President Cyril Ramaphosa. Picture: GCIS
President Cyril Ramaphosa. Picture: GCIS

President Cyril Ramaphosa on Thursday defended the government’s decision to approach the IMF for financial assistance, saying the loan has no stringent conditions attached to it and came cheap.

Responding to questions in the National Assembly, Ramaphosa said the loan from the lender of last resort will go a long way to boost the government’s response to the Covid-19 induced economic crisis. At an interest rate of 1%, the loan is cheap and does not come with any conditions that will threaten SA’s sovereignty.

In July the IMF approved SA’s first request for emergency aid, granting the country a $4.3bn (R72.5bn) loan towards mitigating the social and economic effects of the Covid-19 pandemic. The loan, at an interest rate of about 1%, will help the government finance its R500bn Covid-19 relief package.

The rapid financing instrument that SA agreed to does not have structural adjustment conditions. The commitments that the government has made are in line with policies outlined in finance minister Tito Mboweni’s supplementary budget in June. These include reining in the budget deficit and containing growth in debt as a percentage of GDP.

SA has also committed to implementing economic reforms contained in Mboweni’s proposals to reignite growth, which were released in 2019 and endorsed by the cabinet.

Ramaphosa warned on Thursday that government debt servicing costs will consume much of the savings accumulated in the economy if not urgently tackled.

Government debt is expected to reach close to R4-trillion in 2020/2021. This does not include the debt of state-owned companies, Ramaphosa said in his replies to questions from MPs. During the medium-term expenditure framework period, for example, debt service costs are expected to exceed total spending on health care, he said.

Measures to curb the spread of Covid-19, including the lockdown that came into force at the end of March, are set to lead to company closures and a jobs bloodbath. This will mean reduced tax collections, which will put the government’s finances under severe strain and force the state to borrow more.

SA’s debt as a percentage of GDP is already high. The emergency budget, which was necessitated by the health crisis, painted a bleak picture of SA’s fiscal trajectory and the. government expects to miss its tax target for 2020 by more than R300bn.

With declining tax revenues, the government’s debt levels are expected to soar to R4-trillion or 81.8% of GDP by the end of this fiscal year. This is compared to an estimate of 65.6% of GDP (R3.56-trillion) projected in the main budget in February. The government wants to stabilise debt at 87.4% of GDP in 2023/2024, and is aiming for a primary surplus that year. But the government has been battling to contain its wage bill and allocates about R600bn to salaries, representing 35% of its annual spending.

Ramaphosa said debt will stabilise at about 87.4% of GDP, after which it will gradually decline. “The active scenario prevents debt service costs from continuing to rise faster than all other items of spending for the foreseeable future. Under the ‘active’ scenario, which requires a programme of fiscal restraint, we anticipate a small surplus in the primary balance — which is the difference between noninterest spending and revenue in 2023/2024,” Ramaphosa said.

Ramaphosa said the government has adopted an “active” approach to managing the country’s debt. “It is committed to an active set of fiscal and economic reforms to raise confidence and growth. This includes faster implementation of the economic reforms needed to support investment and employment, raise productivity and competitiveness, and lower cost of living and doing business,” he said.

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