The South African government has no choice but to stabilise debt and implement the identified growth reforms in order to avoid the demise of the country, National Treasury’s Director-General Dondo Mogajane said.
“Now it has dawned on all of us, Covid-19 including the downgrade by Moody’s has proven that if we are not going to be serious in ensuring that we implement, we will be in trouble,” he told Moneyweb following the International Monetary Fund (IMF) agreeing to lend the country $4.3 billion (R70.4 billion) to assist with government’s response to the pandemic fallout.
The Rapid Finance Instrument (RFI) forms part of the government’s plans to raise R95 billion to largely fund the health and social aspects of the government’s R500 billion support package. It comes after The New Development Bank and the African Development Bank approved South Africa’s applications for loans of $1 billion dollars and $288 billion dollars respectively.
The RFI is a vehicle that the IMF uses to extend funding to countries which have been affected by a disaster or emergency situation and require funding quickly for balance of payment needs. These loans are not subject to the traditional conditions set by the IMF, such as deep structural reforms.
The stipulations that do apply are self-imposed and contained in a Letter of Intent sent to the IMF, written jointly by the finance minister and the reserve bank governor, in which a country outlines detailed economic reforms it plans to implement as part of its motivation to have its application approved.
“We did not compromise the sovereignty of the SA government. All we did is access a cheap loan agreement and we will be able to save a lot in terms of debt service costs,” said Mogajane.
On Tuesday Treasury released this letter in which Finance Minister Tito Mboweni and Reserve Bank Governor Lesetja Kganyago explained that the South African government did not have outstanding debt with the IMF and has “adequate” capacity to repay the loan in a timeous manner.
“External and public debt sustainability indicators will not change significantly as a result of the RFI purchase, and we will take any necessary measures to maintain debt sustainability,” the letter stated.
The Covid-19 economic disruptions – which cut revenue projections by some R304 billion alongside new stimulus liabilities – have placed great pressure on the state’s finances, leading to a 15% budget deficit. This excludes contingent liabilities government may face from struggling state-owned entities (SOEs).
In the government’s ‘active’ management scenario that Treasury has chosen, the debt to gross domestic product (GDP) is expected to stabilise at 87.4% in 2023/24 and decline thereafter.
In its letter to the IMF, the government said that it is “open to introducing a debt ceiling in addition to the nominal spending ceiling currently in place” to decrease the debt-to-GDP.
Mogajane said that it is critical that government contain debt levels.
Because “if it reaches 100%, 120% or 200% debt-to-GDP that will be our ‘unsustainable’ and we will not be able to repay our debt obligations and we will actually be in a debt-trap situation.”
Fiscal consolidation measures will be proposed in the mid-term policy budget policy statement and the February budget to this effect.
The government further said that it would implement zero-based budgeting for national and provincial departments, take further measures to trim the public wage bill, rationalise transfers to SOEs, and streamline subsidies.
“Moreover, our support to SOEs will be strictly conditional on meeting key performance indicators to improve their operational and financial health, so as to reduce its need over time,” the government wrote.
In addition to putting public finances on a more sustainable footing, the government maintained a commitment to “removing structural constraints to growth” by implementing the economic reform blueprint, first released by National Treasury in August 2019
Government also notes that addressing Eskom’s issues – by ensuring its unbundling to increase its efficiencies and reduce the utility’s threat to the economy – will also be important.
“Time to get to work”
‘We know what we have to do,” said Mogajane explaining that these are measures that government was already embarking on.
“It’s up to us as accounting officers, heads of departments, director generals and politicians to say now is the time to really get to work because, if not, this precious country will vanish in terms of what we are known to be. We are known to be resilient and I think we must demonstrate that.
“Our solution lies there. Our solution does not lie in getting more debt from the IMF or the others because that is unsustainable in the long term,” he added.
The announcement of the IMF’s approval of the R70 billion emergency facility was met with sharp criticism from the public, who generally fear the facility will fall victim to systematic corruption, which has contributed to weakening state finances.
With increasing signs that so-called ‘covidpreneurs’ are exploiting the crisis to enrich themselves, President Cyril Ramaphosa announced that the Special Investigating Unit (SIU) would probe corruption involving Covid-19 funds. The SIU would form part of a multidisciplinary intelligence and security formation that will deal with these investigations.
“South Africans should not feel that things have gone to a state where there is just mayhem in the way that public finances are managed. We are still in control and we are still in charge,” said Mogajane.
He added that the fact that irregular tenders were flagged and are currently under investigation is proof that systems of accountability are working.
National Treasury released emergency procurement instructions which detail measures to assist and regulate the procurement processes of state organs during the national state of disaster and require accounting officers and officials to ensure that procurement is done within the prescripts of the law.
Government informed the IMF that it would ensure that Covid-19 funds are used in a transparent manner and reach their intended purpose, through regular reports and audits on expenditure – including a valuation on delivery that will be conducted by the Auditor-General within 12 months of the end of the fiscal year.
The state will also publish all Covid-19-related procurement contracts and allocations with details about awarded companies and their beneficial owners.
“All we can do is encourage Provincial Treasury to continue playing the most important role that they are playing, including ourselves in National Treasury, so that the integrity of the finance system and our country is intact,” said Mogajane.