Is South Africa’s economic challenge moving the country into a debt trap?

South Africa’s economy is in a precarious state, judging from Minister of Finance, Tito Mboweni’s 2019 Medium Term Budget Policy Statement (MTBS). The Finance Minister presented a dire view of the South Africa economy which is characterized by excessive government spending, the collective impact from load shedding, weak investments and slow growth in most sectors of the economy. The country’s expenditure is way over revenue income, the national debt is bulging and there are no prospects of international respite because of a slowdown in the global economy, mainly driven by the China-US trade wars and the uncertainty of Brexit.

Increasing debt does not bode well for South Africa who in the past two years not only narrowly circumvented a second recession but is also under threat of a downgrade by rating’s agencies.

According to the budget speech, the national debt forecast will exceed 70% of GDP by 2022/23. This debt burden is largely driven by the under-recovery of R54billion in tax revenue for 2019. However, to this, we need to add the constant financial bailouts of the State-Owned Enterprises like South African Airways, the SABC and Eskom, as well as a bloated government wage bill that has risen by 66% in the past decade. Contingency reserves are financing unplanned expenditure. All this points to a bleak picture with the distinct possibility being International World Bank intervention which will have serious consequences for the country.

Generally, failure to generate revenues and cutback on non-productive expenditure would lead to a debt trap resulting in major problems in the economy. This would be characterized by:
Higher inflationary conditions that will increase interest rates due to excessive monetization of public debt and this would eventually lead to loss of control over money supply.

  • Crowding out of private sector resulting from increased government borrowing
  • Excessive government expenditure would result in a substantial deficit on the current account and a decrease in foreign reserves of the country.
  • Nominal interest rates or real interest rates may be higher than the rate of growth of nominal or real gross domestic product. Interest payments may increasingly have to be financed by the increase in public debt or at the cost of other essential government service or by higher taxes. Possibilities of cutting non-interest expenditures or raising taxes may also prove to be limited.

This could result in accelerated government expenditure leading to increasing monetization of debt, crowding out of private sector investment and causing balance of payment constraint.

The notable areas considered by the government are to target a primary balance by 2022/23. There have been areas identified for cutting the expenditure of approximately R50 billion by 2021/2022 especially in areas of goods, services and transfers.

There are also proposals to cut the wage bill and to eliminate illegitimate cross border financial flows and tax evasion. Structural reforms have been enacted to make Eskom more financially efficient and be able to re-address most of the economic woes that the country is facing. The state‐owned companies that require support from the fiscus will be subjected to certain pre‐conditions and principles that are aimed at making sure that they become self-reliant. The drive of further investment in the infrastructure with proper planning and implementation are set to improve the economy. Steps are taken to strengthen co‐operation between the Financial Intelligence Centre, the South African Reserve Bank and SARS. The reserve bank is working towards maintaining inflation between the band 4%-5% which is important especially for an emerging market in order to preserve the value of goods and services.

Currently, South Africa is facing a difficult position, even though the situation has not reached an inflationary environment. However, if the above-mentioned resolutions outlined in the MTBS are implemented, there would be a great potential of a turnaround from the quagmire. If the government will successfully reduce expenditure combined with engaging idle resources in various sectors into productive use there is the likelihood of a positive change. Currently, the government debt to GDP is increasing and there are high chances for a debt trap unless cooperation and consensus are reached to increase investment spending which gives the economy a boost in times of slow economic growth.

Mr Jakubose Sibanda is Quantitative Programmes Coordinator at TSIBA Business School. He writes in his personal capacity.