Adopting a formal debt target could help to strengthen South Africa’s budget framework, with the nation’s burden set to reach an estimated 56.3 percent of gross domestic product (GDP) in 2019, the International Monetary Fund (IMF) said.
Fiscal consolidation announced in the medium-term budget in October was “significant, but may not be sufficient to stabilise debt over the medium term”, the lender said in its annual Article IV country report, published on its website yesterday.
Finance Minister Nhlanhla Nene said in his medium-term budget that gross debt would rise to 49.8 percent of GDP in 2018 and that public debt was approaching the limits of sustainability. He announced plans to contain spending growth and increase revenue over the next two years to narrow the budget deficit. That debt ratio would be 47.6 percent after adjustments made to GDP last month, according to the central bank.
“Containing the wage bill is essential to achieve the planned consolidation and so is an increase in taxes,” the IMF said. “Further adjustment may be necessary to ensure public debt stabilises and is reduced to safer levels.”
Nene plans to curb the fiscal gap to 2.5 percent of GDP in three years from 4.1 percent this year.
While South Africa’s flexible exchange rate had served as a buffer against volatile capital flows, increasing the level of reserves would boost the nation’s resilience against market movements, the IMF said.
Gross reserves decreased to $48.54bn (R557bn) in November from $48.68bn the previous month, according to the Reserve Bank. The rand has weakened by about 9 percent against the dollar since the start of the year. The currency was bid at R11.5812 a dollar at 5pm in Johannesburg.
The IMF kept its 2014 growth estimate for South Africa unchanged at 1.4 percent, in line with the Reserve Bank’s forecast, and cut its 2015 projection to 2.1 percent from 2.3 percent. This year’s expansion would be the slowest pace since a 2009 recession.
At these levels, the unemployment rate of about 25 percent and the large fiscal and current account deficits would remain “elevated”, Laura Papi, the IMF mission chief to South Africa, said from Washington on Wednesday.
The nation’s government “is aware of the risks” highlighted by the IMF and agreed that structural reforms were necessary, the Treasury said yesterday. “South Africa continues to face challenges to support growth and reduce unemployment. However, we are taking steps to address this challenge,” it said.
Inflation slowed to 5.8 percent last month, within policymakers’ target band, as oil prices dropped more than 40 percent since June. – Bloomberg