State capture behind government debt problem – economist

Economist Dr Azar Jammine said state capture during the Zuma administration has seen government debt skyrocket, and little has been done to address this impact.

Jammine told Newzroom Afrika that, since 2009, government debt in proportion to the country’s economy has increased enormously. 

In 2008/9, the country’s debt-to-GDP was around 21% to 22%. It is now around 70% of GDP. The government projects public debt to rise to 78% of GDP by 2025/26. 

However, many private economists think this figure could be much higher at around 85% or more. “In other words, more than quadruple proportionately what it was in 2009,” he said.

“The negative effects of this are, of course, that if you become more and more indebted, then the interest payments on that debt keep burgeoning and crowding out the government’s ability to spend on other, more essential areas of society and needs for social delivery.”

The government’s debt servicing costs have more than doubled since 2008, crowding out other expenditures and raising the prospect of a debt spiral. 

The share of debt-service costs to the main budget revenue increased markedly from 14.3% in 2019 to 20.7% in 2023, well above its long-term average of 13.0%. 

The government projects that its debt-service costs will settle at 22.1% of main budget revenue in 2026 and 5.4% of GDP before easing. 

This has resulted in the South African government paying a greater premium on its debt to encourage investors to lend it money – further increasing its debt servicing costs. 

Jammine said this problem arose when South Africa underwent a leadership change in 2009 when the government embarked upon a radical economic transformation policy. 

“This policy encapsulated an attempt to basically capture the resources of the country to benefit some of the people who took power, the levers of power at that time,” he explained. 

“That saw a massive increase in corruption and the diversion of resources away from proper service delivery towards the pockets of a relatively small handful of individuals.”

While he says there have been attempts to scale that process back, “we are yet to see too many benefits from that”.

In particular, he said the Finance Ministry is trying to curtail the increases in social spending on welfare and redirect activity towards more productive areas of the economy. 

The ministry is also trying to rein in spending on the compensation of public servants, either by reallocating public servants to areas where they are needed or cutting back on the headcount of public service.

Trying to resist significant salary increases is a third big area of focus for the ministry, along with the massive increase in the amount of aid that governments had to give to troubled state-owned enterprises. 

“These enterprises have been one of the primary vehicles through which this policy of state capture and corruption has actually been affected,” he said. 

“We’ve seen a lot of tenders being awarded to people who have siphoned off those funds, and we’ve seen very little outcome and output from those tenders being implemented.”

Jammine explained that if the government keeps spending more due to corrupt activities in part or due to inefficiencies, it has to borrow more unless it raises taxes commensurately. 

“However, it’s been reluctant to raise taxes commensurately because they’re already very high. So, it’s been compelled to borrow more and more,” he said.