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Finance Minister Tito Mboweni (Photo by Gallo Images / Ziyaad Douglas)
Gallo Images / Ziyaad Douglas
- South Africa risks a fiscal crisis by 2024/25 if the country continues to live beyond its means, warned Finance Minister Tito Mboweni.
- Mboweni says the upcoming medium-term budget policy statement might not be very popular in light of the difficult decisions that must be made.
- A fiscal crisis would contribute to a financial or banking crisis, he added.
South Africa is at risk of a fiscal crisis in four years, similar to the one experienced by Argentina, said Finance Minister Tito Mboweni.
The minister made the remarks during a panel discussion organized by the Stellenbosch University economics department, which on Friday celebrated its centenary.
Mboweni spoke candidly about the state of the economy, which was already in recession before the national lockdown that began in late March to halt the spread of the coronavirus.
The economy is forecast to contract between 7% and 13% this year, the worst economic performance in 90 years. As a consequence, the Treasury expects SA’s debt-to-GDP ratio to expand to 81.8% this fiscal year and possibly exceed 100% by 2023/24 if no changes are made.
“I don’t think the medium-term budget policy statement is popular, particularly as we will be dealing with things like South African Airways and other state-owned companies,” Mboweni said. He is scheduled to present his medium-term budget policy statement on October 21, which will outline the country’s spending plans for the next three years.
“Before the shutdown, we were already in a technical recession, so revenue was also down from a fiscal point of view. Then the coronavirus hit us … The ban on the sale of tobacco and alcohol actually made the people became extremely rich in the tobacco and alcohol industry, prices shot up. The underground market was active, “he lamented.
All sectors of the economy, except agriculture, contracted significantly during the second quarter of the year.
The Treasury expects a tax revenue shortfall of around R300 billion for the depressed economy, all while increasing pressure on spending, Mboweni said.
Hippo’s mouth
“The next issue that bothers me is the hippo’s mouth: Revenues are declining and expenses are increasing. You have to shut the hippo’s mouth,” Mboweni said. “If you don’t close it, what worries me is that we are headed for a fiscal crisis.”
The minister said there had been a sell-off of SA bonds at an “alarming rate.” If domestic banks and institutions remained the largest bondholders in South Africa, a possible fiscal crisis would contribute to a “banking crisis and a financial crisis,” Mboweni said. “It is a very serious situation that we are facing. We can no longer live beyond our means,” he said. The minister said he also shared his concerns with the Cabinet.
“A fiscal crisis is on the way for 2024/25 if we don’t take the serious steps we need to take to shut the hippopotamus’ mouth.”
Mboweni said he had a meeting with Harvard professors two days ago, who warned that SA would be “taking the path of Argentina.” “I had the former governor of the Central Bank of Argentina on the line, he said, ‘I’ve seen that movie before, and you’re going down that road.’
Argentina obtained a $ 57 billion loan from the International Monetary Fund in 2018; it is said to be the largest loan in the institution’s history. The country has suffered multiple economic crises and has entered 21 IMF programs.
But Mboweni said there are some “green shoots” in the economy. Mining and manufacturing are rebounding strongly, he noted. Growth could improve from around -7.9% or -8% to “maybe a good recovery” of 2.9%, Mboweni said.
Political problem
Mboweni said that when it comes to “policy coordination” in the government system, the central coordinating mechanism is the Cabinet. “Eventually things get to the Cabinet, that’s where policy coordination takes place,” he explained.
While the “mechanism” is there, Mboweni said the question is whether the right policies are being coordinated. Using the example of the spectrum, a topic that has been discussed for years, he pointed out that decisions have been made by the Cabinet, but no progress has been made. “You need to understand politics. Why isn’t it moving? It’s a political problem, not a coordination problem,” Mboweni said.
