South Africa should set a debt target to improve the credibility of its fiscal policy as slower economic growth made it hard to keep the budget deficit under control, the International Monetary Fund (IMF) said yesterday.
Government debt might stabilise at about 47 percent of gross domestic product (GDP) in five years, with a 10 percent chance that the ratio could reach 63 percent by 2020, the lender said in its annual Article IV country report, published on its website.
“Determining an appropriate debt benchmark remains highly controversial,” the IMF said. “Given South Africa’s outlook, the magnitude of macroeconomic and fiscal shocks, and cross-country comparisons, reducing the debt-to-GDP ratio to around 40 percent by 2020 would allow the country to rebuild adequate fiscal space.”
Falling tax revenues and spending pressures contributed to a widening in the budget deficit to 5.1 percent of GDP in the 2012/13 fiscal year, prompting the government to increase borrowing. Finance Minister Pravin Gordhan forecast gross debt would reach 45 percent of GDP in the year to March 2016 from an estimated 42 percent last year.
While the state’s agreement to limit wage increases for the next three years to 1 percent and to set explicit expenditure ceilings was positive, “the government’s poor record in controlling the wage bill and potential spillovers from high wage demands in other sectors represent downside risks”, according to the report.
The IMF said one of the main risks to the South African economy was a prolonged halt to capital inflows, used to finance the current account shortfall and support the rand. The currency has slumped 16 percent against the dollar this year, the worst performer of 16 major units monitored by Bloomberg. The rand fell 0.54c to be bid at R10.0715 to the dollar at 5pm yesterday.
South Africa’s economy will probably expand 2 percent this year, according to the IMF, falling short of the National Treasury’s estimate of 2.7 percent and in line with the Reserve Bank’s latest forecast. The IMF forecast 2.9 percent growth for next year. The government says it needs 7 percent annual growth to reduce the 25.6 percent jobless rate.
“Quicker implementation of much-needed structural reforms could result in higher growth and job creation,” the IMF said.
The flexible exchange rate should be maintained as it was a strength to the economy, the IMF said, while recommending authorities consider regular and pre-announced auctions to buy foreign exchange.
The central bank’s policy is not to intervene in the currency market to influence the rand, though it buys foreign exchange to boost reserves when conditions are favourable. Reserves rose 1.3 percent to $47.95 billion in August, according to the bank. – Bloomberg