South Africa Looks Toward Inclusive Recovery to Stabilize Debt, Boost Growth

In a conversation with IMF Country Focus, the Director-General of South Africa’s National Treasury Dondo Mogajane explains how the government has responded to the COVID-19 crisis, how IMF financing will help to stabilize the economy, and strategies for addressing debt and spurring growth.

South Africa’s economic activity is projected to contract by 7.2 percent in 2020, according to the IMF’s staff report that accompanied the government’s Rapid Financing Instrument request.

What has been the impact of COVID-19 on South Africa and what sectors have been hit the hardest?

COVID-19 brought many challenges: a decline of about 18 percent in employment between February and April; every third income earner in February did not earn income in April; job losses were felt most among women and manual labor. Those at the bottom of the income distribution have suffered a great deal.

Based on our assessment, the most affected sectors are construction, personal services, trade, catering, hospitality, transport, storage, and communications. The crisis also brought manufacturing and mining to a halt.

We are projecting a loss in government revenue of $18.2 billion this year.

What measures are being taken to provide relief to households and businesses?

Our relief strategy has three phases. The first phase started in mid-March with measures to mitigate the immediate effects of the pandemic: child support grants were targeted to alleviate child hunger; the Unemployment Insurance Fund provided wage support; and we funded emergency procurement and streamlined rules to support the health sector. We also funded direct grants to small businesses, in particular to small tourism operators.

A second phase is aimed at stabilizing the economy. This is driven by support from the IMF and others. Assistance comes through a $29.9 billion package announced by President Ramaphosa on April 21 that boosts healthcare spending, provides financial relief to municipalities, and temporarily expands the social grant payment system.

The third phase will help drive the recovery and economic growth. Central to this recovery strategy will be measures that stimulate demand and supply through interventions such as infrastructure funding.

How will the recently approved $4.3 billion IMF Rapid Financing Instrument be deployed?

This funding will support five interventions laid out in the supplementary budget: supporting health and frontline services; protecting the vulnerable by extending child support, old age benefits, and disability grants by six months; creating more jobs; unlocking economic growth through our reform initiative; and taking measures to stabilize public debt.

We think that over time we will be able to augment these budget initiatives by reprioritizing and ending certain programs and projects that are not effective.

What measures are being put in place to ensure the IMF assistance is used for its intended purpose?

We have agreed with the Auditor General, an independent body, to not wait until next year to audit COVID-19 related spending. General Emergency Procurement instructions were issued by the Treasury on April 28 to put measures in place to prevent and combat the abuse of supply chain management processes and ensure monies go where intended. These instructions also specifically outline control measures that must be put in place in relation to COVID-19 spending, such as reporting frameworks, internal measures between and within departments, the establishment of audit committees, and reporting on a monthly basis what has been procured, who has ordered these, and the amounts. Procurement of personal protective equipment will also be based on a price reference list.

The President also recently announced a high-level committee that includes law enforcement agencies, the Special Investigating Unit, and the Financial Intelligence Center to investigate anti-corruption cases involving COVID-19 funding.

South Africa’s debt is expected to further increase this year. What actions are being taken to address this?

We have designated $9.6 billion for budget cuts. Some of this is part of $23.3 billion in designated spending over three years in relation to public wages and salaries. I recently filed an affidavit to the High Court in South Africa to explain that we cannot fulfill wage increases in the last year of the three-year wage agreement with labor unions because of lost revenue due to the crisis.

We are committed to stabilize debt so that it peaks at 87 percent debt to GDP by 2023-2024 and starts declining thereafter. Ahead of the medium-term budget policy statement in October, some debt reduction will be achieved as a result of the expenditure reviews that we are currently conducting.

We also agreed to a zero-based budgeting exercise. It will help us to focus on areas where we should cut to reverse the rise in debt.

Economic growth in South Africa has been very low in the last decade and is now negative. What is the government doing to reverse this trend?

The government is undertaking structural reforms to facilitate higher and more inclusive growth. Network industries in telecommunications, electricity, ports, rail, and roads will undergo modernization and reform. Trade policies will be reoriented to take advantage of the free trade area in Africa, pursue greater regional integration, and establish South Africa as an export platform to the region. Entry barriers will be lowered to make it easier for business to start, grow, and compete. Support will be focused on labor-intensive sectors like tourism and agriculture where there is more potential for people to get jobs. Finally, reforms will be implemented to strengthen the governance of state-owned companies.