South Africa’s bad debt alarm bells

JOVIAL RANTAO

THE Finance Minister of South Africa Tito Mboweni has sounded strong alarm bells about the country’s soaring national debt amid an economy that is expected to contract by 7,2% in 2020, as a result of the COVID-19 pandemic. 

Presenting the 2020 Supplementary Budget in response to the dramatic economic downturn brought about COVID-19, Mboweni said:

“But debt is our weakness. We have accumulated far too much debt; this downturn will add more. This year, out of every rand that we pay in tax, 21 cents goes to paying the interest on our past debts.   This indebtedness condemns us to ever-higher interest rates. If we reduce debt, we will reduce interest rates for everyone and we will unleash investment and growth.   So today, with an eye on the future, we set out a strategy to build a bridge to recovery.  Our Herculean task is to close the mouth of the Hippopotamus! It is eating our children’s inheritance. We need to stop it now! Our Herculean task is to stabilise debt.”  

Figures disclosed by the Finance Minister show that the budget deficit for the current financial year is at 15.7% of the budget (R-761.7-billion). The figure is more than double the 6.8% (R-370.5-billion) which was forecast in Budget 2020 presented in February. 

“This increase is mainly due to the revised revenue projections and pay‐outs from the Unemployment Insurance Fund. The narrower measure, known as the main budget deficit, is projected to be 14.6 percent of GDP.  Our early projection is that gross national debt will be close to R4 trillion, or 81.8 percent of GDP by the end of this fiscal year. This is compared to an estimate of R3.56 trillion or 65.6 percent of GDP projected in February.  Without external support, these borrowings will almost entirely consume all of our annual domestic saving, leaving no scope for investment or borrowing by anyone else. For this reason, we need to access new sources of funding. Government intends to borrow about US$7 billion from international finance institutions to support the pandemic response. We must make no mistake, these are still borrowings. They are not a source of revenue. They must be paid back,” Mboweni said.

He said the government planned to stabilize the debt through zero-based budgeting.

“Our current system of Public Expenditure Reviews is a step towards zero‐based budgeting. This means that we will try to reduce all expenditures that we thought we can no longer afford. After all, we are not as rich as we were ten years ago.  The upcoming Medium Term Expenditure Framework will pilot this approach. We need to find spending adjustments of about R230-billion over the next two years.  Tax measures of R40-billion over the next four years will also be required,” Mboweni added.

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