Praise and caution for SA from IMF
Acceleration of structural reforms and action needed — global body
The IMF has commended SA on its strengths, but cautioned that the country’s underlying growth and fiscal problems require an acceleration of structural reforms and action that is firmer than contemplated in February’s budget.
The IMF’s Africa department head, Abebe Aemro Selassie, told Business Day that SA needed to achieve a fiscal consolidation effort of up to 3% over the next three years to put the public debt on a declining path.
But he said SA was privileged to have deep and liquid financial markets that enabled the government and corporates to fund themselves domestically, despite the decline in capital inflows to SA and other emerging markets over the past couple of years. SA also had one of the most flexible exchange rates among emerging markets, which helped insulate the economy from global shocks, he said.
Selassie said SA’s large increase in public debt had not delivered on addressing the infrastructure bottlenecks and other challenges the country faced, with growth remaining anaemic. “The trajectory for both growth and primary balance has to change... You want to move the primary balance at a minimum to a level that stabilises debt over the next three or four years and ideally brings it down.
“That ambition is going to be up to what political appetite there is, but we estimate that the primary balance would reach close to 1% of GDP in the medium term, and you’re going to need an additional two to three percentage points to stabilise the debt and eventually bring it down,” he said.
The primary balance is the gap between government’s revenue and its noninterest expenditure. The government has long run primary deficits, which kept ramping up the national debt.
In February, finance minister Enoch Godongwana announced that in 2024 the government would achieve a primary surplus for the first time since 2008/09.
The budget pencilled in primary surpluses for the next three years, rising to 1.8% of GDP, and projected that debt would stabilise in 2025/26.
But several economists are sceptical that this can be achieved — even with the help of the partial drawdown announced by Godongwana on the gold & foreign exchange contingency reserve account (GFECRA), which houses the unrealised profits on SA’s reserves.
The IMF provided technical assistance to the Treasury and the Reserve Bank on the transfer of the GFECRA profits, and Selassie said the decision announced in the budget was
reasonable and in line with global good practice.
But, he said, “the GFECRA drawdown is not going to help you bridge the improvement in the primary balance that you need to stabilise the debt and eventually get it to come downwards ... continued recourse to this source of funding wouldn’t be appropriate, including because there is uncertainty that the gains that have accumulated will persist. The government took a pragmatic decision to use some of the gains, but they need to think about fiscal measures on the revenue and spending efficiency side to help deliver on the fiscal improvement that’s needed.”
The IMF is finalising its new forecasts for Sub-Saharan Africa, including SA, ahead of its April spring meetings, at which it will release the new World Economic Outlook and regional outlooks. In January it trimmed its growth forecast for SA to 1% for 2024 and 1.3% for 2025, citing logistical constraints.
It also trimmed its 2024 SubSaharan Africa forecast slightly, to 3.8%, rising to 4.1% as weather shocks subside and supply issues improve.
But in a presentation at Wits University last week Selassie said a long-awaited rebound was on the horizon for SubSaharan Africa, after a difficult 2023 and a “cocktail of shocks” from 2020 to 2022.
The IMF has since 2020 been flagging the risks of debt distress for many of the countries in the region, and most have been locked out of international capital markets. But since January Kenya, Ivory Coast and Benin have successfully placed a collective $4.85bn of eurobonds on international markets, albeit at expensive rates — Kenya issued at a dollar yield above 10%. In February, The Economist magazine said: “Those bond sales give hope to other African governments; the high yield on Kenya’s bond gives caution.”
Selassie said the return to markets was a good sign as countries were taking difficult steps, particularly steps to reduce fiscal imbalances, and policies were moving in the right direction. However the region still had a long way to go before growth rebounded to the 6%-7% needed to reverse the scarring of the last couple of years.
The IMFC, the IMF’s highest decision-making authority, decided in 2023 to give SubSaharan African countries a third seat on the IMF’s board, up from two seats. How the seats are allocated is up to the region’s ministers and governors. Selassie said discussions were continuing.
On SA, he said the country’s economy had immense potential, and it could and should be doing a lot better on growth and other dimensions.
SA needed to improve productivity and efficiency in core network industries, and improve education outcomes. If the government could put forward a credible fiscal framework and deliver on it, this would reduce bond yields, reduce uncertainty and entice investment that would engender higher growth, he said.