South Africa running out of money at an alarming rate

Efficient Group chief economist Dawie Roodt has warned that South Africa is heading for a financial crisis due to its growing debt burden.

Speaking to State of the Nation's Mark Sham, Roodt said South Africa's fiscal deficit is far too high, partly because state debt and interest payments are out of control.

South Africa's debt-to-GDP is hovering around 75%. If one includes the debt of state-owned enterprises, it increases to 90%. "This is unaffordable," Roodt said.

Another problem is that state revenue, derived from taxes, is falling short because the economy is not growing.

"South Africa's bad policies, which have been in place for decades, resulted in a weak economy. This, in turn, caused lower tax revenue," he explained.

The lower tax revenue and growing state spending forced the government to borrow more money, increasing interest payments.

The situation is getting worse. In the medium term, real growth in debt-service costs of 3.3% is expected to outpace the anticipated real growth in revenue of 1.6%.

South Africa's interest bill is expected to stabilise at 5.2% of gross domestic product in the 2024/25 financial year.

That means debt-service costs will, on average, consume 22 cents of every rand the government collects in the Medium Term Expenditure Framework.

"Worryingly, by 2027/28 financial year, the government will be spending R1.3 billion a day to service its escalating debt burden," Momentum Investments.

That means the government spends more on debt-service costs than on basic education, social development, economic development, peace and security, and health.

Between 2024/25 and 2026/27, debt-service costs were the second-fastest growing nominal expenditure item at 7.8%.

Debt servicing costs drain an economy as they do not add value to the country, like infrastructure development or education.

Therefore, citizens get ‘nothing' for this tax money other than paying for the government spending too much in the past.

Roodt explained that many local institutions, like banks and pension funds, in combination with some international countries, fund South Africa's debt.

He said Europe and the United States have traditionally been the biggest funders of local debt. However, South Africa's stance on global political issues threatens these relationships.

Roodt said the most important thing South Africa must do is implement policies to grow the economy, which will benefit the state.

It will need political backing as it will involve many tough decisions, including reducing government spending and not giving state employees big salary increases.

"The government needs to tell people it can no longer afford them. In fact, it needs to cut back on their salaries," he said.

"However, giving people less money means they get angry at you. In turn, they start to strike and stop voting for you.

Roodt warned that the day will come when the private sector stops funding state debt, which will have disastrous consequences.

It will lead to a big increase in long-term interest rates, high inflation, and widespread economic hardship.

"We can fix the problem. With the new government, there are signs of a slightly more competitive macro-economic environment," he said.

He said the ANC must realise that it has reached the end of its line and needs to change its policies.