Finance chief can restore trust, but has a lot to deliver
Ultimately, Gigaba’s ability to restore confidence in the economy and kick-start economic growth comes down to more than the numbers: it centres on trust.
FINANCE Minister Malusi Gigaba might talk the talk, but the Medium Term Budget Policy Statement will be the test of whether he is able to walk the walk. Over the past two weeks, Gigaba, as the head of the National Treasury, and the Reserve Bank have done their best to soften the landing of what is likely to be a fairly miserable mini-budget.
But even with low expectations the budget will need to be particularly strong if it is to restore much-needed confidence and put the economy back on track.
It is no secret that the fiscus is in a considerably worse position than it was a year ago; growth and revenue targets have come in considerably below expectations and the budget deficit is expected to climb to 4.5 percent of the gross domestic product (GDP) rather than fall to 3.1 percent as predicted in February this year.
Add to this an expectation that Moody’s and S&P are poised to junk the country’s local sovereign debt-rating next month, and there is no space for business as usual.
President Jacob Zuma’s latest cabinet reshuffle has shortened the odds of this serious downgrade for our economy.
As desperate as things might seem, there is still hope. Under these tough conditions some revenue slippage will be expected by the ratings agencies, and a slower reduction in the deficit will be tolerated, but only if it is backed up with meaningful actions and a credible plan.
So far Gigaba has made all of the right noises with his commitments to “fiscal consolidation” and “structural reform” but without trust, accountability and certainty there is little chance of building the confidence needed to underpin inclusive economic growth.
Trust deficit
This is because the greatest obstacle to economic growth in South Africa at the moment is not the budget deficit but a trust deficit. Trust is built through accountability, so if Gigaba is serious about putting the economy first he will at the very least need to follow through with the commitments made in the February budget.
This means that the mini-budget will need to adhere to the R26 billion in cuts to the public expenditure ceiling over the next two years that were proposed in last year’s mini-budget. He will also need to provide certainty in an update to his 14-Point Plan for inclusive growth, with measurable deliverables and hard deadlines.
Of even more importance is how he chooses to handle beleaguered State Owned Entities (SOEs) such as Eskom, the SABC, and SAA. Last week, Gigaba told investors in Washington DC that the government was doing all it could to fight corruption and to run a clean and ethical state. But the lack of accountability at these institutions in the face of gross financial mismanagement and allegations of corruption has done little to lend substance to his words.
Building an environment of accountability means dealing with habitual deviations from normal procurement procedure at these SOEs as well as reining-in wasteful expenditure in other state departments.
This has unfortunately become a hallmark of corrupt activities in poorly-run SOEs and departments such as water affairs, where their annual report shows that irregular expenditure has increased from R360 million for the 2013/2014 financial year, to a staggering R2.5 billion in 2015/2016.
And last year Eskom requested more than R30 billion worth of procurement deviations.
But that’s not all: annual reports submitted to Parliament show that more than R51 billion was wasted during the 2016/2017 financial year as result of irregular, and fruitless and wasteful expenditure in various state departments and SOEs.
This amount is enough to make up for this year’s expected revenue shortfall – and that is before notorious over-spenders such as SAA and Prasa have finalised their reports. As significant impediments to growth, these must be dealt with by Gigaba.
Finally, Gigaba needs to provide policy certainty if he is going to unlock the investment potential necessary to drive economic growth. The impact of ongoing political and policy uncertainty on local consumer and business confidence cannot be underestimated.
Policy certainty
This has resulted in a sharp decline in gross fixed capital formation over the past several years – something that is critical for long-term growth in the economy.
Fortunately, even in our current environment of political risk, an improvement in policy certainty will help to improve investment in key industries, and create a more stable environment for broader and inclusive growth.
For example, South Africa has one of the world’s most dynamic, renewable energy industries, but policy uncertainty has caused investment to stall. Here Gigaba could unblock billions in investment and immediately create thousands of jobs simply by ensuring that Eskom signs energy contracts pending for more than two years.
Ultimately, Gigaba’s ability to restore confidence in the economy and kick-start economic growth comes down to more than the numbers: it centres on trust.
He will need to prove that he is willing and able to follow through on the assurances that have been given to the country. This will not be an easy task, or a popular one, but it is a necessary one.