Governments that are monetarily sovereign (able to produce credible fiat currency) are believed to never run out of money or face spending constraints. They can always print money or raise more debt to fund unlimited spending without worrying about the economic crises, as long as inflation remains under check.
In October 2023, President Cyril Ramaphosa was quoted reassuring South Africans that the government is not running out of money after the finance minister warned of revenue shortfalls. Reports of revenue collection shortfall leading to the 2023 medium term budget policy statement (MTBPS) provoked negative market sentiments and wider national disquiet over the country’s ability to meet its expenditure obligations and fiscal sustainability goals.
The 2024 budget has yet again demonstrated that South Africa is not ready to compromise on its spending obligations and largesse despite the persistent negative budget balance. Debt continues to compensate for low revenue and economic growth, as the country stumbles into a potential debt trap and fiscal contagion.
The government is projected to borrow R550 billion a year or R1.5 billion a day over the next two years to finance the stubborn deficit, rising debt service costs and to absorb part of the Eskom debt. On its own, large national debt is not a problem, especially, when directed towards growth inducing expenditure. The problem arises when debt surges faster than the economy’s debt servicing capacity or GDP. In other words, when debt stimulates the demand for goods and services without directly or indirectly causing a corresponding increase in production of goods and services.
Advocates of monetary sovereignty, not least those in government, have been quick to play down any possibility of South Africa falling into sovereign debt crises (inability to repay the debt to creditors) similar to those experienced in some European countries during the 2008 financial crises and those currently in Ghana, Pakistan and Argentina.
Part of the reason for this optimism is that more than 90% of South Africa’s debt is denominated in local currency and lenders have continued to respond positively to government debt issuance. This has emboldened the government to sustain a long period of negative primary balance averaging 5% of GDP since 2009 against an average GDP growth of 1%. Consequently, accumulated gross debt is expected to reach and purportedly stabilise at R6.2 trillion or 74% of GDP by 2026 fiscal year. The associated annual cost of servicing this debt (the interest paid) in 2026 will be R440 billion, which amounts to 23% of non-interest spending and 20% of revenue respectively.
There is general consensus that a combination of high deficit and debt service costs are unsustainable in the long run. At the same time, there is no agreement over the maximum debt accumulation threshold or debt to GDP ratio at which debt crises suddenly erupt. The determination of whether a fiscal situation is sustainable can be a painstakingly slow process of market sentiments and warnings, which often shifts intermittently from a risky to worse solvency outlook. Prudent fiscal authorities or macroeconomic management framework acknowledge that debt problems are generally channelled through imbalances between ex-ante (planned) demand and supply rather than always manifesting abruptly through credit default or bankruptcy declarations.
The debt induced ex-ante imbalances between demand and supply are in turn channelled in the economy through a combination of implicit and explicit transfers in the economy, including high inflation and interest rates, increasing taxes, rising unemployment, wage suppression, financial repression (icap on interest rate) and currency depreciation. These transfers can be severely acute if the debt is used to pay current expenses rather than finance productive long-term investments, which strengthens the future capacity of the economy to repay the debt. As this process unfolds, wealthy people or investors shift their money to foreign currency, consumers hold back on spending on home and equipment, buyers suspend transactions, manufactures and listed companies move operations elsewhere, farmers cut back on production and workers militate, planting the seed for country wide civil unrest.
South Africa is grappling with mild sequels of implicit and explicit transfers of which the 2023 budget is skirting around by projecting optimist expenditure growth moderation and revenue collection while attributing the growing fiscal deficit to commodity price fluctuations. Inflation remains on the upper bound of the target range thanks to high interest rates, unemployment is on the rise, the rand has depreciated by more than 120% since 2009. Consumers are cutting down on retail spending and the government is enforcing a wage freeze. Growth in capital outlays has slowed down to just under 2% in the case of the private sector and worsened to a negative territory for public corporations and to just under 1% for the general government.
The deteriorating macro-economic indicators clearly indicates that the government is consuming more than it is investing, that growing public debt is crowding out private sector investment and funding current spending rather than construction and maintenance of roads, water reticulation infrastructure, schools and factories. To be clear, the driving force behind South Africa’s public debt bulge is not unforeseen economic circumstances, nor global economic headwinds as the different episodes of budgets suggests. It is bad policy and poor expenditure management. The result is catastrophic limits on investment in education, health, police, infrastructure as well as unprecedented, indiscriminate, and in-year expenditure reprioritisation seen in the 2024 budget.
Unlike other countries that have been forced into debt restructuring agreements, South Africa has a window of opportunity to reverse its deteriorating fiscal trajectory. The revenue collection agency is still able to maintain a healthy tax collection buoyancy and the budget framework continues to guarantee top slicing of the debt service costs. There remains a generous vested private capital interest to maintain tax collections and a semblance of credible political and economic institutions to safeguard stability.
Drastic in-year expenditure adjustments and inconsequential budget cuts will not avert the fiscal crises. Neither will insignificant and unilateral spending freeze do, just as optimistic expenditure moderation and revenue forecasts won’t. The battle against high national debt must be taken to the doorstep of budget claimants or government departments and agencies.
Many departments are yet to internalise the cost of sustaining large primary deficits and this reflects in their procurement conduct that is increasingly characterised by wastage, overpricing, project cost escalation and poor workmanship among other things. The infamous uncompleted Giyani water project, which escalated from R90 million to R4 billion is one example of many profligate and bungled projects flagged annually in the auditor general’s report.
Finance authorities must be steadfast in upholding the principle of hard budget constraint or no-bailout rule. The provision for municipal debt relief to Eskom during the 2023 MTBPS suggests that the government is yet to fully reckon with the perverse fiscal incentives created by bailouts.
Similarly, the treasury seems to have run out of options to finance the R254 billion Eskom debt takeover deal, which itself is an admission of fiscal squeeze and inability to honour budget commitments. As revenue options run out, the government is looking to conceal structural budget gaps with non-tax revenue sources as proposed with the R150 billion drawdown on the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) account.
The ultimate solution is drastic expenditure cuts in areas characterised by profligacy and to guard against new expenditure initiatives especially in the period leading to the national elections. (A debt-ridden Argentina has achieved a budget surplus for the first time since 2012 as a result of strict austerity measures). Every debt crisis begins with unheeded warnings. Alarm bells have rung.
Eddie Rakabe is a researcher at the Mapungubwe Institute for Strategic Reflections. These are his views.
Accumulated gross debt is expected to stabilise at R6.2 trillion or 74% of GDP by 2026. The annual cost of servicing this deb in that year will be R440 billion
