IMF plan to save South Africa’s finances

South Africa’s financial health has deteriorated significantly over the past decade due to a rising debt burden and elevated debt-servicing costs. 

This has primarily been driven by a sharp uptick in government spending since 2008 that has not translated into improved economic growth. 

In its report following the Article IV Consultation with South Africa’s financial authorities, the International Monetary Fund (IMF) outlined the scale of the problem and how it can be tackled. 

The report struck an upbeat tone regarding South Africa’s economy, saying that things are far better than a year ago. 

The seeming end of load-shedding and the Government of National Unity (GNU) formation should translate into a much-improved economic performance in the coming years. 

It expects South Africa to nearly double its annual economic growth to 1.7% by 2030 and said this could rise to above 2% if policy reforms are implemented more efficiently. 

However, the IMF remains concerned about South Africa’s financial health, with the government’s debt burden crossing 75% of GDP in the current financial year. 

Its baseline scenario projects that gross government debt as a share of GDP will rise from 75.7% in the current financial year to 85.6% in 2030. 

This is due to a combination of slow economic growth and increased spending pressures to maintain the state’s social safety net and implement ambitious policy goals such as National Health Insurance and a Basic Income Grant. 

South Africa’s public finances have deteriorated markedly over the past 15 years since the Global Financial Crisis. 

Since then, fiscal deficits have averaged over 4% of GDP, driven by rising wage costs, social transfers, and support to SOEs.

This has led to an increase in public debt as a share of GDP from 25% in 2008 to 75% at the end of the 2023 financial year. The pandemic added further strain on the already stretched public finances. 

While it is widely agreed upon that South Africa has to reduce its budget deficit and tackle its growing debt burden, there are many ways in which this can be done. 

The IMF warned that some measures, such as raising taxes or cutting social grants, could harm economic growth and make it more difficult to service the debt in future. 

Thus, it explained that the best way to reduce the deficit without impacting economic growth is to focus on specific areas of government spending. 

As higher spending with limited efficiency has been at the root of worsening public finances over the last decade, the IMF said there is scope for rolling it back with limited impact on growth. 

If appropriately designed and communicated, cutting inefficient spending and reprioritising expenditure can be socially more acceptable, enhance the credibility of the consolidation, and support confidence.  

The area with the lowest hanging fruit is public sector wages, which have increased by 2.2% as a share of GDP since 2007. 

This rise has been largely due to increased hiring and compensation consistently growing faster than inflation. Crucially, this has not been accompanied by productivity gains. 

The IMF also said there is a large public-sector wage premium relative to the private sector. This means that workers in the public sector earn more than their private counterparts but are less productive. 

Limiting wage increases to below-inflation cost-of-living adjustments and reducing allowances and pay progression could lead to significant savings. 

These measures, coupled with the introduction of an evidence-based approach to pay-setting and early-retirement schemes, could yield up to 2% of GDP in savings.

Another area where billions of rands could be saved is the reform of state-owned enterprises, which have cost the government around 5% of GDP since 2008. 

Reducing SOE operating costs, including rationalising wages and staffing, tackling waste, divesting non-core assets, and streamlining operations, could generate savings of up to 1.5% of GDP.

The IMF also singled out the fragmented procurement system that has resulted in uncompetitive and unfair practices, resulting in the state overpaying for services. 

Reform of this system, which is underway, could yield between 1% and 3% of GDP in savings alongside reduced corruption and fraud. 

While it praised South Africa’s social safety net, the IMF said that subsidies could be better targeted towards vulnerable households. This could yield up to 0.5% of GDP in savings. 

One example in this area is the growing allocation of resources to tertiary education, which largely benefits better-off students and crowds out spending on basic education that benefits poorer households.