure, forcing us to make difficult decisions on where to spend,” Finance Minister Enoch Godongwana said.

“Lower revenue also means that we cannot, within the envelope, accommodate all of the demands on the fiscus.”

The minister said that, over the medium term, consolidated expenditure is expected to increase from R2.4 trillion in 2024/25 to R2.8 trillion in 2027/28. 

Under the IMF baseline, South Africa’s public spending is projected to decline more gradually, given ongoing support to state-owned enterprises (SOEs) and insufficiently well-specified consolidation measures in the MTBPS. 

“As a result, absent additional reforms, public debt is expected to continue to rise over the medium run,” the IMF warned.

It said “more-ambitious-than-envisaged” fiscal consolidation is necessary to place South Africa’s public debt on a sustained downward path. 

The IMF recommended a consolidation effort of 1% of GDP per year over the next three years.

This would allow the government to achieve a primary surplus sufficient to lower debt to around 60% to 70% in the next 5 to 10 years. 

The IMF recommended that the following can be done to achieve this:

• Cutting inefficient public spending on subsidies
• Curtailing transfers to SOEs
• Improving procurement processes by judiciously implementing the new procurement bill
• Rationalising the public-sector wage bill by limiting wage increases to below-inflation adjustments and incentivising early retirement 

The organisation said financing additional public investment and other social or health initiatives in a budget-neutral way would likely require additional revenue measures.

This could take the form of continuing efforts to strengthen tax administration, broadening tax bases, and raising other taxes to finance health insurance.

“A fiscal rule anchored in a prudent debt ceiling can help underpin the consolidation and support policy credibility,” the IMF said. 

“Lower debt is essential to increase capacity to support the economy when shocks occur and reduce debt-service costs to make space for other critical spending.” 

“Cross-country experience suggests that well-designed fiscal rules in support of clear debt-reduction objectives can help bolster credibility and reduce financing costs.” 

Therefore, the IMF recommended that the government implement an enhanced fiscal framework, including a long-term prudent debt anchor of around 60% of GDP, a credible fiscal rule, and an independent body to assess compliance. 

“In the absence of a fiscal rule, the recommended consolidation would need to be more frontloaded to safeguard credibility,” it said. 

“The resilience of the public finances can be further strengthened by bolstering public-financial and expenditure frameworks, enhancing fiscal reporting, and improving the effectiveness of public-investment management and governance.”