South Africa’s debt headache

Finance Minister Enoch Godongwana said South Africa is spending more on debt servicing costs than on infrastructure, which is hampering economic growth. 

This is while South Africa is one of only a few countries in the world where infrastructure collapse poses such a significant threat to business.

The South African Reserve Bank previously agreed with Godongwana’s assessment, saying, “The sustained deterioration in critical infrastructure poses direct operational risks that could disrupt the functioning of the financial system.” 

Godongwana told Newzroom Afrika that fixing infrastructure is one of the pillars of the government’s four-pronged strategy to prepare South Africa for economic recovery. 

These strategies also include stabilising the macroeconomic sphere, boosting economic growth through implementing structural reforms, and ensuring the government has the capacity to achieve economic recovery. 

The reforms include making e-visas easier to obtain to attract tourism and foreign investment, especially from the Chinese market. 

“We are positioning the government to do all those things to ensure that we can achieve the desired level of growth as a nation,” he said.

Godongwana explained that the government is especially focusing on infrastructure to achieve economic growth and stimulate demand for labour. 

He pointed out that jobs are a function of an economy, “and a loss of jobs is a function of an economy that is not growing”.

“For the past ten years, we’ve had an environment where growth has been stagnant.”

However, he said that debt service costs are a major problem because they crowd out all other investments critical for economic growth. 

“We want to make sure that we can manage the debt situation so that we should be able to realise some more revenues and more resources to fund infrastructure,” he said.

The minister explained that this is a delicate balance that the government is trying to achieve. 

The real growth in debt servicing costs is outpacing economic growth at 3.3% as opposed to the projected 1.6% economic growth.

Over the medium-term budget framework, debt servicing costs will consume 22 cents of every rand of tax collected. 

This means more money is spent on debt-servicing than on basic education, social development, economic development, peace and security, and health.

“We want to reach the peak of the debt-to-GDP ratio by this financial year and begin to trend downwards over the next few years,” said Godongwana. 

This will make more money available to spend on other developmental objectives.

Efficient Group chief economist Dawie Roodt warned that if the economy doesn’t begin to perform better, the consolidation of state debt relative to GDP will take even longer. 

Fiscal consolidation aims to reduce budget deficits, typically through spending cuts or tax increases. 

In 30 years of democracy, South Africa has only had 13 years in which it achieved successful fiscal consolidations, Unisa professor of finance Daniel Makina said.

Currently, South Africa is facing a debt-to-GDP ratio of about 75%. However, including the debt held by local authorities and SOEs, South Africa’s debt-to-GDP ratio is significantly higher at 90%.

“We want to reach the peak of the debt-to-GDP ratio by this financial year and begin to trend downwards over the next few years,” Godongwana said. 

This will make more money available to spend on other developmental objectives.

However, the National Treasury forecasts that gross debt stock will rise by about R1 trillion by the 2026/27 financial year.

“Worryingly, by the 2027/28 financial year, the government will be spending R1.3 billion a day to service its escalating debt burden,” according to Momentum Investments.

Standard Bank South Africa CEO Lungisa Fuzile said the deterioration of vital infrastructure through corruption, theft, and vandalism has resulted in massive losses across the economy and a sharp reduction in tax revenue.