How SA can create jobs, repair floundering economy — IMF experts

The government has been given a blueprint on how to tackle the impediments to growing SA's struggling economy by a team of experts from the International Monetary Fund.

The team, which held consultations from November 17 to December 7, focused on policy measures and reforms needed to stimulate a job-creating, inclusive economy.

It noted the Covid-19 pandemic hit SA at a time when its economic vulnerabilities had already been aggravated by a prolonged period of depressed investment, subdued growth, and high and rising public debt. In this context, the country suffered one of the largest output contractions among emerging market economies in 2020 with a significant loss of jobs.

The pandemic also highlighted the need to put the country’s public finances to reverse the upward public debt trajectory, the team said.

Here are the IMF's recommendations:

Reducing growth impediments

Structural rigidities are depressing private investment and hindering inclusive growth and job creation. These rigidities need to be tackled immediately to increase the economy’s productivity and competitiveness and reduce poverty and inequality. To this end, immediate actions are warranted to:

• Raise the efficiency of the economy, particularly in network industries. Essential services, such as electricity, telecommunications, and transportation, are expensive and/or unreliable, contributing to the high cost of doing business. The issue needs to be addressed by enhancing competition in these sectors. There is a need to ensure energy security, upgrade infrastructure, and expedite the long-delayed spectrum auctions to facilitate the digital transition. These reforms will allow entrepreneurs to set up businesses and create jobs, thereby addressing the growing unemployment issue, especially for the youth.

• Reduce the existing regulatory barriers to private investment. Red tape and burdensome bureaucratic procedures should be streamlined to give better opportunities for businesses to start and innovate. The option of establishing a business should be open to all entrepreneurs on a level playing field. Localisation and industrial policies should not be used as a blunt instrument to serve protectionist views and vested interests, which could hinder industrial development and harm competitiveness. It is also important to ensure consistency of localisation and industrial policies with SA’s international trade commitments.

• Increase labour market flexibility to boost job opportunities and facilitate workforce management. SA can benefit from an expanding labour force — something that many other countries cannot because of their demographics. Introducing greater firm-level flexibility in wage bargaining and streamlining the enforcement of employment protection legislation are necessary steps for this labour force to find the right jobs. Importantly, improving the quality of education and vocational training programmes would allow the young population to acquire the skills demanded by employers.

• Intensify actions to address weak governance and corruption. Eradicating corruption will help channel talent, investment, and technology towards their best uses and foster public trust in government institutions. Strengthening the autonomy of anti-corruption agencies, enhancing criminal prosecution, establishing credible deterrence mechanisms, and increasing the transparency of beneficial ownership in procurement contracts are all essential steps.

The announced reforms to attract private-sector participation in energy generation and port and railway operations are encouraging but need to be supported by steadfast action to address Eskom’s and Transnet’s operational and financial problems. Importantly, governance weaknesses are a serious problem that continues to jeopardise the operations of both institutions.

• Eskom. The restructuring and unbundling of Eskom will be costly for the government and must be accompanied by a substantial downsizing and structural transformation of its operations, notably through a meaningful reduction of procurement and personnel costs. Eskom spends more than it earns, reflecting both its operational inefficiencies and unsustainable debt level. Competition from private firms is necessary. The resulting higher level of private investment should help finance the energy transition away from coal, contributing to climate change objectives. The unbundled subsidiaries should operate efficiently without resorting to budgetary funds and maintain sound governance and financial frameworks to guarantee their commercial viability.

• Transnet. Efforts to address the problems in logistics and infrastructure should be accelerated so that SA can fully benefit from favourable commodity prices and boost exports without the constraint of transportation deficiencies. Necessary actions include injecting greater discipline into the company’s operations and fostering private sector participation in the port and railway sectors.

• Other SOEs. A full inventory of SOEs at all levels of government should be carried out. SOEs that do not meet their objectives or lack economic relevance should be divested or liquidated depending on commercial viability. SOEs carrying out predominantly government business should have their functions merged into a related government department or an agency under the purview of the budget.

Putting debt on a sustainable path

Maximising the growth dividend from structural reforms requires decisively reversing the upward trend in public debt. The last decade has demonstrated that increasing expenditure has not fostered durable growth because structural rigidities have impeded channelling spending to productive and competitive activities.

Persistent budget deficits have saddled the government with a high debt burden and ballooning financing costs, while leaving no fiscal space to facilitate significant human capital and infrastructure investment.

An ambitious fiscal consolidation is necessary to restore fiscal space and maximise the impact of structural reforms by welcoming private investment.

A credible public debt anchor — defined as a government’s goal not to surpass a predefined debt ceiling over time — would help complement the existing nominal primary expenditure ceiling in guiding consolidation and limiting debt accumulation when economic activity is set to remain persistently weak.

