South Africans and the world at large are eagerly waiting in anticipation as Finance Minister Tito Mboweni prepares to present the Budget today. Photographer:Phando Jikelo/African News Agency(ANA)
South Africans and the world at large are eagerly waiting in anticipation as Finance Minister Tito Mboweni prepares to present the Budget today. Photographer:Phando Jikelo/African News Agency(ANA)

The Industrial Development Corporation must play key role in boosting SA economy

By Opinion Time of article published Feb 24, 2021

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By George Sebulela

South Africans and the world at large are eagerly waiting in anticipation as Finance Minister Tito Mboweni prepares to present the Budget today.

The economy of South Africa has been under severe pressure as we witnessed multiple rating agencies downgrading it to sub-investment level.

Challenges include the high unemployment rate of approximately 27.1 percent, youth unemployment at 54.7 percent, an unstable energy supply to meet the required demand, an increase in social grants spending and bloated salary payments for the public sector.

The Covid-19 pandemic, sadly, also did not do justice to the South African economy and has compelled the government, through National Treasury, to reallocate and reprioritise budgets to respond to this challenge.

Furthermore, the government stimulus package also had to be announced, which has been successful in other areas, but need to be reviewed and improved in other areas.

According to the African Development Bank report, “South Africa is likely to see economic growth of 2.9  percent year-on year (y/y) in 2021 as it rebounds from the -7.3 percent y/y collapse of last year. This muted recovery has been accompanied by an unsustainable expansion in government borrowings and a widening fiscal deficit. Planned government borrowings for 2021/22 sit at R4.6 trillion (86 percent of gross domestic product ), and are forecast to reach R5.5 trillion by 2023/24 (93 percent of GDP) and 95 percent of GDP by 2025/26.

“As these ratios deteriorate and South Africa sinks deeper into a debt trap, lower credit ratings are all but guaranteed. The slide towards C-grade categories reflects concerns about a rapidly increasing risk of default. South Africa’s credit ratings are likely to fall into the single B grades this year already.“

The difficulty of South Africa to be classified as a high-risk investment country, will not only find it difficult to attract investments but rather raise capital from capital markets at exorbitant interest rates. This will, therefore, make difficult for the government and state-owned entities (SOEs) to repay the debts.

Weak global growth, global trade tensions and commodity price volatility also pose risks to the South African economy. A high public sector wage bill, poor performance of SOEs and social programs, including national health insurance, exert pressure on the budget. South Africa would benefit by manufacturing more for African markets.

The only way out of this trap is inclusive economic growth. Failure to achieve (as opposed to simply plan) rapid economic growth and cut state expenditure, is now critical to avoid financial collapse. This requires policies that promote private and public sector investment in productive infrastructure and a curtailment of unproductive expenditure on inflated public wages and inefficient SEOs.

Reforms are tackling structural constraints to economic growth and job creation. One is restructuring the utility company Eskom to reduce the major risk its debt places on the Treasury. Other reforms include allocating the telecommunications spectrum, removing barriers to mining investment, and reviewing visa requirements to boost tourism. The government is taking steps to improve investment, revitalising townships and industrial parks.

On a more basic level, a key factor in South Africa’s failure to achieve sustainable economic growth is the alarming fact that doing business in South Africa is becoming more difficult, not easier. With the pace of regulatory reform lagging other economies in the developed and developing world, South Africa is becoming less competitive as a destination to set up shop or commit fixed investment.

The result is lower employment, lower tax revenues and a negative growth spiral. This will make it difficult for the government to spend on Infrastructure spend and key priority sectors that has the potential to create more jobs and alleviate poverty as we see it today.

Furthermore, the World Bank’s 2020 Doing Business report says “inefficient regulation tends to go hand in hand with rent-seeking. There are ample opportunities for corruption in economies where excessive red tape and extensive interactions between private sector actors and regulatory agencies are necessary to get things done.”

