The Herald E-Edition

IMF warns SA risks economic stagnation

● Fund blames power cuts, weaker commodity prices for sharp deceleration in country’s growth prospects

Hilary Joffe

The IMF has slashed its growth forecast for SA to just 0.1% for this year and has warned that SA risks economic stagnation unless it acts with urgency to step up the pace of economic reforms.

The IMF, which had lifted its growth forecast to 1.2% in January, cited the increase in the intensity of power cuts and weaker commodity prices for the recent sharp deceleration in SA’s growth prospects.

And though it expects growth to pick up in the medium term, it sees this averaging only about 1.5%.

The IMF has painted a much worse fiscal picture than the finance minister did in last month’s budget, weighing in on the controversy over whether to treat the government’s Eskom debt relief package as “below the line” debt or “above the line” spending.

It has pencilled in a 6.5% fiscal deficit for this year compared with the Treasury’s 4%, in part because — in contrast to the Treasury — it has treated the Eskom relief as an abovethe-line capital transfer. And the fund sees further deterioration in the deficit over the next couple of years until the Eskom situation starts to improve.

The Washington-based institution’s new forecasts came after the annual two-week visit which its staff of economists pays SA each year, ahead of the full Article IV report which it publishes on SA — and each of its other member countries — every year.

The 0.1% forecast for this year is below the 0.9% which the Treasury pencilled into last month’s budget and worse than the Reserve Bank’s bleak 0.3% estimate.

It comes as the market waits for the Bank’s monetary policy committee meeting next week when the Bank will update its forecasts.

The fund’s over-optimistic January estimate was widely seen as outdated, at a time when most economists were already revising their forecasts sharply downwards in the light of higher stages of load-shedding, which became a daily occurrence from the fourth quarter.

In a statement on Wednesday after the staff visit, the IMF gave SA credit for making some progress on reforms to tackle fiscal and structural challenges to boost growth.

The government had made important headway on removing licensing requirements for embedded generation, announcing a plan for private sector participation in transmission infrastructure, completing the spectrum auction and taking steps to improve third-party access to SA’s port and freight rail network, it said.

But while the progress was welcome and needed to be sustained, the fund said, “further reforms are urgently needed to durably lift potential growth, create enough jobs to reduce unemployment, absorb entrants into the labour force, and reduce poverty and inequality”.

Reforms should aim at improving energy security, fostering private investment, promoting good governance and creating jobs, it said.

On public finances, the IMF said that despite recent improvements, fiscal accounts would remain under pressure, with the overall budget balance projected to widen to a deficit of about 6.5% of GDP in fiscal 2023/2024 and to deteriorate through 2025/2026.

The deficit would narrow only after 2026/2027, assuming better conditions at Eskom, the fund said.

“The projected widening of the fiscal deficit in the near term reflects several factors, including the Eskom debt relief package [treated as a capital transfer], wage increases, additional support to other stateowned enterprises [excluding Eskom], and lower-than-budgeted revenue amid weaker economic activity and declining commodity prices,” the IMF’s SA head of mission, Max Alier, said in a response to Business Day on why its fiscal estimates were so much worse than the Treasury’s.

Risks to the fiscal framework were substantial, the fund said in its statement on Wednesday.

“As the revenue windfall fizzles, decisive efforts to reduce public spending as a share of GDP will be needed to stabilise and subsequently bring down the public debt ratio, which is estimated to reach about 70% of GDP by the end of 2022/2023.”

The Treasury said on Wednesday it had taken note of the IMF’s findings.

The fund had highlighted SA’s strengths, which provided a favourable base for growth, but also the downside external and domestic risks to the economic outlook.

“National Treasury is aware of most of the risks to economic growth and is working on mitigating measures to address these, as detailed in the 2023 Budget Review,” it said in a statement.

The Treasury did not respond to an emailed question from Business Day on the IMF’s fiscal estimates and whether this reflected a treatment of the Eskom debt package that differed from the Treasury’s. —

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2023-03-24T07:00:00.0000000Z

2023-03-24T07:00:00.0000000Z

https://herald.pressreader.com/article/281822878046267

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