IMF warns SA of its high debt and rising public wage bill
● The government should aim to curtail the growth of South Africa’s public sector wage bill in line with the inflation rate, the IMF senior resident representative to South Africa said this week.
Curtailing the wage bill was a significant measure that with other steps to put a lid on national debt could add three quarters to one percent to GDP over the next three years.
“A significant proportion of that could come out of the wage bill by doing a number of things,” IMF representative Montie Mlachila told Business Times this week.
On Monday IMF officials from Washington concluded a two-week assessment of South Africa, meeting with government authorities. Their discussion focused on reforms to reignite growth and reduce poverty and inequality, the IMF said.
The IMF’s blunt assessment of how essential it was to curb wage growth in the public service was followed on Wednesday by an announcement by the Department of Public Service and Administration that it planned to offer voluntary severance packages to employees 60 years and older to cut the burgeoning wage bill.
Mlachila said freezing the hiring of new staff and not replacing employees who left could contribute “a significant proportion of the fiscal consolidation that is needed”.
The IMF had also flagged high debt levels. Sovereign debt had doubled since 2009 to about 53% of GDP in 2017. “It’s more the direction [of the debt trajectory] than the absolute levels” that were a concern, he said. Also of concern was the frequent breach of the expenditure ceiling targets. The IMF suggested that an independent body scrutinise fiscal and other government projections.
Mlachila said the parliamentary budget office had such oversight. “Clearly it needs to boost its profile and expertise so it can come out more often in public to say what it thinks of the budget projections.” This action could be complemented by an explicit debt target.
Mlachila said although there was not a science to debt targets, a good indication was how much debt service costs consumed as a percentage of revenues or total expenditure. “South Africa is on the high side relative to other emerging markets,” he said.
“Ideally there ought to be an interactive discussion within the government as to what are the ideal targets South Africa should aim to have. We have some advice but we’d rather not be prescriptive. But clearly we don’t think the current levels are comfortable.”
Last week the government signed a threeyear wage agreement that is expected to exceed the 7.3% wage growth rate over the next three years as anticipated in the 2018 February budget. It is reportedly R30-billion over budget. The National Treasury declined to comment on the wage agreement.
But despite high debt levels, Mlachila said South Africa was nowhere “near a fiscal cliff by international standards”.
It had sufficient buffers.
The floating exchange rate and a large proportion of the debt in rand are shielding South Africa from the problems facing countries that are highly dependent on external financing, such as Argentina or Turkey.
Growth was projected to be 1.5% for 2018, the IMF said.
Yolanda Naudé, head of fund research and portfolio manager at Citadel, said: “The economy has displayed average annual growth of a mere 1.1% over the past four years, while at 1.6% per year our population is growing faster than this.”
Naudé said one of the five structural weaknesses that impeded growth was the low savings rate. The household savings rate for the fourth quarter of 2017 was 0.2%. While this was an improvement in the past three years it was below the level required to support higher investment spending. South Korea has a rate of 8.8%, Mexico 20.6% and the UK 5.3%.