A growth-friendly fiscal consolidation needs to centre on reducing current expenditure in real terms (so that any increases are lower than inflation) while broadening the tax base. Spending measures should tackle compensation costs, improve the efficiency of health and education expenditure, better target tertiary education subsidies, and strengthen the planning and execution of public investment, while protecting targeted support to the vulnerable.

Importantly, there is an urgent need to condition any form of support to SOEs on the implementation of concrete and measurable actions, such as reductions in SOE’s procurement and compensation costs, to significantly improve their performance and restore their viability. Performance against these conditions should ideally be transparently communicated to the public to instil confidence that the reforms are successfully ongoing. Phasing out carbon tax exemptions and tax incentives for selected industries will help boost tax revenue collections.

The Medium-Term Budget Policy Statement (MTBPS) rightly outlines a consolidation path to unwind much of the pandemic-related support over time. Revenue projections are appropriately conservative, given the recent windfall and improved tax administration at the SA Revenue Service.

Expenditure projections on two key budgetary items — compensation of employees and transfers to SOEs — reflect the National Treasury’s intention to impose discipline, but require a concerted effort from all parts of the government. Social transfers, while necessary to mitigate elevated poverty and inequality, should only target the most vulnerable population and fall within the available budgetary space. The credibility of the medium-term budget critically hinges on the government as a whole uniting behind the decisions underpinning the MTBPS’s projections.

Should expenditure trends continue as in the past, spending would be larger than budgeted in the MTBPS and debt would be significantly higher than planned, hurting the availability and costs of financing, worsening the quality of spending, and crowding out private-sector credit. Postponing the necessary consolidation could force an abrupt adjustment, with adverse growth and social consequences.

Maintaining price stability and financial sector soundness

Accommodative monetary policy has helped mitigate the pandemic’s impact, but looking ahead, the SA Reserve Bank (SARB) needs to remain vigilant about rising inflation risks by maintaining its data-dependent and forward-looking approach.

The recent increase in the policy rate was appropriate and consistent with both the planned gradual withdrawal of monetary policy support and the SARB’s commitment to price stability. External sector policies should remain consistent with the inflation-targeting framework by maintaining a flexible exchange rate.

SA’s inflation remains above that of its main trading partners and other EMEs. Its citizens — particularly the poor — would benefit from lower inflation out-turns and expectations. Thus, when circumstances allow in the future, the authorities are encouraged to lower the inflation target within a transparent and well-communicated strategy. Limiting the potential cost of disinflation would require that the process be supported by conducive fiscal and structural policies.

A strong fiscal position would reduce inflation risks. More competitive and flexible product and labour markets would lead to lower production costs and inflation. Importantly, monetary policy has been effective in anchoring inflation but cannot contribute significantly to the growth objective, particularly if structural rigidities persist.

The planned shift in the monetary policy implementation framework, currently under public consultation, should be focused on strengthening monetary policy transmission and the SARB’s ability to support market functioning.

The financial sector has weathered the pandemic well. Robust prudential regulation — closely aligned with international standards — and a commitment to independent supervision has helped moderate risk.

However, the financial system’s resilience needs to be strengthened further amid the weak macroeconomic outlook and the government’s large borrowing needs. This would allow banks to increase their role as intermediaries of funds for productive investments, including for small and medium-sized enterprises.

The ongoing expansion of the payment system to nonbank financial institutions should also help deepen financial access and inclusion.

Close monitoring of the deepening nexus between the financial sector and the sovereign is warranted, together with enhanced supervision, swift completion of the bank resolution and deposit insurance schemes, and improved implementation of anti-money laundering/combating the financing of terrorism measures.

Reforms to the pension system need to be carefully designed to prevent undermining old-age security savings of the population and weakening one of the key pillars of the strong financial system.

Building a green and climate-resilient economy

SA faces significant climate challenges, reflecting both its high vulnerability to extreme weather events and the carbon intensity of the economy. The country’s ambition to achieve carbon-neutrality by mid-century is commendable.

Encouraging initial steps have been taken and have been well received by the international community as evidenced by the support at the COP26 climate summit. Nevertheless, stepped-up efforts are needed to translate the ambitious commitments into a coherent set of concrete actions that will benefit all South Africans, particularly the poorest, who tend to suffer the most from climate change.

In particular, decarbonising the energy sector while ensuring energy security will be essential. A swift rollout of renewable energy facilitated by a competitive energy market as well as a successful transformation of Eskom are key in this regard.

Sound policies to safeguard macroeconomic stability, strengthen institutions, and advance reforms to make product and labour markets more dynamic will complement a just transition towards a green and climate resilient economy.

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