IMF issues ominous warning about public sector

Time is slipping away for SA if public sector debt continues to spiral, the IMF has warned.

Public debt as a share of GDP doubled in the past decade, reaching 53% in 2017, which has pushed up public sector financing needs.

Spending pressures and a higher public sector wage bill could raise financing costs and stunt economic growth further, said the IMF in an ominous statement on Tuesday.

After an IMF team led by Ana Lucía Coronel met key stakeholders in the public and private sectors in the past week, the fund suggested the government implement realistic expenditure ceilings or add a debt ceiling to the fiscal framework.

“Public debt has risen, depleting buffers and leaving little room for fiscal policy to support growth,” said the IMF.

In the past fiscal year, the fiscal deficit was more than one percentage point of GDP above the budget target, as revenues underperformed, affected by low growth, and expenditure was pushed up by bail-out costs for state-owned companies. While the Treasury’s return to fiscal consolidation in the 2018 budget is a move in the right direction, the IMF stressed that with current growth projections, debt is still expected to rise in the medium term.

Last week, the government signed a three-year multiterm public service wage agreement which exceeded the 2018 medium-term expenditure framework by R30bn.

“Currently the public sector wage agreement is higher than what we bargained for and this is all because government wants to avoid a strike,” said Nazmeera Moola, co-head of fixed income at Investec Asset Management.

Moola said if the government could not curb wage increases, it needs to consider cutting jobs in the public sector. “We need a mechanism so that government understands the strain on the fiscal framework,” she said.

Earlier in 2018, the IMF revised its economic growth forecast upwards with expectations of 1.5% growth in 2018 and 1.7% in 2019. While the growth projections are higher, these levels of growth will do little to decrease unemployment, poverty and inequality unless there is greater policy and regulatory certainty.

Last week, SA’s economy saw the largest quarterly fall since the second quarter of 2009, indicating that renewed business and consumer confidence following the election of President Cyril Ramaphosa has not translated into the real economy. The economy has not breached the 2% mark since 2013.

The weak economic growth will put a strain on the 2018 growth targets outlined in February’s budget speech and could result in the Treasury’s fiscal targets being missed, said Citadel chief economist Maarten Ackerman. “Missing these targets would then place SA at increased risk again of further credit rating downgrades.”

The biggest boost to GDP was 1.8% growth in general government services on the back of increased public sector employment, which does not bode well for SA’s fiscal targets or the government’s ability to address the bloated government wage bill, said Ackerman.