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Mboweni’s debt stabilisation plan hinges on big future expenditure cuts

3rd July 2020

By: Terence Creamer

Creamer Media Editor

     

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inance Minister Tito Mboweni announced grim revisions to South Africa’s fiscal framework when presenting his Covid-19-induced ‘Supplementary Budget’ speech on June 24, in which he likened the country’s rising debt profile to that of a hippopotamus “eating our children’s inheritance”.

He used the backdrop of unsettling revisions to government’s medium-term Budget deficit and debt projections to make a firm commitment to stabilising debt at 87.4% of gross domestic product (GDP) in 2023/24.

While the figure represented a marked deterioration from the 65.6% peak debt level outlined in February, it was nevertheless a material improvement relative to warnings ahead of the speech that the country’s debt was poised to rise to above 114% of GDP.

Cabinet, Mboweni said, had adopted an active approach to the problem and had also endorsed a target of delivering primary surplus by 2023/24, meaning revenue would exceed noninterest expenditure.

The stabilisation plan would require spending reductions of about R230-billion over the coming two years, to be facilitated mainly by the introduction of zero-based budgeting, as well as tax measures of R40-billion over the next four years.

No new tax measures were unveiled in the Supplementary Budget, sustaining the National Treasury’s long-standing tradition of announcing tax-policy adjustments only in the February Budget. Some of the changes may be signalled, though, in a second adjustments budget, which will be released in October together with the Medium-Term Budget Policy Statement.

Economic Contraction

The stabilisation plan was announced together with dramatic revisions to the economic outlook, with Mboweni announcing that the economy would contract by 7.2% in 2020, the largest contraction in nearly 90 years. In February, the National Treasury estimated that the economy would expand by 0.9% this year.

The downward revision was in line with projections provided by the South African Reserve Bank, but remained more favourable than some of the forecasts being provided by many private economists and business leaders, who believe that South Africa could contract by between 8% and 10% this year.

The fiscal framework, meanwhile, had been all but decimated by the Covid-19 pandemic and the associated lockdown.

South Africa’s total consolidated Budget spending, including debt-service costs, would exceed R2-trillion for the first time ever in 2020/21, while revenue would slump to R1.12-trillion, or R300-million below the R1.43-trillion forecast outlined in February.

Mboweni said the consolidated Budget deficit would surge to R761.7-billion, or 15.7% of GDP in 2020/21, a sharp deterioration from the R370.5-billion, or 6.8% of GDP, figure provided in February. The main Budget deficit was projected to be 14.6% of GDP.

“Our early projection is that gross national debt will be close to R4-trillion, or 81.8% of GDP, by the end of this fiscal year. This is compared to an estimate of R3.56-trillion, or 65.6% of GDP, projected in February.”

The Medium-Term Expenditure Framework (MTEF) would be guided by the principles of zero-based budgeting, which Mboweni said would require a clear prioritisation of expenditure plans between the politicians and technocrats.

“This means that we will try to reduce all expenditure that we think we can no longer afford,” the Minister said, adding that the approach would be piloted in the upcoming MTEF.

Nevertheless, he confirmed that R3-billion had been found to recapitalise the Land Bank, which has been deemed as too important to fail, owing to the fact that it holds 29% of South Africa’s agricultural debt. The Minister was far more coy, however, on whether resources could be found to support the business rescue of South African Airways.

External Funding

Without immediate external funding support, he warned, government borrowings would consume almost all of the country’s yearly domestic savings, leaving no scope for investment or borrowing by anyone else.

“For this reason, we need to access new sources of funding,” he said, revealing that government intended borrowing about $7-billion from international finance institutions to support the pandemic response.

He confirmed that $4.2-billion of that amount would be provided by the International Monetary Fund (IMF), reporting that, following difficult negotiations, the National Treasury and the IMF had reached a “common understanding”.

South Africa’s funding submission would be considered by the IMF in early July and thereafter government would approach the World Bank and the African Development Bank for additional funding.

The New Development Bank (NDB) had already approved a $1-billion Covid-19 emergency loan to South Africa, which would be used to roll out the country’s healthcare response to the disease and provide a social safety net to alleviate the economic impact of disease containment measures on vulnerable individuals.

It was possible that another $1.5-billion could be made available from the NDB, owing to the fact that a $10-billion Covid-19 facility had been set up to support the five Brics countries of Brazil, Russia, India, China and South Africa.

“We must make no mistake, these are still borrowings. They are not a source of revenue. They must be paid back.”

Mboweni described debt as the country’s weakness, warning that too much debt had already been accumulated, while Covid-19 would force government to take on yet more.

“This year, out of every rand that we pay in tax, 21 cents go to paying the interest on our past debts,” the Minister noted, cautioning that such indebtedness condemned South Africa to ever higher interest rates.

“Our Herculean task is to close the mouth of the hippopotamus! It is eating our children’s inheritance. We need to stop it now!”

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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