SA's troubles are mounting, IMF warns

The IMF has warned that SA faces "mounting economic and social challenges" as economic growth recedes, consumer and business sentiment remain weak, and energy and logistics crises deepen.

It also warns that in several respects, it expects government finances to get worse in the medium term due to intensified electricity cuts, lower tax revenue, greater spending pressures from higher than-anticipated wages, and higher borrowing costs for government.

The IMF doubts that Finance Minister Enoch Godongwana will achieve two of the most important targets he set in the February budget: to reduce the fiscal deficit and to stabilise the country's debt burden by 2025/26. It estimates that the debt-to-GDP ratio is at 70%.

Stabilisation of the debt is imperative for government to reduce debt service costs and free up resources for social spending.

The IMF's key recommendation is that to get public finances on track and bring down debt, further "fiscal consolidation" – predominantly in the form of cuts to expenditure equal to about 3% of GDP – will be necessary.

The IMF completes an annual review of the economy, which involves intensive interaction with SA's financial authorities. The Article IV consultation, as it is officially known, was published on Tuesday.

It notes that inflation has moved outside of the SA Reserve Bank's target band of 3% to 6% and the current account balance, which had enjoyed surplus during last year's commodity boom has swung into deficit. These factors, as well as rising interest rates in the rest of the world leading to shifts in investor sentiment to safer waters and domestic political uncertainty, have weakened the rand.

Says the report:

Looking ahead, GDP growth is projected at 0.1% in 2023 … and annual growth is expected at 1.5% over the medium term… The growth level would be too low to create enough jobs to absorb new labour market entrants. The fiscal position is projected to deteriorate due to weakening mineral revenue, the Eskom debt relief arrangement, wage bill pressures and rising debt service. As a result, public debt is not expected to stabilise.

As well as tougher fiscal consolidation, the IMF recommends structural reforms to encourage economic growth, getting off the greylist of the Financial Action Task Force (FATF) and improving risk management. It supports the path of the SA Reserve Bank to "keep inflation expectations anchored and bring inflation back in the target range.

Responding to the IMF report, the National Treasury said that the economy faced significant risks but noted that the fiscal deficit had narrowed as a percentage of GDP and in nominal terms.

"We are aware of the downside risk to economic growth and were working on further measures to prevent these," it said.

The Treasury updates its growth and fiscal targets only twice yearly, in February and at the October adjustment budget. It said the February projections will be updated to account for the risks that have materialised.

Government was considering recommendations to ensure that debt stabilises in line with the projections made in the February budget and would announce any revisions in October. It would also continue to implement structural reforms to encourage faster economic growth, address the shortcomings that led to greylisting, and implement more effective anti-corruption measures.