IMF sounds the alarm for South Africa by Shaun Jacobs

[Nat Quinn]

IMF sounds the alarm for South Africa by Shaun Jacobs

South Africa’s state finances have rapidly deteriorated over the past 15 years, with the International Monetary Fund (IMF) being the latest to sound the alarm over the current fiscal trajectory.

This was revealed in the report the IMF released following its Article IV Consultation with South Africa, where the institution’s staff met with key government figures and analysed the state’s progress on reforms and fiscal discipline.

The report released in early 2025 is vastly different from previous editions as the consultation took place in a much more positive economic environment.

This time last year, there were very few reasons to be positive about South Africa, with load-shedding at elevated levels, a looming election, and stagnant economic growth.

At the end of 2024, however, the mood was very different. Load-shedding now seems a thing of the past and will most likely never again be as severe as in 2022 and 2023.

The election also saw the formation of a Government of National Unity (GNU), which ensured that South Africa’s future was no longer dependent on the decisions of a single political party.

Reform of the logistics sector is also gathering momentum, with Transnet publishing its Rail Network Statement late in 2024. This paves the way for private players to run trains on its tracks.

However, the IMF is not riding high on this optimism and remains cautious about South Africa’s economic future, given global uncertainty and local reforms taking longer than expected.

The institution’s assessment showed that the balance risks remain tilted to the downside. As a result, its forecast for South Africa’s economic growth is below consensus at 1.5% in 2025.

Concerningly, the IMF does not believe that the current trajectory will result in a rapid uptick in economic growth, a reduction in unemployment, and a slowdown in the growth of government debt.

Its baseline projection shows that economic growth will hover around 1.7% annually until 2030, with unemployment marginally declining to 31.3%.

One of the bright spots in South Africa, the National Treasury’s fiscal consolidation, is also expected to come under pressure.

The IMF projects that gross government debt as a per cent of GDP will rise from 75.7% in the current financial year to 85.6% in 2030.

This is due to a combination of slow economic growth and increased spending pressures from ambitious government proposals such as National Health Insurance, the creation of a Basic Income Grant, and above-inflation public sector wage increases.

There is also a more fundamental drag on the South African economy – the government’s high debt burden and debt-servicing costs.

The IMF said South Africa’s public finances have deteriorated markedly over the past 15 years since the Global Financial Crisis.

Since then, fiscal deficits have averaged over 4% of GDP, driven by rising wage costs, social transfers, and support to SOEs.

Finance Minister Enoch Godongwana and the National Treasury have tried to tackle this issue through fiscal consolidation.

The government has tried to limit increases in spending to below headline inflation and raise additional tax revenue through a more efficient revenue service and, in some cases, tax increases.

However, despite this, the IMF said that government revenues have underperformed expectations, and spending has continued to rise.

This has led to an increase in public debt as a share of GDP from 25% in 2008 to 75% at the end of the 2023 financial year. The pandemic added further strain on the already stretched public finances.

The IMF explained that rising debt, together with tight financing conditions and the loss of investment grade, have exerted significant strain on the South African economy.

These factors have pushed up interest payments to close to 20 per cent of total government revenues, squeezing other priority spending, including investment.

This is a significant handbrake on the local economy, with the government spending over R1 billion a day to service its debt. Debt-servicing costs are also the fastest-growing expenditure item in the budget.

source:IMF sounds the alarm for South Africa – Daily Investor

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