This is particularly true of both South Africa’s onerous regulatory environment and its high levels of corruption. South Africa lacks true, unified outrage against corruption.

The 20 worst-scoring economies on Transparency International’s Corruption Perception Index “average eight procedures to start a business and 15 to obtain a building permit. Conversely, the 20 best-performing economies complete the same formalities with four and 11 steps respectively. Moreover, economies that have adopted electronic means of compliance with regulatory requirements – such as obtaining licenses and paying taxes – experience a lower incidence of bribery.”

It’s clear that South Africa needs to shorten the time taken to start a business. The ease of starting a business will assist to activate the economy with more small, medium and micro-enterprise development and an increase in foreign direct investment (FDI). South Africa has establish SA Invest domiciled in the Department of Trade and Industry with the intention of overcoming challenges and obstacles to start a business.

Hopefully the president’s address will go some way towards reassuring South Africans that the government is alive to the dramatic benefits that can accrue from creating an environment that is more attractive to doing business, and to the dire consequences of maintaining our current slide towards the cliff edge.

In many economically strong and socially equitable states, Development Finance Institutions (DFIs) have acted as catalysts for accelerated industrialisation, economic growth and human resource development.

South Africa urgently needs to accelerate its industrial development and economic growth rates and expand its human resources capabilities. This is necessary not only to address the crippling economic and human development inequalities left by apartheid, but also to match the country’s rapidly growing BRICS partners – Brazil, Russia, India and China. South Africa also has to compete with other emerging markets, while catching up with the established industrial powers of the West.

Development finance thus seeks to address financial market failures, and so complements both government resources and market financing.

According to the UN (UN, 2005:14), DFIs play at least five crucial roles in terms of addressing market failures. Their roles are as follows:

– Appraise the economic and social development impact of projects seeking financing.

– Accompany investors in the long run through long-term loans.

– Offer technical assistance to sectors essential to growth.

– Attract investors by facilitating financing operations.

– Alleviate the negative impact of financial crises through countercyclical financing by offering loans, even during downturns, and pooling efforts with regional financing institutions.

DFIs are now generally expected to address broader development policy objectives.

These include addressing market failures such as private sector development, employment creation, income redistribution, import substitution, the development of poor groups or regions, as well as developing new industrial sectors or boosting weak ones (UN, 2005).

Development banks have played four roles throughout their histories: i) Providing complementary capital to under-serviced sectors. ii) New venture support. iii) Providing countercyclical funding during economic downturns. iv) Responding to specific challenges.

The Industrial Development Corporation(IDC) can therefore play a key role in South Africa for structural transformation by nurturing knowledge development, investing in infrastructure, promoting strategic trade, prioritising investments in existing key sectors and providing coherence to economic policies.

The collaboration of South African Development finance institutions led by IDC is rather very crucial to assist expand infrastructure development. Infrastructure reduces the production costs of the private sector and hence increases productivity.

Thus infrastructure investment has the ability to stimulate demand in the South African economic activities through the multiplier effect. Therefore, IDC is very important in the context of regional integration and industrialisation.

IDC played a significant role in the industrial development of the South African economy. Besides providing funding to the private sector for industrial ventures, particularly small and medium enterprises, the IDC also undertook a number of large-scale projects considered to be of national strategic importance. However, IDC has still not perfected the funding of Black Economic Empowerment transactions particularly where equity contribution is required.

There is, however, commitment from new chief executive Tshokolo Nchocho to push his team to innovate instead of relying on old conventional funding instruments used by the commercial banks. The IDC board of directors are also expected to review all funding mandates to ensure they match market requirements.

In the interest of economic development and advancement of South Africa, it is expected that the IDC, Development Bank of Southern Africa and Land Bank should review their mandates relevant to sector value chain and begin to fully collaborate on projects of industrial, Infrastructure projects etc.

George Sebulela is the president of South African United Business Confederation.

*The views expressed here are not necessarily those of IOL or of title sites

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