Woeful financial situation afoot
“We are no longer as rich as we were.”
This was the message from finance minister Tito Mboweni during his supplementary budget speech on Wednesday last week. It might have taken too long for politicians to admit this, but economists have sounded the alarm on the South African fiscus for some time.
For the past decade SA has been on a borrowing crusade to fund an unsustainable lifestyle. According to the 2020 National Budget, interest payments are budgeted at R200bn for the 2020/21 fiscal year. This translates to almost 20c for every R1 collected by the treasury going to creditors. Before the outbreak of the Covid-19 pandemic the SA economy was sitting at a budgeted deficit of R450bn, which might blow up to between R600bn and R700bn if we factor in Covid-19 impairments. Evidently, SA is living a life beyond its means.
Ever since Mboweni downgraded the social status of SA from rich to “used to be rich”, it was hugely expected that he would follow up with a plan either on how to stay rich, or how to live within its means. Instead, last week the minister delivered an extensive plan that is meant to rein in expenditure and allow the country to live within its means, but not without additional borrowing. The plan carries the ultimate goal of reducing debt levels through borrowing less and avoiding a default on current obligations.
Typical of a once rich family, when it finally reckons that it is almost broke it becomes choosy on who should know about its financial troubles and who shouldn’t. It also begins to run away from traditional creditors lest it be exposed. President Cyril Ramaphosa’s announcement of the R500bn stimulus package in April was immediately followed up by an intense and deeply divided debate on where supplementary funds should be borrowed. The minister of finance was set to borrow from Bretton Woods institutions but politics seemed to suggest somewhere else, citing sovereignty risk problems.
Mboweni seems to have partially won in the debate as the majority of the funds will come from the IMF. SA expects to borrow a total of R119bn; R71bn from the IMF, R17bn from the New Development Bank, and it is not yet clear where the remaining R31bn will be borrowed from, maybe Brics Bank.
State-owned enterprises remain an albatross in SA’s fiscus with their extravagant and reckless spending. They have been repeatedly bailed out from the national coffers to sustain their highly inflated and irregular contracts with suppliers; to rescue their awful business models, and to pay the exorbitant salaries of their executives.
To prove their clumsiness; Eskom recently made headlines for mistakenly transferring R5bn into the wrong account, and SAA paid business rescue practitioners close to R80m for work done between December 2019 and January 2020 when it was said to be broke.
In the supplementary budget, Mboweni announced that from now onwards SA would resort to zero-based budgeting (ZBB) to curb their extravagant expenditure and instil responsibility. Under ZBB they are no longer guaranteed a budget but have to substantiate in detail their proposed expenditure before any amounts are approved and they also have to account for previous allocated budget. This will surely reap rewards towards effective and efficient use of resources by SOEs.
ZBB is also expected to reap rewards for the national Treasury in monitoring expenditure at local government level. In SA local government has been paralysed by misgovernance and rampant corruption.
Most of the municipalities are dysfunctional. Recently deputy auditor-general Tsakani Maluleke bemoaned the regression in audit outcomes of municipalities, indicating that irregular expenditure had increased from R25.2bn in 2017/18 to R32bn in 2018/19.
Only 20 of SA’s 257 municipalities were able to attain a clean audit in 2018/19. ZBB might not be the panacea to all governance problems but it will definitely allow more transparency and accountability in public expenditure.
Corrupt municipalities will now find it hard now to claim twice for the same project or apply for a new budget allocation without fully accounting for the previous one. In fact, they will find it hard to loot.
ZBB is also expected to arrest rampant rent seeking in government departments where bureaucrats unduly benefit from exorbitant tenders. Under ZBB, government departments will be expected to submit possible expenditure plans and this is where inflated prices will be identified and dealt with instantly.
We hope this will help reduce irregular expenditure. For the past few years the problem in the SA economy has not been funds but mismanagement of funds, and ZBB could save the public purse a considerable amount of money.
With manoeuvring skills, Mboweni managed to internally generate R100bn by reallocating funds from budget units that have been inactive due to lockdown regulations, programmes with a history of poor performance, capital and other departmental projects that can be rescheduled to the 2021/2022 budget period.
Through the social grant topups, loan guarantee schemes for small businesses and the Unemployment Insurance Fund, Mboweni, acting as the uncle of a once rich but now almost broke family, has tried all he can to cushion all the vulnerable “children” from the pandemicinduced fallout.
The finance minister has calculated his moves very well in the supplementary budget. He chose not only to respond to the effects of Covid-19 but to put up a long-term plan to address the underlying problems of the economy, chief among them the spiralling debt levels.
High debt levels reduce fiscal space and interest payments reduce money that should be going towards the citizens of a country.
Mboweni is correct to set both an eye on the pandemic and on the future.
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