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Mining sector will not be spared from coming economic crisis

Finance Minister Enoch Godongwana

Finance Minister Enoch Godongwana

2nd November 2023

By: Darren Parker

Creamer Media Contributing Editor Online

     

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Without an urgent acceleration in the implementation of growth-enhancing structural reforms, South Africa is headed for a fiscal crisis, the Minerals Council South Africa has said, noting that the mining sector will not be isolated from this crisis, and that it cannot be left out of a response to develop a solution.

The Medium-Term Budget Policy Statement (MTBPS), delivered by Finance Minister Enoch Godongwana on November 1, laid bare the consequences of the failures of State-owned entities such as Transnet and Eskom, which are negatively affecting the mining sector’s profitability and government tax revenue.

In a stark illustration of this, the mining corporate tax take in the first half of 2023/24 is down by R24.6-billion, or 55.4%, relative to the same period a year earlier. This is an important factor in the R56.8-billion downward revision in gross government tax revenue compared with what was expected in the February Budget, the Minerals Council pointed out.

The scale of the fiscal problem is further emphasised by the fact that, despite cuts to non-interest expenditure over the next two years of R85-billion and the signal of R15-billion worth of tax hikes in 2024/25, government debt is now expected to peak substantially higher at 77.5% of gross domestic product (GDP), compared with the 73.6% projected in the February Budget.

“These are necessary but insufficient steps to put South Africa’s public finances on a more sustainable path. The task is so large that even R85-billion worth of cuts are not making a dent. The solution is to grow the economy faster. It’s the only sustainable solution we have. There is only so much that can be cut and there are risks to the economy by raising taxes,” said new Minerals Council chief economist Hugo Pienaar.

Given the situation, the Minerals Council has welcomed Godongwana’s diagnosis of the structural constraints on the economy and the interventions in conjunction with the private sector as a key partner to address these bottlenecks.

“This medium-term budget statement lays bare how crucial the mining sector is for government revenue. We saw it on the upside for the past two years during our response to the Covid-19 pandemic, and now on the downside this year,” Pienaar said.

Over the next three fiscal years, relative to the February Budget forecast, government tax revenue is now expected to be R121.4-billion less.

“Godongwana’s comments about declining revenue reinforce what the Minerals Council has been warning of in recent years. It is a clear illustration of the strain on profitability in the mining sector because of rising input costs, lower commodity prices and declining production and sales.

“The mining industry can’t do anything about commodity prices, but there are levers to pull to reduce the costs faced by the industry amid double-digit electricity price hikes and transport logistic inefficiencies, particularly the rail network and ports operated by Transnet,” Pienaar said.

According to the MTBPS, coal and iron-ore exports were forfeited because rail and logistics operational failures could have added 1.3 percentage points to the current account balance last year, resulting in a current account surplus. The cost to the economy of rail inefficiencies last year is estimated at R411-billion.

In the first six months of 2023/24, value-added tax (VAT) refund payments were R21.5-billion higher relative to the same period last year owing to increased investments in embedded generation and higher costs of doing business, including more expensive road rather than rail transport.

Of the R21.5-billion in refunds, the mining sector alone accounted for R5.7-billion in VAT refunds. This illustrates the sector’s reliance on road in the absence of efficient rail logistics and the scale of self-generation projects initiated by the sector.

The Minerals Council said Godongwana’s commitment that there would be a separation of infrastructure management from the operations in Transnet in coming months was a welcome development because it would clear the major hurdle blocking the private sector’s involvement in operating trains on the rail network.

The council further noted Godongwana’s comments that only once there was a clear path for the Transnet roadmap, which included enhancing efficiencies and facilitating increased private sector competition and capital investment, would government consider financial support for Transnet.

The Minerals Council and its members were, through Business for South Africa, working to engage the Presidency and Ministers on urgently arresting and stabilising the deterioration in rail and port services provided by Transnet, finding solutions to South Africa’s energy crisis, as well as crime and corruption.

The private sector is a critical partner in addressing key constraints on the economy and, in so doing, improving perceptions of the country, attracting investment and ensuring inclusive, sustainable growth and job creation.

“While we remain positive on recent reform announcements from government to effect change and include private sector participation to drive the economy, we need far more urgency in dealing with these constraints,” Minerals Council CEO Mzila Mthenjane said.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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